-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MC81hgg2NVgRGqc8/s/GWRBjqFLV8jEhiDG+6kEwxhpaMbRqzFDYQ7DAtVJ3Ta4m YvAxvsDjQ8zSROES4dggfg== 0001019687-08-002662.txt : 20080613 0001019687-08-002662.hdr.sgml : 20080613 20080613165806 ACCESSION NUMBER: 0001019687-08-002662 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20080613 DATE AS OF CHANGE: 20080613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BPO Management Services CENTRAL INDEX KEY: 0001015920 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 222356861 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-28560 FILM NUMBER: 08898724 BUSINESS ADDRESS: STREET 1: 1290 N HANCOCK STREET CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 714-974-2670 MAIL ADDRESS: STREET 1: 1290 N HANCOCK STREET CITY: ANAHEIM STATE: CA ZIP: 92807 FORMER COMPANY: FORMER CONFORMED NAME: RESEARCH ENGINEERS INC/ DATE OF NAME CHANGE: 20000317 FORMER COMPANY: FORMER CONFORMED NAME: NETGURU INC DATE OF NAME CHANGE: 20000308 FORMER COMPANY: FORMER CONFORMED NAME: RESEARCH ENGINEERS INC DATE OF NAME CHANGE: 19960603 10QSB/A 1 bpo_10qsba1-063007.htm BPO MANAGEMENT SERVICES bpo_10qsba1-063007.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
As filed with the Securities and Exchange Commission on June 13, 2008

FORM 10-QSB/A

(Mark One)

x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

o     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 FOR THE

TRANSITION PERIOD FROM _______________ to _______________

Commission file number: 0-28560

BPO MANAGEMENT SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
 
DELAWARE
22-2356861
(State or other jurisdiction of 
incorporation or organization)
(I.R.S. Employer
Identification No.) 
 
1290 N HANCOCK STREET, ANAHEIM HILLS, CA 92630
(Address of principal executive offices)

(714) 974-2670
(Issuer's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

The number of shares outstanding of the registrant's only class of common stock, $.01 par value, was 9,004,368 on August 1, 2007.Transitional Small Business Disclosure Format (Check one).   Yes o No x

1
PART I
FINANCIAL INFORMATION
        
        
   
 Page
  
        
Item 1. Financial Statements
    
3
  
Condensed Consolidated Statements of Operations for the three and six months ended
        
June 30, 2007 and 2006 (unaudited)
    
3
  
         
Condensed Consolidated Balance Sheet as of June 30, 2007 (unaudited)
    
4
  
         
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
        
2007 and 2006 (unaudited)
    
5
  
         
Notes to Condensed Consolidated Financial Statements (unaudited)
    
7
  
         
Item 2. Management's Discussion and Analysis or Plan of Operation
    
23
  
         
Item 3. Controls and Procedures
    
33
 
         
PART II
OTHER INFORMATION
         
Item 1. Legal Proceedings
    
34
  
         
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
34
  
         
Item 3. Defaults Upon Senior Securities
    
34
  
         
Item 4. Submission of Matters to a Vote of Security Holders
    
34
  
         
Item 5. Other Information
    
34
  
         
Item 6. Exhibits
    
34
  
         
Signatures
    
35
  
         
Exhibits Attached to this amended Quarterly Report on Form 10-QSB/A
   
36
  
 
2
 
PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
 
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
  
                      
   
THREE MONTHS ENDED
  
 SIX MONTHS ENDED
  
   
JUNE 30,
  
 JUNE 30,
  
   
2007
  
2006
  
2007
  
2006
  
                      
Revenues:
                     
Enterprise content management 
  
$
1,352,273
  
$
727,952
 
$
2,362,044
 
$
1,797,330
 
IT outsourcing services 
    
1,000,608
   
428,483
   
1,980,913
   
869,598
 
Human resource outsourcing servicing 
    
3,299
   
111,306
   
13,817
   
222,681
 
 Total revenues
    
2,356,180
   
1,267,741
   
4,356,774
   
2,889,609
 
                           
Operating expenses:
                          
Cost of services provided 
    
971,014
   
545,475
   
1,873,487
   
965,115
 
Selling, general and administrative  
    
2,309,092
   
1,291,576
   
4,152,679
   
2,946,218
 
Research and development 
    
27,355
   
-
   
93,366
   
-
 
Share-based compensation 
    
92,744
   
19,977
   
146,743
   
39,953
 
 Total operating expenses
    
3,400,266
    
1,857,028
   
6,266,276
   
3,951,286
 
 Loss from operations
    
(1,044,026
)
  
(589,287
)
  
(1,909,502
)
  
(1,061,677
)
                           
Interest expense (income)
                          
Related parties 
    
26,926
   
-
   
62,597
   
-
 
Amortization of related party debt discount
      163,940      -      594,029      -  
Other (net) 
    
48,811
    
7,121
   
87,345
    
4,996
 
Other Expense
    
12,253
   
668
   
14
   
911
 
 Total interest and other expense
    
251,930
    
7,789
 
$
743,985
   
5,907
 
                           
Net loss
  
$
(1,295,956
)
$
(597,076
)
$
(2,653,487
)
$
(1,067,584
)
                           
Basic and diluted net loss per share
  
$
(0.15
)
$
(0.08
)
$
(0.31
)
$
(0.11
)
                           
Basic and diluted weighted average common
    
8,621,527
   
7,131,277
   
8,623,630
   
9,925,000
 
                           
                           
See accompanying notes to condensed consolidated financial statements.
 
