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: June 30, 2009




or




o
            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 o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o  No o




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 o                                                                       
 Accelerated filer o





Non-accelerated
filer o                                                                           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 o  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
            Outstandingas of August 19,
      2009Common
      Stock
            14,251,964





2




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
              
              
              49ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              
              
              77ITEM
      4T.  CONTROLS AND
      PROCEDURES
              
              
              77PART
      II – OTHER INFORMATIONITEM
      1.  LEGAL
      PROCEEDINGS
              
              
              78ITEM
      1A.  RISK
      FACTORS
              
              
              80ITEM
      2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
              
              
              83ITEM
      3.  DEFAULTS UPON SENIOR
      SECURITIES
              
              
              83ITEM
      4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              
              
              83ITEM
      5.  OTHER
      INFORMATION
              
              
              83ITEM
      6.  EXHIBITS
              
              
              84SIGNATURES
              
              
              S-1EXHIBIT
      INDEX
              
              
              E-1




i




PART
I — FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED BALANCE SHEETS




-
ASSETS -




June
      30, 2009
            
            
            December
      31, 2008(Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
            
            $
            234,607
            
            
            $
            960,145Accounts
      receivable, net of allowance for doubtful accounts of $5,352,157 and
      $5,774,921 at June 30, 2009 and December 31, 2008,
      respectively
            
            
            776,563
            
            
            
            1,073,420Unbilled
      revenue
            
            
            76,940
            
            
            
            127,685Notes
      Receivable – StaffChex
            
            
            195,791
            
            
            
            —Prepaid
      expenses and other current assets
            
            
            226,636
            
            
            
            217,882Refundable
      federal income tax
            
            
            26,128
            
            
            
            26,128TOTAL
      CURRENT ASSETS
            
            
            1,536,665
            
            
            
            2,405,260EQUIPMENT,
      FURNITURE AND FIXTURES, net
            
            
            1,048,643
            
            
            
            1,296,689INTANGIBLE
      ASSETS, net
            
            
            108,333
            
            
            
            133,333DEFERRED
      FINANCING COSTS, net
            
            
            422,310
            
            
            
            536,444NOTES
      RECEIVABLE, long term
            
            
            324,115
            
            
            
            —RESTRICTED
      CASH
            
            
            25,000
            
            
            
            —OTHER
      ASSETS
            
            
            27,337
            
            
            
            709,404TOTAL
      ASSETS
            
            $
            3,492,403
            
            
            $
            5,081,130




See notes
to condensed consolidated financial statements




1




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED BALANCE SHEETS




-
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) -




June
      30, 2009
            
            
            December
      31, 2008(Unaudited)CURRENT
      LIABILITIESCurrent
      portion of long-term debt
            
            $
            3,050,199
            
            
            $
            5,950,209Accounts
      payable
            
            
            2,688,069
            
            
            
            2,725,659Accrued
      expenses and other current liabilities
            
            
            2,753,896
            
            
            
            3,336,117Accrued
      payroll and related taxes
            
            
            664,976
            
            
            
            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
            
            
            138,879
            
            
            
            186,055TOTAL
      CURRENT LIABILITIES
            
            
            10,440,720
            
            
            
            14,342,511ACCRUED
      RESTRUCTURING COSTS, net of current
            
            
            192,532
            
            
            
            —LONG-TERM
      DEBT, net of current
            
            
            13,738,434
            
            
            
            10,306,054LIABILITY
      FOR WARRANTS ISSUED
            
            
            1,256,761
            
            
            
            1,213,433DEFERRED
      REVENUE, net of current
            
            
            498,053
            
            
            
            996,104RETIREMENT
      BENEFIT PAYABLE, net of current
            
            
            135,646
            
            
            
            135,646TOTAL
      LIABILITIES
            
            
            26,262,146
            
            
            
            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 June 30, 2009
      and December 31, 2008; 14,251,964 shares issued and outstanding June
      30, 2009 and December 31, 2008)
            
            
            1,425
            
            
            
            1,425Additional
      paid in capital
            
            
            32,641,023
            
            
            
            32,576,500Accumulated
      deficit
            
            
            (55,412,191
            )
            
            
            (54,490,543
            )TOTAL
      STOCKHOLDERS’ EQUITY (DEFICIT)
            
            
            (22,769,743
            )
            
            
            (21,912,618
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
            
            $
            3,492,403
            
            
            $
            5,081,130


See notes
to condensed consolidated financial statements




2




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




-
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -




(UNAUDITED)




For
      the three months ended
                June
      30,
            
            
            For
      the six months ended
                June
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)REVENUE
            
            $
            1,351,149
            
            
            $
            3,291,462
            
            
            $
            2,588,456
            
            
            $
            27,510,890COST
      OF SERVICES
            
            
            —
            
            
            
            2,909,919
            
            
            
            —
            
            
            
            25,653,640GROSS PROFIT
            
            
            1,351,149
            
            
            
            381,543
            
            
            
            2,588,456
            
            
            
            1,857,250SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
            
            
            1,334,856
            
            
            
            6,391,612
            
            
            
            2,525,371
            
            
            
            11,949,610RESTRUCTURING
      EXPENSE
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,100,422DEPRECIATION
      AND AMORTIZATION
            
            
            157,787
            
            
            
            163,078
            
            
            
            313,306
            
            
            
            284,696IMPAIRMENT
      OF GOODWILL
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            16,821,586LOSS
      ON DISPOSAL OF FIXED ASSETS
            
            
            —
            
            
            
            —
            
            
            
            4,708
            
            
            
            1,022,210(LOSS) FROM
      OPERATIONS
            
            
            (141,494
            )
            
            
            (6,173,147
            )
            
            
            (254,929
            )
            
            
            (30,321,274
            )OTHER
      INCOME (EXPENSE)Other income
            
            
            359,896
            
            
            
            260,238
            
            
            
            390,285
            
            
            
            299,315Interest expense and factoring
      fees
            
            
            (371,719
            )
            
            
            (357,897
            )
            
            
            (726,028
            )
            
            
            (906,116
            )Interest expense of
      amortization of original issue discount and warrant
      liabilities
            
            
            (139,469
            )
            
            
            —
            
            
            
            (287,648
            )
            
            
            —Mark to market gain (loss) on
      derivative instruments
            
            
            9,255
            
            
            
            —
            
            
            
            (43,328
            )
            
            
            —Gain
      on restructuring of debt
            
            
            —
            
            
            
            686,797
            
            
            
            —
            
            
            
            686,797Other
      income (expense)
            
            
            —
            
            
            
            39,795
            
            
            
            —
            
            
            
            (99,129
            )Gain (loss) on sale of
      subsidiary
            
            
            —
            
            
            
            600,000
            
            
            
            —
            
            
            
            (1,294,220
            )TOTAL
      OTHER INCOME (EXPENSE)
            
            
            (142,037
            )
            
            
            1,228,933
            
            
            
            (666,719
            )
            
            
            (1,313,353
            )LOSS
      BEFORE INCOME TAXES
            
            
            (283,531
            )
            
            
            (4,944,214
            )
            
            
            (921,648
            )
            
            
            (31,634,627
            )INCOME
      TAX EXPENSE
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,007,180
            )NET LOSS
            
            $
            (283,531
            )
            
            $
            (4,944,214
            )
            
            $
            (921,648
            )
            
            $
            (36,641,807
            )NET
      LOSS PER COMMON SHAREBasic and
    Diluted
            
            $
            (0.02
            )
            
            $
            (0.37
            )
            
            $
            (0.06
            )
            
            $
            (2.69
            )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDINGBasic
      and Diluted
            
            
            14,251,964
            
            
            
            13,425,051
            
            
            
            14,251,964
            
            
            
            13,631,689





See notes
to condensed consolidated financial statements




3




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED




-
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) -




(UNAUDITED)




Common
      StockShares
            
            
            Amount
            
            
            Additional
      Paid in Capital
            
            
            Accumulated
      (Deficit)
            
            
            Total
      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 warrants
            
            
            —
            
            
            
            —
            
            
            
            30,333
            
            
            
            —
            
            
            
            30,333Stock
      based compensation
            
            
            —
            
            
            
            —
            
            
            
            34,190
            
            
            
            —
            
            
            
            34,190Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (921,648
            )
            
            
            (921,648
            )Balance
      as of June 30, 2009
            
            
            14,251,964
            
            
            $
            1,425
            
            
            $
            32,641,023
            
            
            $
            (55,412,191
            )
            
            $
            (22,769,743
            )




See notes
to condensed consolidated financial statements




4




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS




For
      the six months ended
                June
      30,2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      (loss)
            
            $
            (921,648
            )
            
            $
            (36,641,807
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Deferred
      income taxes
            
            
            —
            
            
            
            5,007,180Long
      lived assets impairment and abandonment
            
            
            —
            
            
            
            1,022,210Depreciation
      and amortization
            
            
            447,417
            
            
            
            284,696Loss
      on disposal of fixed assets
            
            
            4,708
            
            
            
            —Impairment
      of goodwill
            
            
            —
            
            
            
            16,821,586Provision
      for (reduction in) doubtful accounts
            
            
            (422,764
            )
            
            
            2,611,046Provision
      for franchise receivables
            
            
            —
            
            
            
            1,638,879Loss
      on sale of subsidiary
            
            
            —
            
            
            
            1,294,220Issuance
      of warrants
            
            
            30,333
            
            
            
            57,619Stock-based
      compensation
            
            
            34,190
            
            
            
            21,102Gain
      on M & T restructuring forgiveness of debt
            
            
            —
            
            
            
            (866,480
            )Issuance
      of stock
            
            
            —
            
            
            
            120,970Interest
      expense – original issue discount and warrant liabilities
            
            
            287,650
            
            
            
            —Mark
      to market loss on derivative instruments
            
            
            43,328
            
            
            
            —Changes
      in operating assets and liabilities:Decrease in accounts
      receivable
            
            
            199,715
            
            
            
            13,062,183Decrease in unbilled
      revenue
            
            
            50,745
            
            
            
            2,001,683(Increase) in prepaid expenses
      and other current assets
            
            
            (8,754
            )
            
            
            (424,434
            )(Increase) decrease  in
      other assets
            
            
            51,313
            
            
            
            (8,963
            )Increase (decrease) in accounts
      payable
            
            
            (37,590
            )
            
            
            1,692,299(Decrease) in accrued expense and
      other
              current
      liabilities
            
            
            (468,668
            )
            
            
            (815,310
            )(Decrease) in accrued payroll and
      related taxes
            
            
            (79,782
            )
            
            
            (2,679,269
            )Increase (Decrease) in deferred
      revenue
            
            
            (498,051
            )
            
            
            840,000Increase (decrease) in accrued
      restructuring costs
            
            
            (47,176
            )
            
            
            929,975(Decrease) in retirement benefits
      payable
            
            
            (62,480
            )
            
            
            —Total adjustments to net
      loss
            
            
            (475,866
            )
            
            
            42,611,192Net cash
      provided by (used in) operating activities
            
            
            (1,397,514
            )
            
            
            5,969,385CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase of equipment, furniture
      and fixtures
            
            
            (44,968
            )
            
            
            (547,790
            )(Increase) in restricted
      cash
            
            
            (25,000
            )
            
            
            —Net cash (used in) investing
      activities
            
            
            (69,968
            )
            
            
            (547,790
            )CASH
      FLOWS FROM FINANCING ACTIVITIES(Repayments) of long-term
      debt
            
            
            (1,138,079
            )
            
            
            (9,623,508
            )Proceeds from issuance of ComVest
      debt
            
            
            —
            
            
            
            8,000,000Gross
      borrowings on notes payable to noteholders
            
            
            —
            
            
            
            204,449Gross borrowings on revolving
      credit facility – ComVest
            
            
            1,900,000
            
            
            
            530,000Fees incurred in
      refinancing
            
            
            (19,976
            )
            
            
            (693,082
            )Net cash provided by (used in)
      financing activities
            
            
            741,945
            
            
            
            (1,582,141
            )Net increase (decrease) in cash
      and cash equivalents
            
            
            (725,538
            )
            
            
            3,839,454CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            960,145
            
            
            
            1,993,641CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            234,607
            
            
            $
            5,833,095


See notes
to condensed 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 six months ended
              June
      30,2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)Cash
      paid during the period for:Interest
            
            $
            486,760
            
            
            $
            598,524Income
      taxes
            
            $
            —
            
            
            $
            15,430




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




Non cash
transactions:




ComVest
      Warrants issued and amortizable Original Issue Discount
            
            $
            634,000ComVest
      financing and amortizable Original Issue Discount
            
            $
            1,000,000ALS
      accrued interest converted to note payable (See Note 11 – Debt
      Obligations)
            
            $
            132,661




During
the six months ended June 30,2009, other assets of $630,754 were offset against
long-term debt.




See notes
to condensed consolidated financial statements




6




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




NOTES
TO CONDENSED 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 June 30, 2009, the Company had an accumulated deficit
of $55,412,191 and working capital deficiency of $8,904,055. For the six months
ended June 30, 2009, the Company incurred a net loss of
$921,648.  Although the Company restructured its debt and obtained new
financing in the third quarter of 2009 (see Note 19 – Subsequent Events), 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 and restructure existing
debt.  There is no assurance that the Company will be successful in
obtaining additional financing and restructuring its existing
debt.  If the Company does not generate sufficient cash from
operations, raise additional financing and restructure existing debt, there is
substantial doubt about the ability of the Company to continue as a going
concern. The accompanying unaudited condensed 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 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 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.  Previously, 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 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 consolidated financial information as of June 30, 2009 and for the six
month periods ended June 30, 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 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 June 30, 2009, and consolidated results of operations, and cash
flows for the three and six month-periods ended June 30, 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 completed its transition 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 June 30, 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 June 30, 2009 and December 31,
2008 were VMS gross receivables of $629,768 and $1,084,320, respectively.
Included in the Company’s accounts payable at June 30, 2009 and December 31,
2008 were VMS payables of $797,368 and $1,173,068, 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 in its wholly owned subsidiary, Clearpoint HRO, LLC (“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 on March 31,  2008.  As of
March 31, 2008, goodwill was fully impaired.