3
 
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2007
(Unaudited)
       
ASSETS
Current assets:
      
Cash and cash equivalents 
  
$
5,266,044
  
Restricted cash 
    
1,948,434
 
Accounts receivable, net of allowance for doubtful accounts of  
        
$110,998
    
2,916,262
 
Inventory consisting of finished goods, net of reserves of $0 
    
158,442
 
Prepaid expenses and other current assets 
    
189,715
 
Total current assets
    
10,478,897
 
Equipment, net of accumulated depreciation of $1,505,767 
    
951,810
 
Goodwill 
    
9,703,283
 
Intangible assets, net of amortization of $140,670 
    
1,010,030
 
Other Assets 
    
97,689
 
   
$
22,241,708
  
         
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
        
Current portion of long-term debt, net of discount of $3,154 
  
$
277,545
  
Current portion of capital lease obligations 
    
92,955
 
Accounts payable 
    
2,992,668
 
Accrued expenses 
    
1,005,785
 
Accrued interest related party 
      62,384  
Accrued dividend payable-related party 
      75,186  
Amount due former shareholders of acquired companies 
    
1,886,301
 
Income taxes payable 
    
229,506
 
Deferred revenues 
    
928,966
 
Related party notes payable 
    
1,200,000
 
Severence obligations payable 
    
480,015
 
Total current liabilities
    
9,231,311
  
Long-term debt, net of current portion and net of discount of $6,046
    
30,225
 
Capital lease obligations, net of current portion
    
402,345
 
Total liabilities
    
9,663,881
  
Commitments and contingencies (Note 9)
        
Stockholders equity:
        
Convertible preferred stock, Series A, par value $.01; authorized  
        
1,608,612 shares;1,605,598 shares issued and outstanding
    
16,378
 
Convertible preferred stock, Series B, par value $.01; authorized  
        
1,449,204 shares;1,449,204 shares issued and outstanding
    
14,492
 
Non-convertible preferred stock, Series C, par value $.01; authorized  
        
21,378,000 shares; 916,667 shares issued and outstanding
    
9,167
 
Convertible preferred stock, Series D, par value $.01; authorized  
        
1,500,000 shares;1,458,334 shares issued and outstanding
    
14,583
 
Common stock, par value $.01; authorized 150,000,000 shares;  
        
8,619,400 shares issued and outstanding
    
90,046
 
Additional paid-in capital 
    
19,585,232
  
Accumulated deficit 
    
(6,754,193
)
Accumulated other comprehensive loss, foreign currency translation adjustments 
    
(397,877
)
Total stockholders ' equity
    
12,577,827
  
   
$
22,241,708
  
         
See accompanying notes to condensed consolidated financial statements.

4
 
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Unaudited)
           
   
2007
  
2006
  
           
Cash flows used in operating activities:
          
Net loss
  
$
(2,653,487
)
$
(1,067,584
)
Adjustment to reconcile net loss from continuing operations
              
to net cash provided by (used in) operating activities:
              
Depreciation expense
    
68,443
   
42,932
 
Amortization of intangible assets 
    
104,668
   
277,655
 
Non-cash compensation expense recognized on issuance  
              
 of stock options
    
146,741
   
39,953
  
Amortization of loan discount 
    
594,031
   
-
 
Changes in operating assets and liabilities: 
              
 Accounts receivable
   
(167,234
)
  
171,806
 
 Inventory
    
540
   
-
 
 Income tax receivable
    
250,000
   
-
 
 Prepaid expenses and other current assets
    
(2,513
)
  
-
 
 Other assets
    
45,393
   
52,696
 
 Accounts payable
    
(366,412
)
  
(31,506
)
 Accrued expenses
    
348,743
   
-
 
 Deferred revenue
    
(178,780
)
  
22,115
 
 Amount due former shareholders of acquired companies
    
179,579
   
-
 
 Income taxes payable
    
(7,725
)
  
-
 
 Payments of severence liability
    
(293,738
)
  
(45,526
)
Net cash used in operating activities
    
(1,931,753
)
  
(537,459
)
               
Cash flows used in investing activities:
              
Purchase of property and equipment, net
    
(303,969
)
  
(125,470
)
Purchase obligation payment - Novus
    
(962,571
)
  
-
 
Restricted deposit of purchase obligation - DocuCom 
      (1,948,434 )       
Cash paid for business combinations, net of cash acquired
    
(2,947,422
)
  
(375,593
)
Net cash used in investing activities
    
(6,162,396
)
  
(501,063
)
               
Cash flows from financing activities
              
Repayment of bank loans
    
(179,483
)
  
-
 
Payment of notes payable
    
-
   
(3,075
)
Assets acquired under capital lease obligations
    
360,090
   
-
 
Repayment of capital lease obligations
    
(46,090
)
  
-
 
Proceeds from related party loan
    
400,000
    
-
 
Proceeds from issuance of preferred stock, net of cash paid
              
for commissions and direct costs
    
12,410,033
   
-
 
Net cash provided by (used in) financing activities
    
12,944,550
   
(3,075
)
Effect of exchange rate changes on cash and cash equivalents
    
(290,555
)
  
-
 
Net increase in cash
    
4,559,846
   
(1,041,597
)
Cash and cash equivalents, beginning of period
    
706,197
   
1,232,169
 
Cash and cash equivalents, end of period
  
$
5,266,043
  
$
190,572
  
               
               
See accompanying notes to condensed consolidated financial statements.
 
5
 
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
           
           
   
2007
  
2006
  
           
Supplemental disclosure of cash flow information:
          
Cash paid for: 
          
Interest
  
$
56,023
  
$
4,394
  
               
Income taxes
  
$
-
  
$
-
  
               
Supplemental disclosure of non-cash investing and financing
              
activities:
              
Acquisition of equipment under capital leases
  
$
360,090
  
$
-
  
Issuance of warrants
  
$
185,187
  
$
-
  
Preferred Stock Series A dividend
  
$
636
  
$
626
  
Business combinations:
              
Net assets acquired
  
$
2,393,691
  
$
901,885
  
Net liabilities assumed
  
$
2,973,910
  
$
422,688
  
Common stock issued as consideration for acquisition
  
$
400,000
        
               
               
See accompanying notes to condensed consolidated financial statements.
 