(j)
Advertising Expense:




The
Company expenses advertising costs in the period in which they are incurred.
Advertising expenses for the three and six months ended June 30, 2009 were
$7,280 and $14,890.  Advertising expenses for the three and six months
ended June 30, 2008 were $10,361 and $31,561, respectively.




(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
to interest expense over the life of the related loan. Deferred financing costs
of $422,309 at June 30, 2009 and $536,444 at December 31, 2008 were net of
accumulated amortization of $331,113 and $197,002, respectively.




10




Amortization
of financing costs for the three and six months ended June 30, 2009 was $67,055
and $134,111, respectively.  Amortization of financing costs for the
three and six months ended June 30, 2008 was $11,792 and $23,584,
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 six months ended June 30, 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:




Six
      Months Ended
                June
      30,2009
            
            
            2008Stock
      Options
            
            
            945,600
            
            
            
            816,000Warrants
            
            
            4,050,825
            
            
            
            11,445,0004,996,425
            
            
            
            12,261,000


(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.




(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.




11




(i)
Cash, Cash Equivalents and Restricted Cash:




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 six months ended June
30, 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 June 30,
2009 was less than the FDIC limit of $250,000 and there were no uninsured cash
and cash equivalents at June 30, 2009.




At June
30, 2009, the Company had $25,000 of restricted cash, which is classified as a
non-current asset.  The restricted cash serves as collateral for an
irrevocable standby letter of credit that provides financial assurance that the
Company will fulfill its obligations with respect to the settlement of Sunz
Insurance (see Note 18 – Litigation).  The cash is held in custody by
the issuing bank, is restricted as to withdrawal or use, and is currently
invested in money market funds.  Income from these investments is paid
to the Company.




(ii)
Accounts Receivable, Unbilled Revenues and 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 June 30, 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
amounts from the prior year financial statements have been reclassified to
conform to the current year presentation. Accounts receivable – related party in
the amount of $336,670 was reclassified to accounts receivable for the year
ended December 31, 2008. Additionally, certain items were reclassified in
the condensed consolidated statement of cash flow for the six months ended June
30, 2008. These reclassifications had no effect on the Company’s consolidated
net loss or stockholders’ deficit.




(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.




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. The adoption of
FSP FAS 157-4 did not have a material impact on the Company’s consolidated
financial statements.




13




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. Because FSP
FAS 107-1 and APB 18-1 apply only to financial statement disclosure, the
adoption did not have a material impact on the Company’s consolidated financial
statements.




In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments”(“FAS 115-2 and FAS
124-2”).  This FSP provides a framework to perform an other-than-temporary
impairment analysis, in compliance with Generally Accepted Accounting Principles
(“GAAP”), which determines whether the holder of an investment in a debt or
equity security, for which changes in fair value are not regularly recognized in
earnings, should recognize a loss in earnings when the investment is
impaired.  Additionally, this FSP amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements.  
FAS 115-2 is effective for interim reporting periods ending after June 15,
2009.  The Company adopted FAS 115-2 and FAS 124-2 during the quarter ended
June 30, 2009.  The adoption did not have a material impact on the
Company’s condensed consolidated financial statements.





In May
2009, the FASB issued Statement No. 165, “Subsequent Events”(“FAS 165”), which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued.  In particular, FAS 165 provides guidance
on the period after the balance sheet date and the circumstances under which
management should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements.  FAS 165 also
requires certain disclosures about events or transactions occurring after the
balance sheet date.  FAS 165 is effective for interim and annual
reporting periods ending after June 15, 2009. The Company adopted the
provisions of FAS 165 in the quarter ended June 30, 2009.  The
adoption did not have a material impact on the Company’s consolidated financial
statements.





Standards Issued But Not Yet
Adopted




In April
2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”
(“FAS 141(R)-1”).  FAS 141(R)-1 requires that assets acquired and
liabilities assumed in a business combination that arise from contingencies be
recognized at fair value per SFAS No. 157, if the acquisition-date fair value
can be reasonably determined. If the fair value cannot be reasonably determined,
then the asset or liability should be recognized in accordance with SFAS
No. 5, “Accounting for Contingencies,” and FASB Interpretation
(“FIN”) No. 14, “Reasonable Estimation of the Amount of a Loss - an
interpretation of FASB Statement No. 5.” FAS 141(R)-1 also requires new
disclosures for the assets and liabilities within the scope of the FSP. The
Company is applying the guidance of FAS 141(R)-1 to business combinations
completed on or after January 1, 2009. The Company was not involved in any
business combinations on or after January 1, 2009.




In June
2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial
Assets - an amendment of FASB Statement No. 140”(“SFAS 166”), which
amends the existing guidance on transfers of financial
assets.   The amendments include: (1) eliminating the qualifying
special-purpose entity concept, (2) a new unit of account definition that must
be met for transfers of portions of financial assets to be eligible for sale
accounting, (3) clarifications and changes to the derecognition criteria for a
transfer to be accounted for as a sale, (4) a change to the amount of recognized
gain or loss on a transfer of financial assets accounted for as a sale when
beneficial interests are received by the transferor, and (5) extensive new
disclosures. SFAS 166 is effective for new transfers of financial assets
occurring on or after January 1, 2010.  The adoption of SFAS 166 is
not expected to have a material impact on the Company’s consolidated financial
statements; however, it could impact future transactions entered into by the
Company.




14




In June
2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), amending the consolidation guidance for
variable-interest entities under FIN 46(R), “Consolidation of Variable Interest
Entities an
interpretation of ARB No. 51.”The amendments include:
(1) the elimination of the exemption for qualifying special purpose entities,
(2) a new approach for determining who should consolidate a variable-interest
entity, and (3) changes to when it is necessary to reassess who should
consolidate a variable-interest entity.  SFAS 167 is effective January
1, 2010. The Company is currently evaluating the impact of this standard on its
consolidated financial statements.




In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification (Codification) and the Hierarchy” of GAAP(“SFAS 168”),
which replaces SFAS No. 162, “The Hierarchy of GAAP”and establishes the
Codification as the single source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities.  SEC rules and interpretive
releases are also sources of authoritative GAAP for SEC registrants. 
SFAS 168 modifies the GAAP hierarchy to include only two levels of GAAP:
authoritative and nonauthoritative.  SFAS 168 is effective for interim and
annual periods ending after September 15, 2009.  As SFAS 168 is
not intended to change or alter existing GAAP, it will not impact the Company’s
condensed consolidated financial statements.  The Company will adjust
historical GAAP references in its Quarterly Report on Form 10-Q for the quarter
ending September 30, 2009 to reflect accounting guidance references included in
the Codification.




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




(a)           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 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 commenced 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.  As of June 30, 2009, StaffChex was current in all payments
to ClearPoint.  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.




15




(b)           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. As of June 30, 2009, no such earnout has been earned
or received.




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
            )


(c)           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 June 30, 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 17 –
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 $1,494,157 as of June 30, 2009, which has a remaining life
of 18 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 18 – 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.




17




NOTE
5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS:




June
      30,
                2009
            
            
            December
      31,
                2008(Unaudited)Prepaid
      insurance
            
            $
            219,174
            
            
            $
            125,410Other
      current assets
            
            
            7,462
            
            
            
            92,472$
            226,636
            
            
            $
            217,882


NOTE
6 — EQUIPMENT, FURNITURE AND FIXTURES:




June
      30,
                2009
            
            
            December
      31,
                2008(Unaudited)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
            
            
            (769,206
            )
            
            
            (481,842
            )Equipment,
      furniture and fixtures, net
            
            $
            1,048,643
            
            
            $
            1,296,689


Depreciation
expense for the three and six months ended June 30, 2009 was $145,297 and
$288,306, respectively.  Depreciation expense for the three and six
months ended June 30, 2008 was $50,911 and $148,237, 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.  During
the six months ended June 30, 2008, the Company removed $1,837,918 of fixed
assets and $815,708 of accumulated depreciation as a result of this
impairment.




NOTE
7 — INTANGIBLE ASSETS:




June
      30,
                2009
            
            
            December
      31,
                2008(Unaudited)Covenant
      not to compete
            
            $
            250,000
            
            
            $
            250,000Less,
      accumulated amortization
            
            
            (141,667
            )
            
            
            (116,667
            )Intangibles,
      net
            
            $
            108,333
            
            
            $
            133,333


The
covenant not to compete is being amortized over its five (5) year life.
Amortization expense of intangible assets for the six months ended June 30, 2009
and 2008 was $25,000 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




June
      30,
                2009
            
            
            December
      31,
                2008(Unaudited)Due
      from ALS
            
            $
            —
            
            
            $
            500,667Long
      term portion of related party receivable
            
            
            —
            
            
            
            181,400Security
      deposits and other assets
            
            
            27,337
            
            
            
            27,337$
            27,337
            
            
            $
            709,404


NOTE
9 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:




June
      30,
                2009
            
            
            December
      31,
                2008(Unaudited)Other
      accrued expenses
            
            $
            1,564,308
            
            
            $
            1,873,437Insurance
      premiums payable
            
            
            689,588
            
            
            
            962,680Accrued
      termination fee - Optos
            
            
            500,000
            
            
            
            500,000$
            2,753,896
            
            
            $
            3,336,117




18




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 six months ended June 30, 2009, the Company paid
out $4,352 related to the 2007 reserve.




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. The
Company initially recorded $314,709 of restructuring charges for costs of
severance and related benefits to a related party (see Note 16 – Management and
Employment Agreements and Note 17 – 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 and six months ended June 30, 2009, the
Company paid out $17,571 and $42,824, respectively, 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 June 30, 2009
            
            
            —
            
            
            
            48,478
            
            
            
            48,478Less:  current
      portion
            
            
            —
            
            
            
            (48,478
            )
            
            
            (48,478
            )Total
      accrued restructuring costs – long-term
            
            $
            —
            
            
            $
            —
            
            
            $
            —




19




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 (
            
            
            —
            
            
            
            (42,824
            )
            
            
            (42,824
            )Total
      accrued restructuring costs at June 30, 2009
            
            
            —
            
            
            
            90,401
            
            
            
            90,401Total
      accrued restructuring costs at June 30, 2009 – related
    party
            
            
            256,709
            
            
            
            —
            
            
            
            256,709Less:  current
      portion
            
            
            (64,177
            )
            
            
            (90,401
            )
            
            
            (154,578
            )Total
      accrued restructuring costs – long-term
            
            $
            192,532
            
            
            $
            —
            
            
            $
            192,532


NOTE
11 — DEBT OBLIGATIONS:




A summary
of all debt is as follows:




June
      30, 2009
            
            
            December
      31, 2008(Unaudited)Term
      Loan with ComVest due December 31, 2010. Principal and interest payments
      payable monthly bearing interest of 10% per annum (net of $836,820 and
      $1,124,468 OID at June 30, 2009 and December 31, 2008, respectively
      (See  Note 19 - Subsequent Events)
            
            $
            6,281,228
            
            
            $
            6,529,542Revolver
      with ComVest due December 31, 2010. Interest payments payable monthly
      bearing interest of 7.250% per annum (See Note 19 – Subsequent
      Events)
            
            
            2,900,000
            
            
            
            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
            
            
            4,751,432
            
            
            
            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
            
            
            490,000
            
            
            
            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%
            
            
            1,638,456
            
            
            
            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
            
            
            
            336,69016,788,633
            
            
            
            16,256,263Add
      Original Issue Discount (OID)
            
            
            836,820
            
            
            
            1,124,468Total
      principal payments of long term debt
            
            
            17,625,453
            
            
            
            17,380,731Less:
      Current
      portion
            
            
            3,050,199
            
            
            
            5,950,20914,575,254
            
            
            
            11,430,522Less
      OID
            
            
            (836,820
            )
            
            
            (1,124,468
            )Long
      term debt, net of current and OID
            
            $
            13,738,434
            
            
            $
            10,306,054




20




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


2009
            
            $
            2,200,1992010
            
            
            10,868,0482011
            
            
            804,6872012
            
            
            1,072,9162013
            
            
            1,072,917Thereafter
            
            
            1,606,686$
            17,625,453




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 was amortized
over the life of the long term debt.  Amortization related to the
warrants amounted to $54,114 and $0 for the three months ended June 30, 2009 and
June 30, 2008, respectively, and $111,608 and $0 for the six months ended June
30, 2009 and June 30, 2008, respectively.  Amortization related to the
original issue discount of $1,000,000 amounted to $85,356 and $0 for the three
months ended June 30, 2009 and June 30, 2008, respectively, and $176,041 and $0
for the six months ended June 30, 2009 and June 30, 2008,
respectively.  The maximum amount permitted to 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 was to 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 exceeded the Revolver Maximum, the Company was required to make a
payment to ComVest sufficient to reduce the amount outstanding to an amount less
than or equal to the Revolver Maximum. The Company was able to borrow under the
Revolver, up to the then applicable Revolver Maximum. The amounts due under the
Revolver bore 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
June 30, 2009, the interest rate on the Revolver was 7.25% and during the year
ended December 31, 2008, averaged 7.25%.  At June 30, 2009, the
interest rate on the Term Loan was 10% per annum. The Loans provided that the
stated interest rates were subject to increase by 500 basis points during the
continuance of an event of default under the Loan Agreement. Amounts due under
the Loans were payable monthly, beginning July 1, 2008.




21




The
outstanding principal amount of the Term Loan was 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 were payable monthly starting
August 1, 2008, including December 1, 2010. The final installment due and
payable on December 31, 2010 was to be in an amount equal to the entire
remaining principal balance, if any, of the Term Loan.