6

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION

BPO Management Services, Inc and Subsidiaries (the "Company") was incorporated in Delaware and commenced operations on July 26, 2005. On December 15, 2006, the Company entered into a merger agreement with netGuru, Inc. (netGuru). The shareholders of the Company received aggregate netGuru equity comprised of 7,336,575 shares of common stock, 1,567,095 shares of Series A preferred stock, 1,449,200 shares of Series B preferred stock, and 916,666 shares of Series C preferred stock, which represented the majority of the outstanding shares after the merger. Therefore, the merger was treated as a "reverse merger" and the previously outstanding shares of netGuru were treated as an equity transaction by the Company. The Company is a provider of business process outsourcing services offering enterprise content management ("ECM") services, information technology outsourcing ("ITO") services and human resource outsourcing ("HRO") services to middle market enterprises located primarily in the United States and Canada.

For accounting purposes, the acquisition has been treated as a recapitalization of Former BPOMS with Former BPOMS as the acquirer. The historical financial statements prior to December 15, 2006, are those of the Former BPOMS which began operations on July 26, 2005. All share-related data has been presented giving effect to the recapitalization resulting from the reverse merger.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements are prepared on a consistent basis in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-QSB and Item 10 of Regulation SB. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and consolidation and elimination entries) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The interim financial statements should be read in conjunction with the Company's consolidated financial statements and related footnotes included in our Annual Report on Form 10-KSB for the year ended December 31, 2006.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of BPOMS and its wholly-owned subsidiaries. All significant intercompany accounts, transactions and profits among the consolidated entities have been eliminated upon consolidation. Each of the following entities is included in consolidation as of the Company's formation or the subsidiary's date of acquisition.
 
7
 
COMPANY
  
INCEPTION/ACQUISITION DATE
  
       
BPO Management Services, Inc.
   Inception date: July 26, 2005  
Adapsys Document Management LP
   Acquired: July 29, 2005  
Adapsys LP
   Acquired: July 29, 2005  
Digica, Inc.
   Acquired: January 1, 2006  
Novus Imaging Solutions, Inc.
   Acquired: September 30, 2006  
NetGuru Systems, Inc.
   Acquired: December 15, 2006  
Research Engineers, GmbH   Acquired: December 15, 2006   
DocuCom Imaging Solutions, Inc.
   Acquired: June 21, 2007  
Human Resource Micro-Systems, Inc.
   Acquired: June 29, 2007  

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent obligations in the financial statements and accompanying notes. Our most significant assumptions are employed in determining values for uncollectible accounts receivable, depreciation, intangible asset valuation and useful lives, goodwill impairments contingencies, determination of the remaining severance obligation, valuation of share based payments revenue recognition and the valuation of liabilities resulting from a business combination as well as estimates used in applying our revenue recognition policy. The estimation process requires assumptions to be made about future events and conditions, and, as such, is inherently subjective and uncertain. Actual results could differ materially from our estimates. In estimating the fair value of stock-based payments, we use the current quoted market price of our underlying common share for stock awards, and the Black-Scholes-Merton Option Pricing Model for stock options and warrants. We estimate our expected volatility of our common share based on the average volatilities of similar entities for an appropriate period following their going public; and we estimate the expected term of the option, taking into account both the contractual term of the option and the effects of employees' expected exercise and post-vesting employment termination behavior.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value Of Financial Instruments," requires management to disclose the estimated fair value of certain assets and liabilities defined by SFAS No. 107 as financial instruments. At June 30, 2007, management believed the carrying amounts of cash and cash equivalents, receivable and payable amounts, and accrued expenses approximated fair value because of the short maturity of these financial instruments. The Company also believed that the carrying amounts of its capital lease obligations approximated their fair value, as the interest rates approximated a rate that the Company could have obtained under similar terms at the balance sheet date.

FOREIGN CURRENCY TRANSLATION

The financial position and operating results of all foreign operations are consolidated using the local currencies of the countries in which the Company operates as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. The resulting translation adjustments are recorded directly into a separate component of shareholders' equity. Gains and losses resulting from foreign currency transactions are included in operations and were not material for the three and six months ended June 30, 2007 and 2006.

CASH AND CASH EQUIVALENTS

The Company considers all liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash balances at financial institutions that management believes possess high-credit quality. At June 30, 2007, the Company had $6,007,867 on deposit that exceeded the United States (FDIC) federal insurance limit. At June 30, 2007, the Company has $569,150 (the accounts are in Canadian dollars with a value of $602,722 CDN) on deposit that exceeded the Canadian (CDIC) insurable limit of $100,000 CDN per entity per bank. The Canadian funds insurance is limited to Canadian currency deposits only and does provide coverage to money master high interest savings accounts (money market accounts) but all accounts are considered in the overall limitation per entity per bank.

8
 
RESTRICTED CASH

CDN $1,800,000 is payable to the previous shareholders of DocuCom, $900,000 payable in three months and $900,000 payable in nine months from the date of the acquisition. These payments are guaranteed by a letter of credit for which the Company deposited as security $1,948,434 which is invested in a certificate of deposit and is shown on the balance sheet as restricted cash. In addition, $500,000 has been deposited in an escrow account for the benefit of the prior shareholders of HRMS and is subject to offsets in accordance with the share purchase agreement.

REVENUE RECOGNITION

The Company recognizes revenue when the following criteria are met: (1) persuasive evidence of an arrangement, such as agreements, purchase orders or written or online requests, exists; (2) delivery of the product or service has been completed and no significant obligations remain; (3) the Company's price to the buyer is fixed or determinable; and (4) collection is reasonably assured. The Company's revenues arise from the following segments: ECM solutions including collaborative software products and services, ITO services and HRO services.