As of
June 30, 2009, the Company was in default on principal installment payments due
for February, 2009 through June, 2009 under the Term Loan in the aggregate
amount of $701,822. In addition, the Company was in default on principal
installment payments due for July, 2009 under the Term Loan in the aggregate
amount of $439,357 and was in default on interest payments due for July, 2009 in
the amount of $61,295. The Company was also in default on interest payments due
for July, 2009 under the Revolver in the amount of $18,098.  The
failure to make such payments constituted events of default under the Loan
Agreement.  The Company was obligated to pay a default interest rate
of 500 basis points over the prevailing rate, which difference between the
default rate and the prevailing rate was not paid.  On May 19, 2009,
ComVest executed a waiver letter (the Term Loan Waiver”) related to the Loan
Agreement for the periods of February through April, 2009.  Pursuant
to the Term Loan Waiver, ComVest waived the foregoing defaults, provided that
ComVest reserved the right to collect at a later time, but no 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 August 14, 2009, ComVest executed a waiver letter, which
waived the Company’s defaults under the Loan Agreement through August 14, 2009,
provided the Company pays the difference between the increased interest rate
charged in connection with the defaults and the regular interest rate no later
than March 31, 2010 (see Note 19 – Subsequent Events).




On
January 29, 2009, in order to assist the Company in making the payments under
the XRoads Agreement, as defined in Note 16 – 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, were 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 termination of the
XRoads Agreement, no reduction in any subsequent Term Loan installments were to
be permitted.  Amendment No. 1 also contained 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 provided 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 were segregated and solely used for the repayment of the Term Loan. To
the extent that royalty receipts from these sources did not meet the minimum
threshold of $200,000 per month, the Company was to make up the difference from
its operating cash.  In the event that royalty receipts from these
sources exceeded $450,000 in a given month, the Company could 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.




22




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. 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 June 30,
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 was to
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.  Fees paid pursuant to the Revolver were $17,354 and $0 for the
three months ended June 30, 2009 and June 30, 2008, respectively, and $25,208
and $0 for the six months ended June 30, 2009 and June 30, 2008,
respectively.




As of
June 30, 2009, the outstanding balances on the Revolver and the Term Loan were
$2,900,000 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 August
14, 2009, the Company entered into an Amended and Restated Revolving Credit
Agreement with ComVest (“Amended Loan Agreement”).  This Amended Loan
Agreement amended and restated the Loan Agreement dated June 20,
2008.  In connection with such Amended Loan Agreement, the Company
issued to ComVest an Amended and Restated Warrant to purchase, in the aggregate,
2,210,825 shares of the Company’s common stock (see Note 19 – Subsequent
Events).




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.




23




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.




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 June 30, 2009, income tax
refunds of $1,024,000 resulting from net operating loss carry-backs and $91,000
in refunds of overpayments were received by the Company and remitted to
M&T.  At June 30, 2009, the Company remitted to M&T a total of
approximately $2,467,000, which was comprised of approximately $1,353,000
applied to the $3 million accounts receivable target and $1,114,000 applied to
the $1 million federal and state income tax refund target.  The excess
of $114,000 over the $1 million tax refund target will be credited to the
M&T Deferred Obligations.  At June 30, 2009, the outstanding
balance related to the $3 million accounts receivable target was
$1,532,682.




24




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 June 30, 2009,
the Company’s consolidated balance sheet included a warrant liability of
$1,256,761 related to the fair value of warrants issued to M&T in connection
with the M&T Restructure Agreement.




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 June 30, 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.




25




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 six months ended June
30, 2009 and 2008 was $0 and $23,584, 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 was $67,056 and $0 for the three
months ended June 30, 2009 and 2008, respectively, and $134,112 and $0 for the
six months ended June 30, 2009 and 2008, 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.




CPR did
not make the required payments of: (i) $50,000 in January, 2009 and (ii)
$490,000, plus accrued interest, of which $8,166 was accrued as of June 30,
2009, 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.  On August 14, 2009, ComVest executed a waiver letter,
which waived all of the Company’s defaults under the Blue Lake Note through
August 14, 2009 (see Note 19 – Subsequent Events).




On July
14, 2009, Blue Lake filed a Complaint in the Superior Court of Humboldt County,
California seeking payment of the $490,000, plus accrued interest and fees (see
Note 18 – Litigation).




26




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.




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.




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.




CPR did
not make the required interest payments under the Amended Sub Notes for the
quarter ended June 30, 2009, in the aggregate amount of $11,500. Pursuant to the
terms of the Amended Sub Notes, 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 a Sub Noteholder. An event of default under
the Amended Sub Notes 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 August 14, 2009, ComVest executed a waiver
letter, which waived all of the Company’s defaults under the Amended Sub Notes
through August 14, 2009 (see Note 19 – Subsequent Events).




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.




27




Pursuant
to the Amended Loan Agreement with ComVest, the Company must deliver to ComVest,
on or prior to September 13, 2009, written agreements from the Sub Noteholders
agreeing to defer and postpone payments of principal and interest in respect of
the Amended Sub Notes until one or more dates on or after December 31,
2009.  The Company’s failure to enter into such agreements would
constitute an event of default under the Amended Loan Agreement, which would
permit ComVest to exercise its remedies including, among other things, declaring
all amounts outstanding under the Amended Loan Agreement immediately due and
payable and exercising its rights under the Amended and Restated Warrant (see
Note 19 – Subsequent Events).  The Company is currently in the process
of negotiating such agreements with the Sub Noteholders.  However,
there is no assurance that the Company will be able to enter into such
agreements on or prior to September 13, 2009.




Note Payable to ALS,
LLC




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.




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 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 18 –
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 June 30, 2009 and 2008, the Company recorded $28,054 and
$24,950, respectively, in interest expense associated with the ALS Note, and for
the six months ended June 30, 2009 and 2008, the Company recorded $55,459 and
$61,816, respectively, in interest expense associated with the ALS
Note.  As of June 30, 2009, the Company had $246,309 of accrued
interest payable recorded on its consolidated balance sheet associated with the
ALS Note. The Company presented the ALS Note on the balance sheet net of other
assets of $300,000 in expenses related to the TSIL Litigation as per the letter
agreement dated June 20, 2008 and an advance payment of $330,000 on the ALS
Note, which nets out to $1,638,000 (see Note 18 – Litigation).




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.




28




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.




The
Company did not make the required quarterly payment to StaffBridge for the
quarter ended June 30, 2009 of $59,172 and was also in arrears on interest
payments due in the amount of $2,366.  An event of default under the
StaffBridge 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 August 14, 2009, ComVest executed a waiver
letter which waived all of the Company’s defaults under the StaffBridge Note
through August 14, 2009 (see Note 19 – Subsequent Events).




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.




Pursuant
to the Amended Loan Agreement with ComVest, the Company must deliver to ComVest,
on or prior to September 13, 2009, a written agreement from the StaffBridge
Shareholders agreeing to defer and postpone payments of principal and interest
in respect of the StaffBridge Note until one or more dates on or after December
31, 2009.  The Company’s failure to enter into such agreement would
constitute an event of default under the Amended Loan Agreement, which would
permit ComVest to exercise its remedies including, among other things, declaring
all amounts outstanding under the Amended Loan Agreement immediately due and
payable and exercising its rights under the Amended and Restated Warrant (see
Note 19 – Subsequent Events).  The Company is currently in the process
of negotiating such agreement with the StaffBridge
Shareholders.  However, there is no assurance that the Company will be
able to enter into such agreement on or prior to September 13,
2009.




29




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.




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 June 30, 2009, 1,804,400 options were available for
issuance.




30




Accounting
for Employee Awards




The
Company’s consolidated results of operations for the six months ended June 30,
2009 and 2008 include share-based employee compensation expense totaling $24,567
and $21,105, respectively.  The Company’s consolidated results of
operations for the three months ended June 30, 2009 and 2008 include share-based
employee compensation expense totaling $5,994 and $6,313,
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.




Accounting
for Non-Employee Awards




Stock
compensation expense related to non-employee options was $9,623 and $0 for the
six months ended June 30, 2009 and 2008, respectively. Stock compensation
expense related to non-employee options was $4,839 and $0 for the three months
ended June 30, 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 six months ended June
30, 2009 and 2008, all of which relates to stock options, was as
follows:




Six
      Months EndedJune
      30, 2009
            
            
            June
      30, 2008(Unaudited)Statement
      of Operations line item:SG&A
            
            $
            34,190
            
            
            $
            21,105Total
            
            $
            34,190
            
            
            $
            21,105


Total
stock-based compensation recognized by the Company for the three months ended
June 30, 2009 and 2008, all of which relates to stock options, was as
follows:




Three
      Months EndedJune
      30, 2009
            
            
            June
      30, 2008(Unaudited)Statement
      of Operations line item:SG&A
            
            $
            10,832
            
            
            $
            6,313Total
            
            $
            10,832
            
            
            $
            6,313


During
the six months ended June 30, 2009 and 2008, no stock options were
granted.  The following information relates to the stock option
activity under the Plan for the six months ended June 30, 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 June 30,
      2009
            
            
            945,600
            
            
            
            2.86




31




The
aggregate intrinsic value for the options in the table above was $0 at June 30,
2009 based on the closing common share price of $0.19 as at June 30, 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 second 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 June 30, 2009. This amount changes
based on the fair market value of the Company’s common stock.




At June
30, 2009 and 2008, there was $98,903 and $65,748 respectively of unrecognized
compensation cost related to all unvested stock options.




Warrants




At June
30, 2009, warrants to purchase 4,050,825 shares were outstanding, having a
weighted average exercise price of $0.37 per share with an average remaining
contractual life of 2.4 years.




Number
      of Warrants
            
            
            Weighted
      Average Exercise Price(Unaudited)Balance,
      January 1,
      2009
            
            
            14,915,825
            
            
            $
            3.80Issued
      during the
      period
            
            
            175,000
            
            
            
            .19Cancelled
      during the period
            
            
            (11,040,000
            )
            
            
            5.00Exercised
      during the
      period
            
            
            —
            
            
            
            —Balance,
      June 30,
      2009
            
            
            4,050,825
            
            
            
            0.37


At June
30, 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
      - 1.55
            
            
            
            4,050,825
            
            
            
            2.4
            
            
            $
            .37


Warrants
were valued using the Black-Scholes model, using the weighted average key
assumptions of volatility of 106% to 309%, a risk-free interest rate of 0.60% 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
            
            June
      30, 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
            
            $
            1,256,761
            
            
            $
            
            
            
            $
            
            
            
            $
            1,256,761





32




Fair
      Value Measurements Using
                Significant
      Unobservable Inputs
                (Level
      3)Beginning
      Balance
            
            $
            1,213,433Total
      gains or (losses) (realized/unrealized)Included
      in earnings
            
            
            43,328Included
      in other comprehensive income
            
            
            —Purchases,
      issuances and settlements
            
            
            —Transfer
      in and/or out of Level 3
            
            
            —Ending
      Balance
            
            $
            1,256,761The
      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




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
June 30, 2009 were as follows (unaudited):




Remainder
      of fiscal
      2009
            
            $
            99,585Fiscal
      2010
            
            
            84,076Fiscal
      2011
            
            
            25,631Fiscal
      2012
            
            
            3,424Thereafter
            
            
            —Total
            
            $
            212,716


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 June 30, 2009 and
2008 was $41,644 and $38,444, respectively, and rent expense for the six months
ended June 30, 2009 and 2008 was $81,510 and $89,467, 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.  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 six months ended June 30, 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.




33




The
Company recorded an estimated liability of $220,066 based upon the expected
remaining life of the former owner, and made payments of $27,987 and $39,498 in
the three months ended June 30, 2009 and 2008, respectively, and $90,467 and
$38,628 in the six months ended June 30, 2009 and 2008, respectively. Estimated
future payments to the former owner are as follows:




At
      June 30, 2009 (Unaudited)Remainder
      of fiscal
      2009
            
            $
            41,9822010
            
            
            83,4842011
            
            
            84,4202012
      and
      thereafter
            
            
            84,420Total
      minimum
      payments
            
            
            294,306Present
      value (at 12.25% discount rate) net minimum retirement
      payments
            
            $
            220,066Less,
      current
      portion
            
            
            (84,420
            )$
            135,646


NOTE
15 — 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 six months ended June 30, 2009 and 2008, the
Company continued a 100% full valuation allowance to offset any income tax
benefit because it is more likely than not that the future benefit will not be
realized.




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 – Debt Obligations). 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 June 30, 2009, the Company did not receive or remit any federal or state
tax refunds to M&T, and during the six months ended June 30, 2009, the
Company received and remitted approximately $56,000 in federal and state tax
refunds to M&T.




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 June 30, 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 June 30, 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.




34




NOTE
16 — 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.




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 June 30, 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
June 30, 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 June 30, 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.




35




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”).




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 six
months ended June 30, 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 six months ended June 30, 2009,
pursuant to the XRoads Agreement, the Company paid XRoads a total of $290,000
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.  As of
the date of filing this Quarterly Report on Form 10-Q, the Company accrued an
aggregate of $39,280 pursuant to the XRoads Agreement, consisting of $37,500 in
fees related to services provided by XRoads, $780 in accrued interest and $1,000
in reimbursement of expense.




The terms
and conditions of the original XRoads Agreement which were not affected by the
XRoads Amendment remained 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 remained at 10%, calculated in
accordance with the XRoads Amendment, and subject to the cap of $50,000 per
month.




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
issued an additional warrant to purchase up to 75,000 shares of common stock at
an exercise price of $0.29 per share, exercisable through 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.




36




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.




The
XRoads Agreement provided that either the Company or XRoads could terminate the
XRoads Agreement at any time with at least thirty days prior written
notice.  On July 6, 2009, the Company sent such thirty-day termination
notice to XRoads.  The XRoads Agreement and Brian Delle Donne’s
services as the Company’s Interim Chief Operating Officer were terminated
effective August 7, 2009 (see Note 19 – Subsequent Events).