Revenue from software sales is recognized upon shipment if no significant post-contract support obligations remain outstanding and collection of the resulting receivable is reasonably assured. Customers may choose to purchase maintenance contracts that include telephone, e-mail and other methods of support, and the right to unspecified upgrades on a when-and-if available basis. Revenue from these maintenance contracts is deferred and recognized ratably over the life of the contract, usually twelve months.

In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the AICPA issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 distinguishes between significant and insignificant vendor obligations as a basis for recording revenue, with a requirement that each element of a software licensing arrangement be separately identified and accounted for based on relative fair values of each element. The Company determines the fair value of each element in multi-element transactions based on vendor-specific objective evidence ("VSOE"). VSOE for each element is based on the price charged when the same element is sold separately.

In 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," which modifies SOP 97-2 to allow for use of the residual method of revenue recognition if certain criteria have been met. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the transaction fee is recognized as revenue.

The Company sells its collaborative software along with a maintenance package. This constitutes a multi-element arrangement. The price charged for the maintenance portion is the same as when the maintenance is sold separately. The fair values of the maintenance contracts sold in all multi-element arrangements are recognized over the terms of the maintenance contracts. The collaborative software portion is recognized when persuasive evidence of an arrangement exits, price is fixed and determinable, when delivery is complete, collection of the resulting receivable is reasonably assured and no significant obligations remain.
 
Revenues from providing IT services are recognized primarily on a time and materials basis, with time at a marked-up rate and materials and other reasonable expenses at cost, once the services are completed and no significant obligations remain. Certain IT services contracts are fixed price contracts where progress toward completion is measured by mutually agreed upon pre-determined milestones for which the Company recognizes revenue upon achieving such milestones. Fixed price IT contracts are typically for a short duration of one to nine months. Fees for certain services are variable based on an objectively determinable factor such as usage. Those factors are included in the written contract such that the customer's fee is determinable. The customer's fee is negotiated at the onset of the arrangement.

9
 
ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company sells its products and services to its customers on credit terms; granting credit to those who are identified credit worthy based on an analysis of the entities credit history. A provision is made for an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based upon its historical collection experience and a review of the current collectibility status of accounts receivable - trade. Specific accounts receivable that are eventually determined to be uncollectible are charged against the allowance for doubtful accounts when identified. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change.

DEFERRED REVENUES

The Company defers revenues for its maintenance contracts and for its collaborative software sales that are not considered earned. The Company defers its maintenance revenues when the maintenance contracts are sold, and then recognizes the maintenance revenues over the term of the maintenance contracts. The Company defers its collaborative software sales revenues if it invoices or receives payment prior to the completion of a project, and then recognizes these revenues upon completion of the project when no significant obligations remain.

RESEARCH AND DEVELOPMENT

The Company's research and development ("R&D") costs consist mainly of software developers' salaries. The Company follows the provisions of SFAS No. 86 to capitalize software development costs when technological feasibility has been established and to stop capitalization when the product is available for general release to customers. The Company expenses development costs when they are related to enhancement of existing software products.

INCOME TAXES

The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

SHARE-BASED COMPENSATION

The Company accounts for share-based compensation to employees pursuant to SFAS No.123(R), "Share Based Payment," which requires that all share-based compensation to employees, including grants of employee stock options, be recognized as expense in the Company's financial statements based on their respective grant date fair values. As SFAS No. 123(R) requires that share-based compensation expense be based on awards that are ultimately expected to vest, share based compensation for 2007 has been reduced by estimated forfeitures.

SFAS 123(R) requires the use of a valuation model to calculate the fair value of share-based awards. The Company has elected to use the Black-Scholes-Merton option pricing model, which incorporates various assumptions including volatility, expected life, expected dividend and interest rates. As a private company, Former BPOMS did not have a history of market prices of its common stock, and as such, the Company used an estimated volatility in accordance with SAB No. 107 "Share Based Payment." In 2006, the Company used the volatility of the stock price of netGuru, BPOMS' predecessor company, adjusted to remove the effects of divestitures, cash distributions, and the reverse merger which BPOMS deems not representative of the events that would take place during expected term of the options that were valued. The expected life of awards was based on the simplified method as defined in SAB No. 107. The risk-free interest rate assumption was based on observed interest rates appropriate for the terms of the awards. The dividend yield assumption was based on the company's history and expectation of not paying any dividends in the foreseeable future. Forfeitures were estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company uses the straight line amortization method to record expenses under this statement and recognized share-based compensation expense. The fair value of the Company's stock options granted to employees was estimated using the following assumptions:

10
 
Expected Dividend yield 
      --  
Expected volatility  
     123 %
Risk-free interest rate 
     4.6%-5.03 %
Expected option lives (in years) 
     7  
Estimated forfeiture rate  
     7 %
 
For the three months ended June 30, 2007 and 2006, the Company recognized $92,744, and $19,977, respectively, in share-based compensation expense. For the six months ended June 30, 2007 and 2006, the Company recognized $146,743 and $39,953, respectively, in share-based compensation expense. The Company may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense if there are any modifications or cancellation of the underlying unvested securities. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional equity awards to employees or we assume unvested equity awards in connection with acquisitions. Share-based compensation expense was recorded in selling, general and administrative expense.

VALUATION OF THE COMPANY'S COMMON SHARES AT THE TIME OF GRANT

The Company granted shares of its common stock as partial consideration for the acquisition of Digica Inc. in January 2006 and the acquisition of Human Resource Micro-Systems, Inc. in June of 2007. The fair values of these grants were determined based on recent sales of the Company's securities immediately preceding the dates of closing.

SEGMENT REPORTING

The Company applies the provisions of SFAS No. 131, "Disclosures about Segments  of an Enterprise and Related Information." SFAS No. 131 requires segments to be determined and reported based on how management measures performance and makes decisions about allocating resources. See Note 8 "Segment and Geographic Data" for a description of and disclosures regarding the Company's significant reportable segments.