NOTE
17 — 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 six  months ended June 30, 2008,
ClearPoint made interest payments of $3,000 and $9,000 to Alyson Drew and Fergco
pursuant to the Drew Note and Fergco Note, respectively.  During the
six months ended June 30, 2009, the Company made interest payments of $4,000 and
$12,000 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 16 – Management and Employment
Agreements.




37




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 six months ended June 30, 2009 and
2008 were $0 and $0, 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.




38




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 six
months ended June 30, 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 first quarter of 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 or six months ended June
30, 2009.




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
six months ended June 30, 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 June 30, 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 16 – Management and Employment Agreements.




NOTE
18 — 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.




39




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 discovery in the litigation has concluded.  Both TSIL
and the Company have filed Motions for Summary Judgment as to the claims
asserted by TSIL against the Company.  The Company filed its motion on
June 24, 2009 and TSIL filed its motion on August 14, 2009.  These
motions will be ruled upon at an uncertain time prior to trial, which is
presently scheduled for November 2009.




40




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”).




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.




41




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.




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.  Pursuant to
the settlement, the Company made a cash payment of approximately $49,000 to Sunz
and issued 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.




42




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.




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 of approximately
$166,586, 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.




On June
2, 2009, AICCO filed a motion for summary judgment against the Company and on
July 2, 2009, the Company filed its opposition to such motion, and filed a
cross-motion for summary judgment against the additional
defendants.  On July 29, 2009, the additional defendants filed their
opposition to the Company's cross-motion, and filed a motion for summary
judgment against the Company.  On July 31, 2009, AICCO replied to the
Company’s opposition to AICCO’s motion for summary
judgment.  Discovery in this matter is ongoing, and the Company is
preparing an opposition to the additional defendants’ motion for summary
judgment.




43




Blue
Lake Rancheria




On July
14, 2009, Blue Lake Rancheria filed against the Company a Complaint in the
Superior Court of Humboldt County, California seeking payment of the $490,000,
plus accrued interest and attorneys' fees.  The lawsuit also names
Michael D. Traina, the Company’s Chairman of the board of directors and Chief
Executive Officer, and Christopher Ferguson, the Company’s majority stockholder,
as defendants.  Messrs. Traina and Ferguson served as guarantors of
the payment of the Blue Lake Note.  The Company asserts that the
exercise of the shares being released from escrow satisfied the obligation due
to Blue Lake and is required to file an Answer no later than August 23,
2009.




Michael
W. O’Donnell




In May
2009, Michael W. O’Donnell filed a claim in the Circuit Court of the Ninth
Judicial Circuit in and for Orange County, Florida seeking an unspecified amount
of unpaid wages and reasonable attorney’s fees related to the termination of his
employment with the Company.  On August 21, 2008, Mr. O’Donnell was
notified that his employment was being terminated for Cause, as defined in the
Employment Agreement dated February 23, 2007 and the Amended Letter Agreement
dated June 17, 2008 between the Company and the ALS Parties, which include Mr.
O’Donnell.  The Company has answered Mr. O’Donnell’s claims and
disputed his allegations.  Furthermore, on August 7, 2009, the Company
also filed a counter-claim against Mr. O’Donnell for breach of contract arising
out of his failure to honor the terms of the Employment Agreement and the
Amended Letter Agreement.




National
Union Fire Insurance




National
Union Fire Insurance made a Demand for Arbitration on the Company asserting a
claim for approximately $4,158,000 for amounts owed for premiums, adjustments,
expenses and fees associated with a Workers Compensation Policy previously held
by the Company and sold as part of the sale to Mercer Ventures, Inc. to
TradeShow Products, Inc.  The Company complied with the Demand and
named an arbitrator for the proceeding.  The date of the arbitration
has not yet been scheduled.




Allegiant
Professional Business Services Inc.




On July
31, 2009, Allegiant Professional Business Services Inc. (“Allegiant”) (formerly
known as TradeShow Products, Inc.) made a claim for damages and breach of
contract related to the sale of Mercer Ventures, Inc. to TradeShow Products,
Inc.  Allegiant is seeking repayment of $91,604 for nonpayment of
taxes.  The Company is in the process of responding to the
claim.




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.




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.




44




NOTE
19 — SUBSEQUENT EVENTS:




The
Company evaluated all events subsequent to June 30, 2009 through the date the
accompanying condensed consolidated financial statements were issued on August
19, 2009.  There were no subsequent events to report except the
following:




Termination
of XRoads Solutions Consulting Agreement




The
XRoads Agreement provided that either the Company or XRoads could terminate the
XRoads Agreement at any time with at least thirty days prior written
notice.  On July 6, 2009, the Company sent such thirty-day termination
notice to XRoads.  The XRoads Agreement and Brian Delle Donne’s
services as the Company’s Interim Chief Operating Officer were terminated
effective August 7, 2009.




Amended
and Restated Revolving Credit Agreement with ComVest




On August
14, 2009, the Company entered into the Amended Loan Agreement with
ComVest.  The Amended Loan Agreement amended and restated the Loan
Agreement, dated as of June 20, 2008, as amended on January 29, 2009, between
the Company and ComVest (the “Original Loan Agreement”).  Pursuant to
the Amended Loan Agreement, the maximum availability under the secured revolving
credit facility (the “Amended Revolver”) was increased from $3.0 million to
$10.5 million (the “Amended Revolver Maximum”).  The remaining
outstanding principal balances of $2.9 million under the revolving credit note
and $7.1 million under the term loan extended by ComVest pursuant to the
Original Loan Agreement were paid in full by an advance from the Amended
Revolver, and the term note was cancelled.




Effective
as of the first business day of each of the first twelve (12) calendar weeks in
each calendar quarter beginning with the calendar quarter ending March 31, 2010,
the Amended Revolver Maximum will be reduced by an amount equal to 1/12th of the
amount, calculated as of the last day of the immediately preceding calendar
quarter, equal to the sum of: (i) the amount (if any) by which the Amended
Revolver Maximum exceeds the amounts outstanding under the Amended Revolver,
plus (ii) all cash and cash equivalents of the Company and its subsidiaries
determined in accordance with accounting principles generally accepted in the
United States on a consolidated basis, minus (iii) all documented reasonable
costs and expenses incurred and paid in cash by the Company between August 14,
2009 and such quarter-end in connection with the registration of the resale of
shares underlying the Amended ComVest Warrant (as defined below).  To
the extent the amounts outstanding under the Amended Revolver exceed the Amended
Revolver Maximum, the Company must make a payment to ComVest to reduce the
amount outstanding to an amount less than or equal to the Amended Revolver
Maximum.  The Company may borrow under the Amended Revolver from time
to time, up to the then applicable Amended Revolver Maximum.




The
Company may request an increase in the Amended Revolver Maximum to an aggregate
amount not in excess of $11,250,000 minus: (i) any and all required reductions
as described above, and (ii) the outstanding principal amount of any
indebtedness incurred after August 14, 2009, up to a maximum principal amount
outstanding of $750,000 minus any increase in the Amended Revolver Maximum then
in effect.  To request such an increase, the Company must introduce to
ComVest a participant reasonably satisfactory to ComVest to participate in the
advances under the Amended Revolver in a principal amount not less than the
requested increase in the Amended Revolver Maximum, on a pari passu basis with
ComVest.




The
amounts due under the Amended Revolver bear interest at a rate per annum equal
to 12.00%, subject to increase by 400 basis points during the continuance of any
event of default under the Amended Loan Agreement.  Subject to certain
exceptions, the interest payments will be deferred as follows:




(i)           interest
in respect of all periods through and including September 30, 2009 will accrue
but will not be due and payable in cash except as and when provided in paragraph
(iii) below;




(ii)           10%
of all interest accruing during the period from October 1, 2009 through and
including December 31, 2009 will be due and payable in cash monthly in arrears
on the first day of each calendar month commencing November 1, 2009 and
continuing through and including January 1, 2010, and the remaining 90% of such
accrued interest will be due and payable in accordance with the following
paragraph (iii);




45




(iii)           all
accrued interest described in paragraph (i) above, and the deferred portion of
accrued interest described in paragraph (ii) above, will be due and payable (A)
as to 10% thereof, on April 1, 2010, (B) as to 15% thereof, on July 1, 2010, (C)
as to 35% thereof, on October 1, 2010, and (D) as to the remaining 40% thereof,
on December 31, 2010; and




(iv)           accrued
interest in respect of all periods from and after January 1, 2010 will be due
and payable in cash monthly in arrears on the first day of each calendar month
commencing February 1, 2010 and upon the maturity of the Amended
Revolver.




The
Amended Revolver matures on December 31, 2010, subject to extension to December
31, 2011, in ComVest’s sole and absolute discretion, if the Company requests the
extension no earlier than September 30, 2010 and no later than October 31, 2010
and there are no continuing events of default on the originally scheduled
Amended Revolver maturity date (which defaults may be waived in ComVest’s sole
and absolute discretion).




In
addition, the Amended Loan Agreement provides that:




(i)           ComVest
must pre-approve the hiring of all members of senior management of the Company
and all employment agreements or other contracts with respect to senior
management;




(ii)           the
Company will, on or prior to September 28, 2009, designate two (2) members of
the Board of Directors of the Company, each to be placed within separate classes
of the Board of Directors and each of which will be unaffiliated with and
independent of ComVest; and




(iii)           the
Company must deliver to ComVest, on or prior to September 13, 2009, written
agreements from specified holders of indebtedness of the Company (excluding
indebtedness held by M&T) agreeing to defer and postpone payments of
principal and interest in respect of such indebtedness until one or more dates
on or after December 31, 2009.




Under the
Amended Loan Agreement, the Company 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.




The
Amended Loan Agreement also requires the Company to, subject to certain
exceptions, obtain ComVest’s written consent until all obligations under the
Amended Loan Agreement have been satisfied in full in connection with certain
transactions including, but not limited to, incurrence of additional
indebtedness or liens on the Company’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 the Company’s equity securities; payment of certain
compensation to the Company’s executive officers; changing the Company’s
business model or ceasing substantially all of its operations for a period
exceeding 10 days; sale of accounts receivable; amendment of the Company’s
organizational documents; certain transactions with the Company’s affiliates;
making certain capital expenditures, and incurring monthly operating expenses in
excess of specified dollar amounts. In addition, beginning with fiscal quarter
ending March 31, 2010, the Company must maintain certain fixed charge coverage
ratios set forth in the Amended Loan Agreement.




The
Amended Loan Agreement lists various events of default including, but not
limited to: default in the payment of principal or interest under all
obligations of the Company under the Amended Loan Agreement or in the observance
or performance of any covenant set forth in the Amended Loan Agreement; default
of the Company or any of its subsidiaries under any indebtedness exceeding
$100,000 (excluding any amount due to Blue Lake and any litigation brought with
respect to amounts owed to Blue Lake, so long as such amounts are paid solely in
shares of the Company’s common stock); occurrence of certain bankruptcy or
insolvency events; and existence of any litigation, arbitration or other legal
proceedings, other than certain specified litigation, brought by any creditors
of the Company or any subsidiary in an aggregate claimed amount exceeding
$300,000.




46




In
connection with the execution of the Amended Loan Agreement, ComVest executed a
waiver of existing events of default under the Original Loan Agreement (the
“Waiver”).  The Waiver is effective provided that the Company pays to
ComVest on March 31, 2010 (or sooner if there is a further event of default)
approximately $160,000, constituting the difference between interest calculated
at the default rate and at the non-default rate under (i) the term note on the
outstanding principal balance of the term note for the period from March 1, 2009
through August 14, 2009, and (ii) the original revolving credit note on the
outstanding principal balance of the advances from time to time during the
default period stated in (i) above.




Upon
occurrence of an event of default, and at all times during the continuance of an
event of default, (i) at the option of ComVest (except with respect to
bankruptcy defaults for which acceleration shall be automatic) all obligations
of the Company under the Amended Loan Agreement 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 the
Company and its subsidiaries under the Amended Loan Agreement and/or seek
specific performance thereunder; (iii) ComVest may exercise its rights under the
Collateral Agreement, as defined below, against the assets of the Company and
its subsidiaries; (iv) the Amended Revolver may be immediately terminated or
reduced, at ComVest’s option; and (v) upon ComVest’s request, the Company will
provide it with immediate, full and unobstructed access to and control of its
books, records, systems and other elements of its business and
management.




The
Company’s obligations under the Amended Loan Agreement and the Amended Revolver
are jointly and severally guaranteed by each of its direct and indirect
subsidiaries (the “Guarantors”) pursuant to the Guaranty Agreement, dated as of
June 20, 2008 (the “Guaranty Agreement”) and the Reaffirmation of Guaranty,
dated as of August 14, 2009 (the “Reaffirmation of Guaranty”), and are secured
by a security interest in all of the Company’s and its subsidiaries’ assets (the
“Collateral”) as set forth in the Collateral Agreement dated June 20, 2008 (the
“Collateral Agreement”). Pursuant to the Guaranty Agreement and the
Reaffirmation of Guaranty, in the event the Company’s obligations are declared
immediately due and payable, then the Guarantors shall, upon demand by ComVest,
pay all or such portion of the Company’s obligations under the Amended Loan
Agreement declared due and payable.




Upon the
occurrence of an event of default under the Amended Loan Agreement, as described
above, ComVest may enforce against the Guarantors their obligations set forth in
the Guaranty Agreement. Pursuant to the Collateral Agreement, upon an event of
default under the Amended Loan Agreement, ComVest may exercise any remedies
available to it under the Uniform Commercial Code, and other applicable law,
including applying all or any part of the Collateral or proceeds from its
disposition as payment in whole or in part of the Company’s obligations under
the Amended Loan Agreement.