RETIREMENT PLANS

The Company and certain of its United States subsidiaries have qualified cash or deferred 401(k) retirement savings plans. The plans cover substantially all United States employees who have attained age 21 and have one year of service. Employees may contribute up to 15% of their compensation. The Company does not make matching contributions to the plan, except in one subsidiary, where it matches 100% of the employee contribution up to a maximum of 4% of the employee’s salary . For the quarters ended June 30, 2007 and 2006, the Company contributions to the plan amounted to $6,636 and $7,261, respectively. For the six months ended June 30,  2007 and 2006, the Company contributions to the plan amounted to $13,101 and $14,518, respectively. Certain of its Canadian subsidiaries have defined contribution pension plans whereby after a qualification period the company contributes an amount which vary from 2% to 8% of the employees annual earnings. For the three months ended June 30, 2007 and 2006, the Company contributions to the plan amounted to $12,336 and $7,678, respectively. For the six months ended June 30, 2007 and 2006, the Company contributions to the plan amounted to $20,683 and $22,343, respectively.

RECLASSIFICATIONS

Certain reclassifications have been made to the fiscal 2006 consolidated financial statements to conform to the fiscal 2007 presentation. The primary reclassifications relate to the presentation of the three business segments and the presentation of share and per share data giving effect to the one-for-fifteen reverse stock split, the reverse merger of BPOMS into netGuru, Inc. and the resulting recapitalization of equity.

11
 
BASIC AND DILUTED LOSS PER SHARE

In accordance with FASB Statement No. 128, Earnings Per Share, we calculate basic and diluted net loss per share using the weighted average number of common shares outstanding during the periods presented and adjust the amount of net loss, used in this calculation, for preferred stock dividends declared during the period.

We incurred a net loss in each period presented, and as such, did not include the effect of potentially dilutive common stock equivalents in the diluted net loss per share calculation, as their effect would be anti-dilutive for all periods. Potentially dilutive common stock equivalents would include the common stock issuable upon the conversion of preferred stock and the exercise of warrants and stock options that have conversion or exercise prices below the market value of our common stock at the measurement date. As of June 30, 2007 and 2006, all potentially dilutive common stock equivalents amounted to 102,469,199 and 4,645,999 shares, respectively.

The following table illustrates the computation of basic and diluted net loss per share:

   
THREE MONTHS ENDED
  
SIX MONTHS ENDED
  
   
JUNE 30,
  
JUNE 30,
  
   
2007
  
2006
  
2007
  
2006
  
                   
Numerator:
                  
Net loss
  
$
(1,295,956
)
$
(597,076
)
$
(2,653,487
)
$
(1,067,584
)
Less:
                          
Preferred dividends paid in stock
    
(32,112
)
  
-
   
(63,594
)
  
-
 
Loss and numerator used in computing basis
                          
and diluted loss per share
  
$
(1,328,068
)
$
(597,076
)
$
(2,717,081
)
$
(1,067,584
)
                           
Denominator:
                          
Denominator for basic and diluted net loss per share-
                          
weighted average number of common shares
                          
outstanding
    
8,621,527
   
7,131,277
   
8,623,630
   
9,925,000
 
                           
Basic and diluted net loss per share
    
(0.15
)
  
(0.08
)
  
(0.32
)
  
(0.11
)
 
The following table sets forth potential shares of common stock that are not included in the diluted net loss per share because to do so would be antidilutive since the company reported net losses in all the reporting periods:

   
THREE MONTHS ENDED
  
SIX MONTHS ENDED
  
   
JUNE 30,
  
JUNE 30,
  
   
2007
  
2006
  
2007
  
2006
  
                   
Options to purchase shares of common stock
    
2,487,002
   
1,978,990
   
2,487,002
   
1,978,990
 
Warrants to purchase shares of common stock
    
95,436,953
   
49,003
   
95,436,953
   
49,003
 
Shares of convertible preferred stock - Series A
    
1,637,710
   
1,168,806
   
1,637,710
   
1,168,806
 
Shares of convertible preferred stock - Series B
    
1,449,200
   
1,449,200
   
1,449,200
   
1,449,200
 
Shares of convertible preferred stock - Series D
    
23,333,341
    
-
   
23,333,341
    
-
 
                           
Total
    
124,344,206
    
4,645,999
   
124,344,206
   
4,645,999
 
 
COMPREHENSIVE INCOME (LOSS)

The net loss reflected on our Consolidated Statements of Operations substantially represents the total comprehensive loss for the periods presented.

12

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

In June 2006, the FASB issued Interpretation ("FIN") 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires recognition of tax benefits that satisfy a greater than 50% probability threshold. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for the Company beginning January 1, 2007. The Company believes that adoption of FIN 48 will not have a material effect on its financial position, results of operations or cash flows.
 
FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 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. This statement is effective for us beginning January 1, 2008. Adoption of SFAS No. 157 did not have a material effect on our financial position, results of operations or cash flows.

3.    BUSINESS COMBINATIONS

On June 21, 2007, the Company purchased 100% of the issued and outstanding capital stock of DocuCom Imaging Solutions Inc. a Canadian corporation (“DocuCom”) for a total purchase price of Cdn$2,761,097 (approximately US$2.58 million). The DocuCom results of operations have been included in the consolidated financial statements since the date of acquisition. In addition to adding the DocuCom data and document management solutions capability with its long term Canada-based customer relationships, the acquisition enhanced the Company’s ability to offer high quality, cost-effective service utilizing its near shore delivery model to its US customers.
 
The purchase price consisted of cash in the amount of Cdn$961,097 (approximately US$910,000), at closing on June 21, 2007. The purchase agreement also provided that the Company pay the selling shareholders Cdn$900,000 (approximately US$840,000) three months after closing and Cdn$900,000 (approximately US$840,000) nine months after closing. The Company secured the subsequent payments through a bank-issued irrevocable standby letter of credit in favor of the selling shareholders in the aggregate amount of Cdn$1,800,000 (approximately US$1.68 million). The letter of credit was securitized by the deposit of $1,948,434 that is shown on the balance sheet as restricted cash. 

The following table presents the preliminary allocation of the acquisition price, including professional fees and other related acquisition costs, to the assets acquired and liabilities assumed, based on their fair values as of the date of acquisition:
 
13
Cash and cash equivalents
  
$
-
  
Accounts receivable
    
1,579,611
 
Acquired contracts
    
-
 
Other current assets
    
172,888
 
Property, plant and equipment
    
204,419
 
Other assets
    
-
 
Goodwill
    
3,592,996
 
Total assets acquired 
    
5,549,914
 
         
Note payable to bank
    
420,610
 
Accounts payable and other accrued liabilities
    
2,247,173
 
Estimated termination liability
    
-
 
Total liabilities assumed 
    
2,667,783
 
         
 Net assets acquired
  
$
2,882,131
  
 
The purchase price and costs associated with the DocuCom acquisition exceeded the Company's preliminary allocation of the fair value of net assets acquired by $3,592,996, which was assigned to goodwill. The amount ultimately assigned to goodwill is not expected to be deductible for United States income tax, state income tax or Canadian income tax purposes.

The following unaudited pro forma financial information presents the combined results of operations of the Company and DocuCom for the year ended December 31, 2006 and for the six months ended June 30, 2007 as if the acquisition had occurred on January 1, 2006 and January 1, 2007, respectively.
 
14
 
Unaudited Pro Forma Statement of Operations For the Twelve Months Ended December 31, 2006:
               
                
   
 BPOMS
  
DocuCom
  
Pro Forma
  
                
Revenues
  
$
4,711,139
  
$
13,066,960
  
$
17,778,099
  
                     
Net Income (Loss)
  
$
(3,300,186
)
$
(355,249
)
$
(3,655,435
)
                     
Basic and diluted loss per
                    
common share
  
$
(0.39
)
$
-
  
$
(0.43
)
                     
Basic and diluted weighted average
                    
common shares outstanding
    
8,496,119
   
-
   
8,496,119
 
                     
                     
Unaudited Pro Forma Statement of Operations For the Six Months Ended June 30, 2007:
                    
                     
 
    
BPOMS
    
DocuCom
    
Pro Forma
  
                     
Revenues
  
$
4,356,774
  
$
7,134,492
  
$
11,491,266
  
                     
Net Income (Loss)
  
$
(2,653,487
)
$
(36,290
)
$
(2,689,777
)
                     
Basic and diluted loss per
                    
common share
  
$
(0.31
)
$
-
  
$
(0.31
)
                     
Basic and diluted weighted average
                    
common shares outstanding
    
8,623,630
   
-
   
8,623,630
 
 
On June 29, 2007, the Company purchased 100% of the issued and outstanding capital stock of Human Resource Micro-Systems, Inc., a California corporation (“HRMS”). The aggregate purchase price was $2,000,000, of which amount the Company paid the selling shareholders $1,100,000 and issued them 384,968 shares of the Company’s restricted common stock valued at $400,000 (based upon the volume-weighted average closing bid price of the common stock during the ten consecutive trading days immediately preceding the closing). The Stock Purchase Agreement provided that the selling shareholders be paid the remaining $500,000 12 months after closing through an escrow account, subject to offset with respect to any claims for indemnity by the Company under the terms of the Stock Purchase Agreement.

 The HRMS product delivers customizable software solutions for domestic and global mid-market organizations seeking to optimize their human resources service delivery and is being integrated with the Company’s existing human resources outsourcing services based in San Francisco, California in order to broaden the Company’s HRO offering to its customers. Since HRMS was purchased at the end of the reporting period, its results of operations have not been included in the condensed consolidated statements of operations of BPOMS. The following table presents the preliminary allocation of the acquisition price, including professional fees and other related acquisition costs, to the assets acquired and liabilities assumed, based on their fair values as of the date of acquisition:

15
 
Current assets
  
$
434,834
  
Property, plant and equipment
    
1,939
 
Other non-current assets
    
-
 
Goodwill
    
2,026,465
 
Identifiable intangible assets
    
-
 
Total assets acquired 
    
2,463,238
 
         
Current liabilities
    
306,127
 
Other non-current liabilities
    
-
 
Long-term debt
    
-
 
Total liabilities assumed 
    
306,127
 
         
 Net assets acquired
  
$
2,157,111
  
 
Acquired identifiable intangible assets in the amount of $0 were assigned to customer contracts pending valuation. The purchase price and costs associated with the HRMS acquisition exceeded the Company's allocation of the fair value of net assets acquired by $2,026,465, which was assigned to goodwill. The amount ultimately assigned to goodwill is not expected to be deductible for United States income tax purposes.

The following unaudited pro forma financial information presents the combined results of operations of the Company and HRMS for the year ended December 31, 2006 and for the six months ended June 30, 2007 as if the acquisition had occurred on January 1, 2006 and January 1, 2007, respectively.