In
connection with the Amended Loan Agreement, each of Messrs. Michael Traina, the
Company’s Chairman of the Board of Directors and Chief Executive Officer, and
John Phillips, the Company’s Chief Financial Officer, reaffirmed their
respective Validity Guaranties previously given to ComVest on June 20, 2008 (the
“Validity Guaranty”) by executing a Reaffirmation of Validity Guaranties, dated
August 14, 2009 (the “Reaffirmation of Validity Guaranties”). The Validity
Guaranty provides that each officer will not, intentionally or through conduct
constituting gross negligence, and the Company will not, through intentional
acts of either Mr. Traina or Mr. Phillips or through conduct constituting gross
negligence by each such officer, provide inaccurate or misleading information to
ComVest, conceal any information required to be delivered to ComVest or fail to
cause the Collateral to be delivered to ComVest when required or otherwise take
any action that constitutes fraud. In the event of a breach or violation of the
obligations of Messrs. Traina or Phillips under the Validity Guaranty, the
officer must indemnify and hold ComVest harmless from any loss or damage
resulting from such breach or violation.




The
Company will pay ComVest modification fees in the amount of $210,000, charged to
the Amended Revolver, payable $60,000 on January 1, 2010 and $50,000 on each of
April 1, 2010, July 1, 2010 and October 1, 2010.  In addition, on the
first business day of each calendar month prior to the maturity date of the
Amended Revolver and on the Amended Revolver maturity date or the earlier
termination of the Amended Revolver, the Company must pay ComVest a monthly
unused commitment fee equal to 0.25% of the amount by which the Amended Revolver
Maximum exceeds the average daily outstanding principal amount of advances
during the immediately preceding calendar month, charged to the Amended
Revolver.




47




Warrant
Issued to ComVest




In
connection with the transaction with ComVest described above, the Company issued
to ComVest the Amended and Restated Warrant, dated August 14, 2009 (the “Amended
ComVest Warrant”), to purchase, in the aggregate, 2,210,825 shares (the “ComVest
Warrant Shares”) of the Company’s common stock, $0.0001 par value per share (the
“Common Stock”), for an exercise price of $0.01 per share (the “ComVest Exercise
Price”).  Upon the occurrence and during the continuation of an event
of default (other than certain specified events of default) under the Amended
Loan Agreement, then upon five (5) business days’ notice to the Company, the
Amended ComVest Warrant is exercisable for a number of shares of Common Stock
that, when aggregated with all ComVest Warrant Shares previously acquired upon
exercise of the Amended ComVest Warrant, constitutes 51% of the fully diluted
Common Stock of the Company at the time of exercise (a “Default
Exercise”).  The exercise price of the Amended ComVest Warrant for a
Default Exercise is $0.001 per share of Common Stock.  The exercise
price of the Amended ComVest Warrant may be paid to the Company in cash, check
or, at ComVest’s option, by crediting the exercise price to any obligation then
owed to it under the Amended Loan Agreement.  The Amended ComVest
Warrant is exercisable until August 31, 2014.  The ComVest Exercise
Price and the number of ComVest Warrant Shares are subject to adjustment
following certain events, including distributions on the Common Stock; merger,
consolidation or share exchange; and certain issuances of Common
Stock.  The Amended ComVest Warrant may be exercised via a “cashless
exercise.”




If at any
time the Common Stock is not registered under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), or the Company has ceased or suspended
the filing of periodic reports under the Exchange Act, ComVest has the right to
require the Company to redeem and purchase from ComVest, for a cash purchase
price of $2.0 million, 50% of the Amended ComVest Warrant, or the equivalent of
50% of the ComVest Warrant Shares that may be, or have been, issued upon
exercise of the Amended ComVest Warrant: (i) if the Company or any of its
stockholders enters into a binding agreement with respect to any sale (as
defined in the Amended Loan Agreement); (ii) upon and after the occurrence and
during the continuance of an event of default under the Amended Loan Agreement;
or (iii) any other event or circumstance that causes, effects, or requires any
payment in full under the Amended Loan Agreement.




If there
is a proposed sale of a majority of the outstanding shares of Common Stock of
the Company, on an as-converted basis, ComVest has the right, exercisable upon
written notice to the selling stockholder(s) provided not less than ten (10)
days prior to the proposed date for consummation of the sale, to elect to
participate in the transaction and sell to the proposed purchaser(s) a portion
of the ComVest Warrant Shares equal, on a percentage basis, to the percentage of
the selling stockholder(s)’ Common Stock included in the proposed
transaction.




48




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, obtain additional financing and
      restructure existing debt
obligations;




·
            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.




49




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.  ClearPoint completed this transition during the three months
ended June 30, 2008.  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 $922 and $36,642 for the six months ended June 30, 2009 and 2008,
respectively. ClearPoint is highly leveraged and has very limited financial
resources.  At June 30, 2009, ClearPoint had cash and cash equivalents
of $235, $26,262 of total liabilities and accumulated deficit of approximately
$55,412.




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 six months ended June 30, 2009, ClearPoint did not make certain required
payments under the Loan Agreement with ComVest, the Blue Lake Note, the Sub
Notes payable to Sub Noteholders and the StaffBridge Note.  See
“—Liquidity and Capital Resources—Debt Restructuring – M&T and ComVest,”
“—Notes Issued to Blue Lake and Sub Noteholders” and “—StaffBridge” for
additional information regarding such defaults and waivers from ComVest relating
to the defaults.




ClearPoint
included a “going concern” note in its condensed consolidated financial
statements for the fiscal quarter ended June 30, 2009 (see Note 1 of the Notes
to the Condensed Consolidated Financial Statements included in this Quarterly
Report on Form 10-Q).  As of June 30, 2009, 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 cash and liquidity needs, ClearPoint will be required to raise additional
financing and restructure existing debt, and there is no assurance that
ClearPoint will be successful in obtaining additional financing and
restructuring existing debt obligations.  If ClearPoint cannot
generate sufficient cash from operations, raise additional financing and
restructure existing debt, there is substantial doubt about the ability of
ClearPoint to continue as a going concern for the next twelve
months.




On August
14, 2009, ClearPoint entered into an Amended Loan Agreement with ComVest, which
amended and restated the Loan Agreement, dated as of June 20, 2008, between
ClearPoint and ComVest.  For additional information regarding the
Amended and Restated Revolving Credit Agreement, see “—Subsequent
Events.”




50




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 and 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 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.




Critical
accounting policies 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 3 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 Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q.




51




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.




Results
of Operations (Unaudited)




Three
Months Ended June 30, 2009 Compared to




Three
Months Ended June 30, 2008 (000’s)




The
following summarizes select items of ClearPoint’s condensed consolidated
statements of operations for the three months ended June 30, 2009 and June 30,
2008:




$
      (000’s)
            
            
            2009
            
            
            %
      of Revenue
            
            
            2008
            
            
            %
      of Revenue
            
            
            %
      ChangeRevenues
            
            
            $
            1,351
            
            
            
            100.0
            %
            
            $
            3,291
            
            
            
            100.0
            %
            
            
            (58.9
            )%Cost
      of services
            
            
            
            —
            
            
            
            —
            
            
            
            2,910
            
            
            
            88.4
            %
            
            NAGross
      profit
            
            
            
            1,351
            
            
            
            100.0
            %
            
            
            381
            
            
            
            11.6
            %
            
            
            254.6
            %SG&A
      expenses
            
            
            
            1,335
            
            
            
            98.8
            %
            
            
            6,391
            
            
            
            194.2
            %
            
            
            (79.1
            )%Depreciation
      and amortization expense
            
            
            
            158
            
            
            
            11.7
            %
            
            
            163
            
            
            
            4.9
            %
            
            
            3.1
            %(Loss)
      from operations
            
            
            
            (142
            )
            
            
            (10.5
            )%
            
            
            (6,173
            )
            
            
            (187.6
            )%
            
            
            (97.7
            )%Other
      income (expense)
            
            
            
            369
            
            
            
            27.3
            %
            
            
            300
            
            
            
            9.1
            %
            
            
            23.0
            )%Interest
      (expense)
            
            
            
            (511
            )
            
            
            (37.8
            )%
            
            
            (358
            )
            
            
            (10.9
            )%
            
            
            42.7
            %Gain
      on restructuring of debt
            
            
            
            —
            
            
            
            —
            
            
            
            687
            
            
            
            20.9
            %
            
            NAGain
      (loss) on sale of subsidiary
            
            
            
            —
            
            
            
            —
            
            
            
            600
            
            
            
            18.2
            %
            
            NALoss
      before income taxes
            
            
            
            (284
            )
            
            
            (21.0
            )%
            
            
            (4,944
            )
            
            
            (150.2
            )%
            
            
            (94.3
            )%Income
      tax expense
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            NANet
      (loss)
            
            
            $
            (284
            )
            
            
            (21.0
            )%
            
            $
            (4,944
            )
            
            
            (150.2
            )%
            
            
            (94.3
            )%


Net
Revenues




ClearPoint’s
revenues for the three months ended June 30, 2009 and 2008 were $1,351 and
$3,291, respectively, which represented a decrease of $1,940 or 58.9%. 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 $1,172 of royalties in net revenue during
the three months ended June 30, 3009 and $256 in franchise fees for the three
months ended June 30, 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 June 30, 2009 and 2008 was $0 and $2,910,
respectively, which represented a decrease of $2,910.  Under the new
business model, there is no cost of services rendered as revenues are recorded
net of costs associated with supplying temporary labor.  ClearPoint’s
gross profit for the three months ended June 30, 2009 and 2008 was $1,351 and
$381, respectively, which represented a increase of $970 or 254.6%. This
increase 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 June 30, 2009
and 2008, ClearPoint’s gross profit was 100% and 11.6%
respectively.




52




Selling,
General, Administrative and Restructuring Expenses




ClearPoint’s
selling, general, administrative (“SG&A”) and restructuring expenses for the
three months ended June 30, 2009 and 2008 were $1,335 and $6,391, respectively,
which represented a decrease of $5,056 or 79.1%. 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 former branch based operations during the three months ended June
30, 2009, which include expenses related to salaries, employee benefits and
rents.  ClearPoint also recognized $223 in recovery of bad
debt.  As a percentage of revenue for the three months ended June 30,
2009 and 2008, SG&A expenses were 98.8% and 194.2% respectively, due to
substantially less SG&A expenses associated with ClearPoint’s former branch
based operations.




Depreciation
and Amortization Expense




ClearPoint’s
depreciation and amortization expense for the three months ended June 30, 2009,
and 2008 was $158 and $163, respectively, which represented a decrease of $5 or
3.1%. The decrease was due to a decrease in equipment purchases.




Interest
Expense




ClearPoint’s
interest expense for the three months ended June 30, 2009 and 2008 was $511 and
$358, respectively, which represented an increase of $153, or 42.7%, primarily
due to the increased interest cost from the increase in ClearPoint’s overall
debt and the amortization of deferred financing fees to interest
expense.




Other
Income or Expense




For the
three months ended June 30, 2009 and 2008, total Other Income was $369 and $300,
respectively.  For the three months ended June 30, 2009, the income
was primarily due to the recognition of $358 in connection with the settlement
of the litigation involving Sunz and a gain on derivative instruments of
$9.  During the three months ended June 30, 2008, the income was
primarily attributable to payroll refunds.




Net
Loss




ClearPoint’s
net loss for the three months ended June 30, 2009 and 2008 was $284 and $4,944,
respectively, which represented a decrease in loss of $4,660 or 94.3%. The
decrease in loss was primarily a result of the decrease in SG&A expense due
to the change in ClearPoint’s business model.




53




Six
Months Ended June 30, 2009 Compared to




Six
Months Ended June 30, 2008 (000’s)




The
following summarizes select items of ClearPoint’s condensed consolidated
statements of operations for the six months ended June 30, 2009 and June 30,
2008:




$
            (000’s
            )
            
            2009
            
            
            %
      of Revenue
            
            
            2008
            
            
            %
      of Revenue
            
            
            %
      ChangeRevenues
            
            
            $
            2,588
            
            
            
            100.0
            %
            
            $
            27,511
            
            
            
            100.0
            %
            
            
            (90.6
            )%Cost
      of services
            
            
            
            —
            
            
            
            —
            
            
            
            25,654
            
            
            
            93.2
            %
            
            NAGross
      profit
            
            
            
            2,588
            
            
            
            100.0
            %
            
            
            1,857
            
            
            
            6.8
            %
            
            
            39.4
            %SG&A
      expenses
            
            
            
            2,525
            
            
            
            97.6
            %
            
            
            11,950
            
            
            
            43.4
            %
            
            
            (78.9
            )%Restructuring
      expense
            
            
            
            —
            
            
            
            —
            
            
            
            2,100
            
            
            
            7.6
            %
            
            
            —Fixed
      assets impairment expense, net
            
            
            
            5
            
            
            
            0.2
            %
            
            
            1,022
            
            
            
            3.7
            %
            
            
            (99.5
            )%Impairment
      of goodwill
            
            
            
            —
            
            
            
            —
            
            
            
            16,822
            
            
            
            61.1
            %
            
            
            —Depreciation
      and amortization expense
            
            
            
            313
            
            
            
            12.1
            %
            
            
            285
            
            
            
            1.0
            %
            
            
            8.9
            %(Loss)
      from operations
            
            
            
            (255
            )
            
            
            (9.8
            )%
            
            
            (30,322
            )
            
            
            (110.2
            )%
            
            
            (99.2
            )%Other
      income (expense)
            
            
            
            347
            
            
            
            13.4
            %
            
            
            200
            
            
            
            0.7
            %
            
            
            73.5
            %Interest
      (expense)
            
            
            
            (1,014
            )
            
            
            (39.2
            )%
            
            
            (906
            )
            
            
            (3.3
            )%
            
            
            11.9
            %Gain
      on restructuring of debt
            
            
            
            —
            
            
            
            —
            
            
            
            687
            
            
            
            2.5
            %
            
            
            —Gain
      (loss) on sale of subsidiary
            
            
            
            —
            
            
            
            —
            
            
            
            (1,294
            )
            
            
            (4.7
            )%
            
            
            —Loss
      before income taxes
            
            
            
            (922
            )
            
            
            (35.6
            )%
            
            
            (31,635
            )
            
            
            (115.0
            )%
            
            
            (97.1
            )%Income
      tax expense
            
            
            
            —
            
            
            
            —
            
            
            
            5,007
            
            
            
            18.2
            %
            
            
            —Net
      (loss)
            
            
            $
            (922
            )
            
            
            (35.6
            )%
            
            $
            (36,642
            )
            
            
            (133.2
            )%
            
            
            (97.5
            )%


Net
Revenues




ClearPoint’s
revenues for the six months ended June 30, 2009 and 2008 were $2,588 and
$27,511, respectively, which represented a decrease of $24,923 or 90.6%. 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 $2,314 and $1,568 of royalties in net
revenue during the six months ended June 30, 2009 and 2008,
respectively.