16
 
Unaudited Pro Forma Statement of Operations For the Twelve Months Ended December 31, 2006:
               
                
   
 BPOMS
  
HRMS
  
Pro Forma
  
                
Revenues
  
$
4,711,139
  
$
1,229,598
  
$
5,940,737
  
                     
Net Income (Loss)
  
$
(3,300,186
)
$
35,583
  
$
(3,264,603
)
                     
Basic and diluted loss per
                    
common share
  
$
(0.39
)
$
0.09
  
$
(0.37
)
                     
Basic and diluted weighted average
                    
common shares outstanding
    
8,496,119
   
384,968
   
8,881,087
 
                     
                     
Unaudited Pro Forma Statement of Operations For the Six Months Ended June 30, 2007:
                    
                     
 
    
BPOMS
    
HRMS
    
Pro Forma
  
                     
Revenues
  
$
4,356,774
  
$
682,361
  
$
5,039,135
  
                     
Net Income (Loss)
  
$
(2,653,487
)
$
(3,189
)
$
(2,656,676
)
                     
Basic and diluted loss per
                    
common share
  
$
(0.32
)
$
(0.01
)
$
(0.31
)
                     
Basic and diluted weighted average
                    
common shares outstanding
    
8,238,662
   
384,968
   
8,623,630
 

Both acquisitions took place close to the end of the period and the Company has not concluded its study of the valuation of the assets acquired and the liabilities assumed.

4.    DEBT

SHORT-TERM RELATED PARTY DEBT

Short-term related party debt consisted of the following at June 30, 2007:

17
 
Notes payable to 2 officers, who are also significant
      
shareholders, secured by all assets of the Company, 
      
bearing an annual interest rate of 9%
  
$
1,200,000
  
         
Long-term debt, including capital lease obligations, consisted of the following
        
at June 30, 2007:
        
         
a.         Credit facility from Bank of Nova Scotia, secured
        
by assets of the Company, variable annual interest
        
rate of 7% at June 30, 2007
  
$
130,968
  
b.         Note payable to a former owner of an acquired subsidiary,
        
secured by the Company's main operating account and
        
related proceeds, which has not been perfected, bearing
        
an annual interest rate of 10%
    
125,000
 
c.         Loan from Business Development Bank of Canada,
        
   expiring May 21, 2010, variable annual interest
        
   rate of 11.25% at June 30, 2007
    
55,203
 
d.        Collateralized loan payable to Chrysler Financial,
        
       expiring March 2008, fixed interest rate of 13.9%
    
5,808
 
e.        Capital lease obligations maturing at dates ranging
        
       from November 30, 2009 to December 31, 2011, secured
        
       by the leased assets
    
618,308
 
         
Total long-term debt before unamortized discount
        
and inputed interest
    
935,287
 
Less: Imputed interest and unamortized discount
    
(132,217
)
         
Long-term debt
    
803,070
 
Less: current portion
    
370,500
 
         
   
$
432,570
  

RELATED PARTY NOTES PAYABLE

In August 2006 the Company entered into an agreement with two individuals who are officers, directors, and significant shareholders for a bridge loan not to exceed $3,000,000. From the inception of that agreement through January 30, 2007 a total of $2,740,000 was advanced to the Company. The loan agreement provided for principal and accrued and unpaid interest were due and payable April 30, 2007. The loan agreement is unsecured. The unpaid principal of $1,200,000 and accrued and unpaid interest of $122,251 as of June 30, 2007 are due and payable on demand. The amount due under the loan agreement has both a face and stated value of $1,200,000 as of June 30, 2007. The stated fixed interest rate is 9.00% per annum for the three and six month periods ended June 30, 2007. For financial reporting purposes the effective interest rate yield was 55% and 105% per annum for the three and six month periods ended June 30, 2007. The loan agreement was not in effect during either the three or six month periods ending June 30, 2006

Common share purchase warrants (collectively the Warrants) to purchase one share of the Company’s common stock, par value $0.01 per share (the Common Stock), at an exercise price of $0.035 per share that are exercisable on issuance were granted in conjunction with the loan agreement. The total funds borrowed from the related parties amounted to $2,740,000. The associated Warrants are exercisable for 707,704 shares of common stock. The Warrants, which expire seven years after issuance, were assigned a value of $834,717, estimated using the Black-Scholes valuation model. The following assumptions were used to determine the fair value of the Warrants using the Black-Scholes valuation model: a term of seven years, risk-free rate range of 4.16% - 5.03%, volatility of 125%, and dividend yield of zero. In accordance with EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the values assigned to the Warrants was allocated based on their relative fair values. The discount on the loan agreement for the Warrants was accreted to interest expense, using the effective interest method, over the initial term of the loan agreement (original loan agreement due date was April 30, 2007) Total interest expense recognized relating to the accretion of the Warrants discount for the three and six month periods ending June 30, 2007 was $163,940 and $594,030, respectively. There was no interest expense related to the accretion of the Warrant discount for the three and six month periods ending June 30, 2006.

18
 
The loan agreement provided that if the Company required additional equity in order to meet certain surplus requirements needed to accomplish the reverse merger with netGuru; it could offer the related parties the opportunity to convert a portion of the outstanding loan agreement amount then payable at an aggregate conversion price equal to 50% of the fair value of the common stock at the adjusted closed market price on the day immediately preceding the conversion of the loan agreement amounts. A total of $1,540,000 was converted into 916,667 shares of the Company’s Series C preferred stock in December 2006 (conversion price of $1.68 per share of Series C preferred stock is based on a adjusted closing price of the common stock on the day immediately preceding the conversion of $3.36). Under the loan agreement, the Series C Preferred stock is redeemable, in whole or in part, at the option of the Company at an initial redemption price of 125% of the amount so converted. Pursuant to the terms of the Company's Series D preferred stock equity financing, the consent of the holders of such shares is required prior to the Company redeeming any of the Series C preferred stock. The Company incurred a $82,200 loan fee of 3% of the total amount borrowed under the loan agreement which was paid to the related parties.
 
Under the loan agreement the Company was required to pay an amount equal to an amount not less than 25% of the net proceeds it received from all subsequent debt and equity financings towards the retirement of the then outstanding principal and accrued and unpaid interest (Note 5). Any unwaived failure by the Company to make any such payment would constitute a material breach of the loan agreement. In connection with the consummation of the Series D preferred stock equity financing on June 13, 2007, the two individuals waived this loan agreement covenant. The waiver related solely to the Series D preferred stock financing.