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 six months ended June 30, 2009 and 2008 was $0 and $25,654,
respectively, which represented a decrease of $25,654.  Under the new
business model, there are no cost of services rendered.  ClearPoint’s
gross profit for the six months ended June 30, 2009, and 2008 was $2,588 and
$1,857, respectively, which represented an increase of $731 or 39.4%. This
increase 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 revenues are recorded net of costs associated with supplying
temporary labor.  As a percentage of revenue for the six months ended
June 30, 2009 and 2008, ClearPoint’s gross profit was 100% and 6.8%,
respectively.




Selling,
General, Administrative and Restructuring Expenses




ClearPoint’s
SG&A and restructuring expenses for the six months ended June 30, 2009 and
2008 were $2,525 and $11,950, respectively, which represented a decrease of
$9,425 or 78.9%. The decrease was a direct result of ClearPoint’s change in
business model, which substantially reduced SG&A expenses associated with
ClearPoint’s former branch based operations during the six months ended June 30,
2009, as well as the recognition of $423 in recovery of bad
debt.  During the six months ended June 30, 2008, ClearPoint recorded
$1,605 in a provision for amounts due from the former franchisees that are no
longer in operation and allowances for doubtful accounts totaling $5,185. As a
percentage of revenue for the six months ended June 30, 2009 and 2008, SG&A
expenses were 97.6% and 43.4% respectively, largely as a result of reduced
revenue due to the recording of franchise royalties on a net basis.




54




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 six months ended June 30, 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 six months ended June 30, 2009,
and 2008 were $313 and $285, respectively, which represented an increase of $28
or 9.8%. For the six months ended June 30, 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 4 of the Notes to the
Condensed Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q. ClearPoint removed $1,838 of fixed assets and $816 of accumulated
depreciation as a result of this impairment. ClearPoint also recorded an
impairment of goodwill for the six months ended June 30, 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 six months ended June 30, 2009 and 2008 was $1,014 and
$906, respectively, which represented an increase of $108, or 11.9%, primarily
due to the increased interest cost from the increase in ClearPoint’s overall
debt.




Other
Income or Expense




For the
six months ended June 30, 2009 and 2008, total Other Income was $347 and $200,
respectively.  For the six months ended June 30, 2009, the income was
primarily due to the recognition of $358 in connection with the settlement of
the litigation involving Sunz and other income of $32, and was partially offset
by the loss on derivative instruments of $43.  For the six months
ended June 30, 2008, the increase in other income was primarily due to payroll
refunds.




Net
Loss




ClearPoint’s
net loss for the six months ended June 30, 2009 and 2008 was $922 and $36,642,
respectively, which represented a decrease in loss of $35,720 or 97.5%. The
decrease was primarily a result of ClearPoint’s change in business
model.  During the six months ended June 30, 2008, ClearPoint recorded
an impairment of goodwill of $16,822, restructuring charge of $2,100, SG&A
expenses of $11,950, and an income tax benefit valuation allowance of
$5,007.  For the six months ended June 30, 2009, ClearPoint’s SG&A
expenses significantly decreased (as described above) and there were no
impairment charges recorded.




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 June 30, 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 and 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 and 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 Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q).




55




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:




Six
      Months Ended
                June
      30,$
      (000’s)
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)Cash
      and cash equivalents at beginning of period
            
            
            $
            960
            
            
            $
            1,994Cash
      provided by (used in) operating activities
            
            
            
            (1,397
            )
            
            
            5,969Cash
      (used in) investing activities
            
            
            
            (70
            )
            
            
            (548
            )Cash
      provided by (used in) financing activities
            
            
            
            742
            
            
            
            (1,582
            )Cash
      and cash equivalents at end of period
            
            
            $
            235
            
            
            $
            5,833


Six
Months Ended June 30, 2009 and 2008




Net cash
provided by (used in) operating activities was ($1,397) and $5,969 for the six
months ended June 30, 2009 and 2008, respectively.  Cash used in
operating activities during the six months ended June 30, 2009 primarily
consisted of: a book loss of $922; non-cash items of: depreciation and
amortization expense of $447, partially offset by a reduction in the provision
for doubtful accounts of $423, interest expense related to the original issue
discount and warrant liability of $288, issuance of warrants relating to a
consulting agreement of $30, a loss on derivatives of $43, stock based
compensation of $34 and disposal of fixed assets of $5; and cash items of: a
decrease in accounts receivable of $200 related to collections and conversion of
receivables to a note and a decrease in new revenues related to the adoption of
new iLabor business, a decrease in unbilled revenue of $51, an increase in notes
receivable related to StaffChex accounts receivable, a decrease in prepaid
expenses and other current assets of $43, a decrease in other assets of $51, a
decrease in accounts payable of $38, a decrease in accrued expenses of $548, a
decrease in accrued payroll taxes of $80, a decrease in deferred revenue of
$498, a decrease in accrued restructuring costs of $47 and a decrease in
retirement benefits of $62.




56




Cash
provided by operating activities during the six months ended June 30, 2008
primarily consisted of: a book net loss of $36,642; non-cash items of: a
deferred tax expense of $5,007 as of January 1, 2008 due to a full
valuation allowance against the deferred tax assets, depreciation and
amortization expense of $1,307, an impairment of goodwill of $16,822, a
provision for doubtful accounts of $2,611, a provision for doubtful accounts of
$1,639 relating to franchisees and a loss on the sale of HRO of $1,294, issuance
of warrants related to the refinancing of $1,305, gain on the restructuring of
debt of $2,114 and stock based compensation of $41; and cash items of: a
decrease in accounts receivable of $13,062 due to the franchising of
ClearPoint’s branches and the related decrease in revenue in addition to the
adoption of the new technology based iLabor business model, a decrease in
unbilled revenue of $2,002, a decrease in prepaid expenses and other current
assets of $(424), an increase in other assets of $9, an increase in accounts
payable of $1,692, a decrease in accrued expenses and other accrued liabilities
of $815, a decrease in accrued payroll and related taxes of $2,679, an increase
of deferred revenue of $840 and an increase in accrued restructuring costs of
$930.




Net cash
(used in) investing activities was ($70) and ($548) for the six months ended
June 30, 2009 and 2008, respectively.  The primary use of cash for
investing activities for the six months ended June 30, 2009 was for the purchase
of fixtures and software and a decrease in restricted cash.  The
primary use of cash for investing activities for the six months ended June 30,
2008 was for capitalized software development of $548.




Net cash
provided by (used in) financing activities was $742 and ($1,582) for the six
months ended June 30, 2009 and 2008, respectively.  The following
primary financing activities in the six months ended June 30, 2009 resulted in
the net cash provided of $742: repayments of long term debt of ($1,138),
borrowings against ClearPoint’s credit facility of $1,900 and fees incurred in
refinancing ($20).  The primary financing activities for the six
months ended June 30, 2008 were: repayments to long term debt of ($9,419),
borrowing from ComVest of $8,000, net of original issue discount (“OID”) of
$1,000, borrowings on the ComVest revolver of $530 and fees incurred in the
refinancing of debt of $693.




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.




57




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 June 30,
2009, the balance sheet included a warrant liability of $1,256,761 related to
the fair value of M&T Warrants (see Note 11 of the Notes to the Condensed
Consolidated Financial Statements included in Part I, Item 1 of 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.




58




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 June 30, 2009, income tax
refunds of $1,024 resulting from net operating loss carry-backs and $91 refunds
of overpayments were received by ClearPoint and remitted to
M&T.  At June 30, 2009, ClearPoint remitted to M&T a total of
approximately $2,467, which was comprised of approximately $1,353 applied to the
$3,000 accounts receivable target and $1,114 applied to the $1,000 federal and
state income tax refund target.  The excess of $114 over the $1,000
tax refund target will be credited to the M&T Deferred
Obligations.  At June 30, 2009, the outstanding balance related to the
$3,000 accounts receivable target was $1,533.




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 June 30, 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.




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.




59




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 was 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 was to 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 permitted to be outstanding under the ComVest Revolver was
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
was to 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 exceeded the ComVest Revolver maximum, ClearPoint was required
to make a payment to ComVest sufficient to reduce the amount outstanding to an
amount less than or equal to the ComVest Revolver maximum. ClearPoint could
borrow under the ComVest Revolver from time to time, up to the then applicable
ComVest Revolver maximum. The amounts due under the ComVest Revolver bore
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
June 30, 2009, the interest rate on the $2,900 outstanding under the ComVest
Revolver was 10.00% and the interest rate on $7,118 outstanding under the
ComVest Term Loan was 7.25% per annum. The ComVest Loans provided that the
stated interest rates were 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 were payable monthly, beginning July 1, 2008. The
outstanding principal amount of the ComVest Term Loan was payable as follows:
$150 on July 1, 2008 and subsequent monthly payments were 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, until
December 1, 2010. The final installment due and payable on December 31, 2010 was
to be in an amount equal to the entire remaining principal balance, if any, of
the ComVest Term Loan.




As of
June 30, 2009, ClearPoint was in default on principal installment payments due
for February, 2009 through June, 2009 under the ComVest Term Loan in the
aggregate amount of $702. In addition, ClearPoint was in default on principal
installment payments due for July, 2009 under the ComVest Term Loan in the
aggregate amount of $439 and was in default on interest payments due for July,
2009 in the amount of $61. ClearPoint was also in default on interest payments
due for July, 2009 under the ComVest Revolver in the amount of
$18.  The failure to make such payments constituted events of default
under the ComVest Loan Agreement.  ClearPoint was obligated to pay a
default interest rate of 500 basis points over the prevailing rate, which
difference between the default rate and the prevailing rate was not
paid.  On May 19, 2009, ComVest executed a waiver letter (the “Term
Loan Waiver”) related to the ComVest Loan Agreement for the periods of February
through April, 2009.  Pursuant to the Term Loan Waiver, ComVest waived
the foregoing defaults, provided that ComVest reserved the right to collect at a
later time, but no 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.  On August 14, 2009,
ComVest executed a waiver letter, which waived ClearPoint’s defaults under the
ComVest Loan Agreement through August 14, 2009, including defaults under the
StaffBridge Note, the Blue Lake Note and the Sub Notes described below, provided
ClearPoint pays to ComVest approximately $160, constituting the difference
between the increased interest rate charged in connection with the defaults and
the regular interest rate, no later than March 31, 2010.  For
additional information regarding the StaffBridge Note, the Blue Lake Note and
the Sub Notes, see “—StaffBridge” and “—Notes Issued to Blue Lake and Sub
Noteholders.”  For additional information regarding the waiver letter
executed by ComVest on August 14, 2009, see “—Subsequent Events.”




60




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, were 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 termination
of the XRoads Agreement, no reduction in any subsequent installments were to be
permitted.  For additional information regarding the XRoads Agreement,
as amended, see “—Agreement with XRoads Solutions.”  Amendment No. 1
to the ComVest Term Loan also contained 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
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.  The waiver letter dated August 14, 2009
included a waiver of such cross-default provision related to ClearPoint’s
default under the Blue Lake Note.  In addition, the Amended ComVest
Loan Agreement specifically excludes from the definition of an event of default
any litigation brought in respect of the Blue Lake Note, provided that and so
long as payments under the Blue Lake Note are paid solely in shares of
ClearPoint’s common stock.  For additional information regarding the
Blue Lake Note, see “—Notes Issued to Blue Lake and Sub
Noteholders.”




Pursuant
to the Amended ComVest Loan Agreement, ClearPoint must deliver to ComVest, on or
prior to September 13, 2009, written agreements from specified holders of
indebtedness of ClearPoint, including the Amended Sub Notes and the StaffBridge
Note described below, but excluding indebtedness held by M&T, agreeing to
defer and postpone payments of principal and interest in respect of such
indebtedness until one or more dates on or after December 31,
2009.  ClearPoint’s failure to enter into such agreements would
constitute an event of default under the Amended ComVest Loan Agreement, which
would permit ComVest to exercise its remedies including, among other things,
declaring all amounts outstanding under the Amended ComVest Loan Agreement
immediately due and payable and exercising its rights under the Amended and
Restated Warrant.  For additional information regarding the Amended
ComVest Loan Agreement and the Amended and Restated Warrant, see “—Subsequent
Events.”  ClearPoint is currently in the process of negotiating such
agreements.  However, there is no assurance that ClearPoint will be
able to enter into such agreements on or prior to September 13,
2009.




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 were segregated and solely used for
the repayment of the ComVest Term Loan. As amended pursuant to Amendment No. 1
to the ComVest Term Loan entered into in connection with the XRoads Agreement,
to the extent that royalty receipts from these sources did not meet the minimum
threshold of $200 per month, ClearPoint was to make up the difference from its
operating cash.  In the event that royalty receipts from these sources
exceeded $450 in a given month, ClearPoint could utilize the excess for
operations or offset amounts owed on the ComVest Revolver at its
discretion.  For the six months ended June 30, 2009, ClearPoint
remitted approximately $904 of principal and interest payments pursuant to the
ComVest Term Loan, all of which was derived from its royalty receipts, $68 of
interest payments pursuant to the ComVest Revolver, all of which was derived
from its operating cash and $200 to XRoads pursuant to the XRoads Agreement,
which ClearPoint was permitted to remit pursuant to Amendment No. 1 to the
ComVest Loan Agreement.  As of June 30, 2009 ClearPoint has remitted,
since inception of the loan, $2,634 of principal and interest payments, pursuant
to the ComVest Term Loan, of which $1,798 was derived from its royalty receipts
and $661 was derived from its other operations and $608 of principal and
interest payments, pursuant to the ComVest Revolver, all of which was derived
from its other operations.




61




The
ComVest Loans mature on December 31, 2010, subject to certain prepayment
requirements related to the ComVest Term Loan. The ComVest Loan Agreement
provided 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.




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. 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
provided that 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 June 30, 2009, ClearPoint was in compliance
with the applicable notice and reporting requirements required under the ComVest
Loan Agreement.  The ComVest Loan Agreement also required ClearPoint
to obtain ComVest’s written consent 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.




62




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.




ClearPoint
paid to ComVest non-refundable closing fees in the amount of $530, charged to
the ComVest Revolver, simultaneously with funding of the amounts payable to
ClearPoint under the ComVest Loan Agreement. In addition, ClearPoint was to pay
to ComVest a monthly collateral monitoring, availability and administrative fee
equal to 0.15% of the average daily principal amount outstanding under the
ComVest Revolver during the preceding calendar month, up to $4.50 per
month.




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.
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 June 30,
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 $2,269 including interest at
June 30, 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.  ClearPoint
presented the ALS Note on the balance sheet net of other assets of $300 in
expenses related to the TSIL Litigation and an advance payment of $330 on the
ALS Note, which nets out to $1,638.  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.




63




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 six months ended June 30, 2009
and 2008, ClearPoint accrued $55 and $62, respectively, in interest expense
associated with the ALS Note.  As of June 30, 2009, ClearPoint had
$246 of accrued interest payable recorded on its consolidated balance sheet
associated with the ALS Note.




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. 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.  Amendment No. 1 to the ComVest Loan Agreement
contains ComVest’s acknowledgement and consent to ClearPoint’s amendment of the
payment terms and payment schedule of the StaffBridge Note pursuant to the
second Debt Extension Agreement.




ClearPoint
did not make the required quarterly payment to StaffBridge for the quarter ended
June 30, 2009 of $59 and was also in arrears on interest payments due in the
amount of $2.  An event of default under the StaffBridge 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 August 14, 2009, ComVest executed a waiver letter, which
waived all of ClearPoint’s defaults under the StaffBridge Note through August
14, 2009.  See “—Debt Restructuring – M&T and ComVest—ComVest” and
“—Subsequent Events.”




64




See
“—Debt Restructuring – M&T and ComVest—ComVest” for a description of
ClearPoint’s obligation to restructure the StaffBridge Note pursuant to the
Amended ComVest Loan Agreement.




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.




CPR did
not make the required payments of: (i) $50 in January, 2009 and (ii) $490, plus
accrued interest, of which $8 has been accrued as of June 30, 2009, 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.  On July 14, 2009, Blue Lake filed a
Complaint in the Superior Court of Humboldt County, California seeking payment
of the $490,000, plus accrued interest and fees.  For additional
information regarding this Complaint, see Part II, Item 1 of this Quarterly
Report on Form 10-Q.  On August 14, 2009, ComVest executed a waiver
letter, which waived all of ClearPoint’s defaults under the Blue Lake Note
through August 14, 2009.  See “—Debt Restructuring – M&T and
ComVest—ComVest” and “—Subsequent Events.”




65




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 June 30,
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
June 30, 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.




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.




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.




See
“—Debt Restructuring – M&T and ComVest—ComVest” for a description of
ClearPoint’s obligation to restructure the Amended Sub Notes pursuant to the
Amended ComVest Loan Agreement.




66




CPR did
not make the required interest payments under the Amended Sub Notes for the
quarter ended June 30, 2009, in the aggregate amount of $11.  Pursuant
to the terms of the Amended Sub Notes, 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 a Sub Noteholder.  An
event of default under the Amended Sub Notes 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 August 14, 2009,
ComVest executed a waiver letter, which waived all of ClearPoint’s defaults
under the Amended Sub Notes through August 14, 2009.  See “—Debt
Restructuring – M&T and ComVest—ComVest” and “—Subsequent
Events.”




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
were 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.




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
June 30, 2009, AMS did not pay to CPR the earnout payments required under the
HRO Purchase Agreement.




67




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
June 30, 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.




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 commenced on June 3, 2009.




68




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 in the six months ended
June 30, 2008. 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.




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”).




69




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 18 –
Litigation” to ClearPoint’s condensed 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.




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. 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 was 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 Advisory Services Agreement was automatically
renewed on June 26, 2009 pursuant to its terms.  During the six months
ended June 30, 2009, ClearPoint is obligated to pay TNMC $2 for reimbursement of
travel expenses.




70




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 June, 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 June 30, 2009, ClearPoint paid Mr. Ferguson
approximately $58 pursuant to the consulting agreement and recorded a related
party liability of $257 as of June 30, 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 June 30,
2009.




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
June 30, 2009, ClearPoint paid Mr. Braun approximately $75 as severance under
the Braun Separation Agreement.




71




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”).  The XRoads Agreement
provided that either ClearPoint or XRoads could terminate the XRoads Agreement
at any time with at least thirty days prior written notice.  On July
6, 2009, ClearPoint sent such thirty-day termination notice to
XRoads.  The XRoads Agreement and Brian Delle Donne’s services as
ClearPoint’s Interim Chief Operating Officer were terminated effective August 7,
2009.




ClearPoint
paid XRoads $50 per month for each of the first four months of Mr. Delle Donne’s
services.  In addition, XRoads was 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 was 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 six
months ended June 30, 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 six months ended
June 30, 2009, pursuant to the XRoads Agreement, ClearPoint paid XRoads a total
of $290 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.  As of the date of filing this Quarterly Report on Form 10-Q,
ClearPoint accrued an aggregate of $39 pursuant to the XRoads Agreement,
consisting of $37 in fees related to services provided by XRoads, $1 in accrued
interest and $1 in reimbursement of expense.




72




The terms
and conditions of the original XRoads Agreement which were not affected by the
XRoads Amendment remained 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 remained at 10%, calculated in
accordance with the XRoads Amendment, and subject to the cap of $50 per
month.




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
issued an additional warrant to purchase up to 75,000 shares of common stock the
exercise price of $0.29 per share, exercisable through 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.




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 the beginning of the fiscal quarter ended
June 30, 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.




Subsequent
Events




For a
description of subsequent events, see Note 19 – Subsequent Events to the Notes
to the Condensed Consolidated Financial Statements contained in this Quarterly
Report on Form 10-Q, which description is incorporated herein by
reference.




Income
Taxes




As of
June 30, 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 18 to the Notes to the Condensed 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.




73




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.




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.




74




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.




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. The adoption of
FSP FAS 157-4 did 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. Because FSP
FAS 107-1 and APB 18-1 apply only to financial statement disclosure, the
adoption did not have a material impact on ClearPoint’s consolidated financial
statements.




75




In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments”(“FAS 115-2 and FAS
124-2”).  This FSP provides a framework to perform an other-than-temporary
impairment analysis, in compliance with Generally Accepted Accounting Principles
(“GAAP”), which determines whether the holder of an investment in a debt or
equity security, for which changes in fair value are not regularly recognized in
earnings, should recognize a loss in earnings when the investment is
impaired.  Additionally, this FSP amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements.  
FAS 115-2 is effective for interim reporting periods ending after June 15,
2009.  ClearPoint adopted FAS 115-2 and FAS 124-2 during the quarter ended
June 30, 2009.  The adoption did not have a material impact on
ClearPoint’s condensed consolidated financial statements.





In May
2009, the FASB issued Statement No. 165, “Subsequent Events”(“FAS 165”), which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued.  In particular, FAS 165 provides guidance
on the period after the balance sheet date and the circumstances under which
management should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements.  FAS 165 also
requires certain disclosures about events or transactions occurring after the
balance sheet date.  FAS 165 is effective for interim and annual
reporting periods ending after June 15, 2009. ClearPoint adopted the
provisions of FAS 165 in the quarter ended June 30, 2009.  The
adoption did not have a material impact on ClearPoint’s consolidated financial
statements.







Standards Issued But Not Yet
Adopted




In April
2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”
(“FAS 141(R)-1”).  FAS 141(R)-1 requires that assets acquired and
liabilities assumed in a business combination that arise from contingencies be
recognized at fair value per SFAS No. 157, if the acquisition-date fair value
can be reasonably determined. If the fair value cannot be reasonably determined,
then the asset or liability should be recognized in accordance with SFAS
No. 5, “Accounting for Contingencies,” and FASB Interpretation
(“FIN”) No. 14, “Reasonable Estimation of the Amount of a Loss - an
interpretation of FASB Statement No. 5.” FAS 141(R)-1 also requires new
disclosures for the assets and liabilities within the scope of the FSP.
ClearPoint is applying the guidance of FAS 141(R)-1 to business combinations
completed on or after January 1, 2009. ClearPoint was not involved in any
business combinations on or after January 1, 2009.





In June
2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial
Assets - an amendment of FASB Statement No. 140”(“SFAS 166”), which
amends the existing guidance on transfers of financial
assets.   The amendments include: (1) eliminating the qualifying
special-purpose entity concept, (2) a new unit of account definition that must
be met for transfers of portions of financial assets to be eligible for sale
accounting, (3) clarifications and changes to the derecognition criteria for a
transfer to be accounted for as a sale, (4) a change to the amount of recognized
gain or loss on a transfer of financial assets accounted for as a sale when
beneficial interests are received by the transferor, and (5) extensive new
disclosures. SFAS 166 is effective for new transfers of financial assets
occurring on or after January 1, 2010.  The adoption of SFAS 166 is
not expected to have a material impact on ClearPoint’s consolidated financial
statements; however, it could impact future transactions entered into by
ClearPoint.




76





In June
2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), amending the consolidation guidance for
variable-interest entities under FIN 46(R), “Consolidation of Variable Interest
Entities an
interpretation of ARB No. 51.”The amendments include:
(1) the elimination of the exemption for qualifying special purpose entities,
(2) a new approach for determining who should consolidate a variable-interest
entity, and (3) changes to when it is necessary to reassess who should
consolidate a variable-interest entity.  SFAS 167 is effective January
1, 2010. ClearPoint is currently evaluating the impact of this standard on its
consolidated financial statements.





In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification (Codification) and the Hierarchy” of GAAP(“SFAS 168”),
which replaces SFAS No. 162, “The Hierarchy of GAAP”and establishes the
Codification as the single source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities.  SEC rules and interpretive
releases are also sources of authoritative GAAP for SEC registrants. 
SFAS 168 modifies the GAAP hierarchy to include only two levels of GAAP:
authoritative and nonauthoritative.  SFAS 168 is effective for interim and
annual periods ending after September 15, 2009.  As SFAS 168 is
not intended to change or alter existing GAAP, it will not impact ClearPoint’s
condensed consolidated financial statements.  ClearPoint will adjust
historical GAAP references in its third quarter 2009 Form 10-Q to reflect
accounting guidance references included in the Codification.





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 June 30, 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.




77




PART
II — OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS.




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
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
ClearPoint.




ClearPoint
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
ClearPoint.  Agreements related to the acquisition of certain assets
and liabilities of ALS in February 2007 contain provisions under which
ClearPoint may seek indemnification from ALS in connection with the
foregoing.  ClearPoint intends to pursue all appropriate claims for
such indemnification and cannot estimate the potential liability, if
any.




On
January 11, 2008, ClearPoint 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 ClearPoint’s Crossclaim,
denying all claims, and filed a Counterclaim asking for a declaratory judgment
that it does not have to indemnify ClearPoint 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 ClearPoint 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 ClearPoint
(the “ALS Agreement”). Pursuant to the ALS Agreement, the ALS Parties and
ClearPoint agreed, among other things, as follows:




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




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




·
            That
      the ALS Parties and ClearPoint shall take all appropriate actions to
      dismiss all of their respective claims against one another in the TSIL
      Litigation, and that following such dismissal, ClearPoint 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, ClearPoint 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 ClearPoint in the
      TSIL Litigation, or the amount of TSIL’s claims against ClearPoint are
      liquidated by settlement or
otherwise.




78




ALS did
not elect to provide a defense to ClearPoint, and ClearPoint remains represented
by its own counsel. 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. The
discovery in the litigation has concluded.  Both TSIL and ClearPoint
have filed Motions for Summary Judgment as to the claims asserted by TSIL
against ClearPoint.  ClearPoint filed its motion on June 24, 2009 and
TSIL filed its motion on August 14, 2009.  These motions will be ruled
upon at an uncertain time prior to trial, which is presently scheduled for
November 2009.




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 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.  Pursuant to
the settlement, ClearPoint made a cash payment of approximately $49 to Sunz and
issued an irrevocable letter of credit to cover future claims, if
any.  The letter of credit will expire on February 23,
2013.




AICCO,
Inc.




On
November 18, 2008, AICCO, Inc. (“AICCO”) filed a complaint in 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 of approximately
$167, 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.




On June
2, 2009, AICCO filed a motion for summary judgment against ClearPoint and on
July 2, 2009, ClearPoint filed its opposition to such motion, and filed a
cross-motion for summary judgment against the additional
defendants.  On July 29, 2009, the additional defendants filed their
opposition to ClearPoint's cross-motion, and filed a motion for summary judgment
against ClearPoint.  On July 31, 2009, AICCO replied to ClearPoint’s
opposition to AICCO’s motion for summary judgment.  Discovery in this
matter is ongoing, and ClearPoint is preparing an opposition to the additional
defendants’ motion for summary judgment.




Michael
W. O’Donnell




In May
2009, Michael W. O’Donnell filed a claim in the Circuit Court of the Ninth
Judicial Circuit in and for Orange County, Florida seeking an unspecified amount
of unpaid wages and reasonable attorney’s fees related to the termination of his
employment with ClearPoint.  On August 21, 2008, Mr. O’Donnell was
notified that his employment was being terminated for Cause, as defined in the
Employment Agreement dated February 23, 2007 and the Amended Letter Agreement
dated June 17, 2008 between ClearPoint and the ALS Parties, which include Mr.
O’Donnell.  ClearPoint has answered Mr. O’Donnell’s claims and
disputed his allegations.  Furthermore, on August 7, 2009, ClearPoint
also filed a counter-claim against Mr. O’Donnell for breach of contract arising
out of his failure to honor the terms of the Employment Agreement and the
Amended Letter Agreement.




79




National
Union Fire Insurance




National
Union Fire Insurance made a Demand for Arbitration on ClearPoint asserting a
claim for approximately $4,158 for amounts owed for premiums, adjustments,
expenses and fees associated with a Workers Compensation Policy previously held
by ClearPoint and sold as part of the sale to Mercer Ventures, Inc. to TradeShow
Products, Inc.  ClearPoint complied with the Demand and named an
arbitrator for the proceeding.  The date of the arbitration has not
yet been scheduled.




Blue
Lake Rancheria




On July
14, 2009, Blue Lake Rancheria filed against ClearPoint a Complaint in the
Superior Court of Humboldt County, California seeking payment of the $490, plus
accrued interest and attorneys' fees.  The lawsuit also names Michael
D. Traina, ClearPoint’s Chairman of the board of directors and Chief Executive
Officer, and Christopher Ferguson, ClearPoint’s majority stockholder, as
defendants.  Messrs. Traina and Ferguson served as guarantors of the
payment of the Blue Lake Note.  ClearPoint asserts that the exercise
of the shares being released from escrow satisfied the obligation due to Blue
Lake and is required to file an Answer no later than August 23,
2009.




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.




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 our
reports filed with the SEC, which could materially affect our business,
financial condition or results of operations.




The risks
described below and in our reports filed with the SEC 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 reports
filed with the SEC.




80




This
Quarterly Report on Form 10-Q includes a going concern note to our
condensed  consolidated financial statements for the fiscal quarter
ended June 30, 2009 which may require us to scale back or cease
operations.




At June
30, 2009, we had cash and cash equivalents of $235, an accumulated deficit of
approximately $55,412 and working capital deficiency of approximately
$8,904.  For the six months ended June 30, 2009, we incurred a net
loss of approximately $922.  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
consolidated financial statements for the quarter ended June 30, 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
and 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
June 30, 2009, we had cash and cash equivalents of approximately $235 and
approximately $26,262 of total liabilities.




Our
ability to borrow under the ComVest loan agreement would be compromised in the
event of non-compliance with applicable covenants under such
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 to ComVest 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 $4,751 at
June 30, 2009, becoming accelerated and immediately due and
payable.




We did
not make certain required principal installment payments of $1,141 or interest
payments of $61, in the aggregate, under the ComVest term loan. We also did not
make required interest payments of $18 under the ComVest revolving credit
facility.  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, 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.




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.  As of the date of filing this Quarterly Report on Form
10-Q, we did not make certain required payments under the note payable to Blue
Lake, notes payable to our Sub Noteholders and the note payable to the former
shareholders of StaffBridge.  In the aggregate, we have failed to pay
$620 under such indebtedness.  On August 14, 2009, ComVest executed a
waiver letter, which waived our defaults under the ComVest loan agreement and
other debt obligations described above through August 14, 2009, provided that we
pay the difference between the increased interest rate charged in connection
with the defaults and the regular interest rate no later than March 31,
2010.




81




Although
ComVest has waived the foregoing defaults, there is no assurance that we will be
able to make future scheduled payments, comply with other requirements of our
existing debt obligations or receive future waivers.




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.




A
covenant in our amended loan agreement with ComVest requires us to restructure
certain of our existing debt obligations on or prior to September 13, 2009, and
the waiver letter executed by ComVest in connection with our amended loan
agreement is conditioned on our payment of certain default interest on or prior
to March 31, 2010.  Our inability to restructure such obligations,
make payments required by the waiver letter or comply with other requirements of
the amended loan agreement would have an adverse effect on our business,
financial condition and results of operations, and we may seek, or be forced to
seek, protection under the federal bankruptcy laws.




The
amended loan agreement with ComVest contains a covenant requiring us to deliver
to ComVest, on or prior to September 13, 2009, written agreements from specified
holders of our indebtedness, including indebtedness held by the Sub Noteholders
and the former shareholders of StaffBridge, agreeing to defer and postpone
payments of principal and interest in respect of such indebtedness until one or
more dates on or after December 31, 2009.  Although we are in the
process of negotiating such agreements, there can be no assurance that we can
restructure our obligations in accordance with the amended loan agreement with
ComVest on or prior to September 13, 2009.  Pursuant to the terms of
the amended loan agreement with ComVest, the failure to comply with such
covenant would constitute an event of default.




In
addition, the waiver of existing events of default provided by ComVest in
connection with entering into the amended loan agreement with us is conditioned
upon our payment to ComVest, on March 31, 2010, or sooner by reason of any
further event of default, of approximately $160, constituting the difference
between interest calculated at the default rate and at the non-default rate on
the principal and interest amounts that we did not pay under ComVest original
loan agreement for the period from March 1, 2009 through August 14,
2009.  Our failure to make such payment on or prior to March 31, 2010,
as applicable, would constitute an event of default under the amended loan
agreement with ComVest.




Events of
default under the amended loan agreement would entitle ComVest to, among other
remedies, declare the loan due and payable and, subject to certain exceptions,
take control of us through exercise of an amended and restated warrant issued to
ComVest.  See “—Issuance of shares of our common stock upon the
exercise of the ComVest amended and restated warrant will cause significant
dilution of equity interests of existing holders of common stock, reduce the
proportionate voting power of existing holders of common stock and could
potentially reduce the market value of our common stock.”  An event of
default under the ComVest loan agreement may also trigger an agreement
termination event under the M&T loan agreement.  See “—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.” If ComVest accelerates the repayment of borrowings,
takes control of us through the exercise of the warrant or exercises other
available remedies in the event of default, it will have a material adverse
effect on our business, financial condition and results of operations, and we
may seek, or be forced to seek, protection under the federal bankruptcy
laws.




Issuance
of shares of our common stock upon the exercise of the ComVest amended and
restated warrant will cause significant dilution of equity interests of existing
holders of common stock, reduce the proportionate voting power of existing
holders of common stock and could potentially reduce the market value of our
common stock.




In
connection with the amended loan agreement with ComVest, we issued to ComVest
the amended and restated warrant dated August 14, 2009 to purchase, in the
aggregate, 2,210,825 shares of our common stock.  Pursuant to the
amended and restated warrant, upon the occurrence and during the continuation of
an event of default (other than certain specified events of default) under the
amended loan agreement, the amended and restated warrant is exercisable for a
number of shares of our common stock that constitutes an aggregate of 51% of our
fully diluted common stock at the time of exercise, which would result in
ComVest taking control of us.  The amended and restated warrant issued
to ComVest is exercisable until August 31, 2014.  Should ComVest
exercise the amended and restated warrant into shares of our common stock upon
the occurrence of a triggering event of default under the amended loan
agreement, it will cause significant dilution of equity interests of existing
holders of common stock, reduce the proportionate voting power of existing
holders of common stock and reduce the value of our common stock and outstanding
warrants.




82




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
“Initial XRoads Warrant”), exercisable through December 31, 2010.  In
connection with the XRoads Extension, on May 14, 2009, ClearPoint issued to
XRoads an additional warrant to purchase up to 75,000 shares of ClearPoint’s
common stock at the exercise price of $0.29 per share (the “Additional XRoads
Warrant” and, together with the Initial XRoads Warrant, the “XRoads Warrants”),
exercisable through April 30, 2011.  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.




On August
14, 2009, ClearPoint entered into the Amended ComVest Loan Agreement with
ComVest.  In connection with Amended ComVest Loan Agreement,
ClearPoint issued to ComVest the Amended ComVest Warrant to purchase, in the
aggregate, 2,210,825 shares of ClearPoint’s common stock for an exercise price
of $0.01 per share (the “ComVest Warrant”).  Upon the occurrence and
during the continuation of an event of default (other than certain specified
events of default) under the Amended ComVest Loan Agreement, the ComVest Warrant
is exercisable for a number of shares of common stock that, when aggregated with
all shares of common stock previously acquired by ComVest upon exercise of the
ComVest Warrant, constitutes 51% of ClearPoint’s fully diluted common stock at
the time of exercise.  The ComVest Warrant is exercisable until August
31, 2014.  For additional information regarding the ComVest Warrant,
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 XRoads Warrants and the ComVest Warrant (collectively, the
“Warrants”) 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 Warrants were being
issued to sophisticated investors that could fend for themselves and that had
access to certain information about ClearPoint and there was no general
solicitation.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES.




Other
than ClearPoint’s failure to make certain payments on or provide required
information pursuant to, as applicable, the ComVest Loan Agreement, the
StaffBridge Note and the Amended Sub Notes 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 principal installment payments due for February, 2009 through June, 2009
under the ComVest Term Loan in the aggregate amount of $702. In addition,
ClearPoint was in default on principal installment payments due for July, 2009
under the ComVest Term Loan in the aggregate amount of $439 and was in default
on interest payments due for July, 2009 in the amount of $61. ClearPoint was
also in default on interest payments due for July, 2009 under the ComVest
Revolver in the amount of $18.  The failure to make such payments
constituted events of default pursuant to the ComVest Loan
Agreement.  ClearPoint is obligated to pay a default rate of 500 basis
points over the prevailing interest rate, 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.




83




As of the
date of filing this Quarterly Report on Form 10-Q, ClearPoint did not make the
required quarterly payment under the StaffBridge Note for the quarter ended June
30, 2009 of $59 and was also in arrears on interest payments due in the amount
of $2.  In addition, ClearPoint did not make the required interest
payments under the Amended Sub Notes for the quarter ended June 30, 2009, in the
aggregate amount of $11.  An event of default under the StaffBridge
Note or the Amended Sub Notes 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
19, 2009, ComVest executed a waiver letter (the “May Waiver”) pursuant to which
ComVest waived the defaults under the ComVest Term Loan through May 19, 2009,
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.  On August 14, 2009, in connection with
the Amended ComVest Loan Agreement, ComVest executed a waiver letter (the
“August Waiver”) pursuant to which ComVest waived the remainder of the
above-described defaults, provided that ClearPoint agreed to pay to ComVest, on
March 31, 2010 (or sooner by reason of any further event of default), (a) the
difference between interest calculated at the default rate and at the
non-default rate under the ComVest Term Loan on the outstanding principal
balance of the ComVest Term Loan for the period from March 1, 2009 through
August 14, 2009 (the “Default Period”), and (b) the difference between interest
calculated at the default rate and at the non-default rate under the ComVest
Revolver on the outstanding principal balance of the advances under the ComVest
Loan Agreement from time to time during the Default Period.




The
foregoing is a summary of certain material provisions of the May Waiver and the
August Waiver.  This summary is not intended to be complete and is
qualified in its entirety by reference to the May Waiver and the August Waiver,
which are incorporated by reference into this Quarterly Report on Form
10-Q.




ITEM
6. EXHIBITS.




Exhibit
      No.
            
            Description4.1
            
            Form
      of Warrant issued to XRoads Solutions Group, LLC dated May 13, 2009
      (incorporated by reference from Exhibit 4.1 to the Quarterly Report on
      Form 10-Q filed on May 20, 2009).4.2
            
            Form
      of Warrant issued to XRoads Solutions Group, LLC dated May 14,
      2009.10.1
            
            Waiver
      Letter dated May 13, 2009 issued by ComVest Capital, LLC (incorporated by
      reference from Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on
      May 20, 2009).10.2
            
            Waiver
      Letter dated May 19, 2009 issued by ComVest Capital, LLC (incorporated by
      reference from Exhibit 10.5 to the Quarterly Report on Form 10-Q filed on
      May 20, 2009).10.3
            
            Amendment
      No. 1 dated May 18, 2009 to Letter Agreement among ClearPoint Business
      Resources, Inc. and XRoads Solutions Group, LLC (incorporated by reference
      from Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on May 20,
      2009).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.





84




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.Date:
      August 19, 2009
              By:
              /s/ Michael
      D. TrainaMichael
      D. TrainaChief
      Executive Officer


Date:
      August 19, 2009
              By:
              /s/ John
      G. PhillipsJohn
      G. PhillipsChief
      Financial Officer




S-1




EXHIBIT
INDEX




Exhibit
      No.
            
            Description4.1
            
            Form
      of Warrant issued to XRoads Solutions Group, LLC dated May 13, 2009
      (incorporated by reference from Exhibit 4.1 to the Quarterly Report on
      Form 10-Q filed on May 20, 2009).4.2
            
            Form
      of Warrant issued to XRoads Solutions Group, LLC dated May 14,
      2009.10.1
            
            Waiver
      Letter dated May 13, 2009 issued by ComVest Capital, LLC (incorporated by
      reference from Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on
      May 20, 2009).10.2
            
            Waiver
      Letter dated May 19, 2009 issued by ComVest Capital, LLC (incorporated by
      reference from Exhibit 10.5 to the Quarterly Report on Form 10-Q filed on
      May 20, 2009).10.3
            
            Amendment
      No. 1 dated May 18, 2009 to Letter Agreement among ClearPoint Business
      Resources, Inc. and XRoads Solutions Group, LLC (incorporated by reference
      from Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on May 20,
      2009).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