A.    CREDIT FACILITY FROM BANK OF NOVA SCOTIA

Adapsys LP has a credit facility with Bank of Nova Scotia. The credit facility is an operating line of credit with a maximum availability of approximately $300,000, secured by all present and future personal property of the Company and carries an annual interest rate of Canadian prime rate plus 1%, which amounted to 7% at June 30, 2007. The credit facility is subject to two covenants, the borrowing base covenant and the tangible net worth covenant. The borrowing base covenant limits the Company's operating loans not to exceed the lesser of $300,000 or the operating limit of the borrowing base, defined as an amount equivalent to 75% of the Company's certain accounts receivables less security interest or charges or specific payables which have or may have priority over the bank's security. The tangible net worth covenant requires the Company to maintain a tangible net worth in excess of approximately $429,000. Tangible net worth is defined by the bank as stockholders' equity less amounts due from related parties, investment in affiliates and intangible assets as defined by the bank. At June 30, 2007, the Company was not in compliance with the tangible net worth or the borrowing base covenants, and had an outstanding balance of approximately $130,968.

B.    NOTE PAYABLE TO A FORMER OWNER OF AN ACQUIRED SUBSIDIARY

In conjunction with the reverse merger with NetGuru, Inc. in December 2006, a note in the amount of $125,000 was issued to the former owner, secured by the Company’s main operating account and related proceeds, which has not been perfected, bearing an annual interest rate of 10% and which was repaid in July 2007.
 
C.    TERM LOAN FROM BUSINESS DEVELOPMENT BANK OF CANADA

ADM has a term loan with the Business Development Bank of Canada that expires on May 21, 2010. The interest rate on this loan is bank's floating rate plus 3.25% and monthly principal re-payments are approximately $1,433. At June 30, 2007, the annual rate of interest on this loan was 11.25% and the balance outstanding was approximately $55,203. The loan is secured by a general security agreement from ADM and joint and several personal guarantees in the amount of approximately $43,000 by two former principals of ADM who were also the Company's 5% shareholders. The Company issued a 7-year warrant to purchase 5,435 shares of the Company's common stock at an exercise price of $0.03 per share to each of these shareholders in return for their loan guarantees. The warrants, valued at approximately $11,049, were recorded as a discount to the term loan. The value of the warrants is being amortized to interest expense over the term of the loan. Unamortized discount at June 30, 2007 was approximately $9,209.

19
 
D.    LOAN PAYABLE TO CHRYSLER FINANCIAL

Digica has a loan payable to Chrysler Financial collateralized by a vehicle with a net book value of $10,500. The loan has a fixed annual interest rate of 13.9% and matures in March 2008. At June 30, 2007, the loan balance was $5,808.

E.    CAPITAL LEASES

Capital leases consist primarily of equipment leases for the U.S. entities. The Company added approximately $360,090 to capital leases in the first quarter of fiscal 2007.

Long-term debt, excluding unamortized discount, and capital lease obligations mature in each of the following years ending June 30:
 
   
Long-Term
  
Capital Lease
  
   
Debt
  
Obligations
  
           
2008
  
$
277,545
  
$
140,898
  
2009
    
15,769
   
140,350
 
2010
    
14,456
   
135,677
 
2011
    
-
   
134,256
 
2012
    
-
   
67,128
 
Thereafter
    
-
   
-
 
Total minimum payments
  
$
307,770
  
$
618,309
  
Less: amount representing interest
          
(123,009
)
               
Present value of minimum capital lease payments
        
$
495,300
  
 
5.    CAPITAL STOCK

In January 2006 the Company issued 362,300 common shares as part of the purchase consideration for Digica, Inc.

In September 2006 the Company issued 144,920 common shares as part of the purchase consideration for Novus Imaging Solutions, Inc.

In December 2006 the Company issued 916,666 Series C Convertible Preferred Stock to two individuals that are officers and significant shareholders for $1,540,000.

In December 2006 the Company issued 1,282,820 common shares in exchange for the shares of NetGuru, Inc. in the reverse merger transaction.

In June 2007 the Company issued 384,968 common shares as part of the purchase consideration for Human Resource Micro-Systems, Inc.

In June 2007 the Company privately placed shares of Series D Convertible Preferred Stock and various common stock and Series D-2 preferred stock purchase warrants to a limited number of institutional investors for gross proceeds of approximately $14,000,000. The shares of Series D Convertible Preferred Stock are convertible into approximately 23.3 million shares of our common stock. The three-year Series A Warrants (initial exercise price of $.90 per share) are exercisable for the purchase of up to approximately 11.7 million shares of our common stock. The five-year Series B Warrants (initial exercise price of $1.25 per share) are exercisable for the purchase of up to approximately 23.3 million shares of common stock. If exercised in full, the aggregate Series A Warrant and Series B Warrant proceeds will be approximately $40 million.

20
 
The investors were also granted a one-year option (in the form of Series J Warrants) to purchase up to $21 million of Series D-2 Convertible Preferred Stock, which is convertible into approximately 23.3 million shares of common stock. At the closing and in connection with such option, the Company granted the investors three-year Series C warrants (initial exercise price of $1.35 per share), which are exercisable for the purchase of up to approximately 11.7 million shares of common stock, and five-year Series D Warrants (initial exercise price of $1.87 per share), which are exercisable for the purchase of up to approximately 23.3 million shares of common stock. The Series C Warrants and the Series D warrants vest only upon the exercise of the Series J Warrants. If exercised in full, the aggregate Series C Warrant and Series D Warrant proceeds will be approximately $60 million.

The Company intends to use the proceeds to complete previously announced acquisitions, fund additional growth in accordance with its business plan, and for general working capital requirements.

6.    CONCENTRATION OF SALES AND CREDIT RISK

The Company is subject to credit risk primarily through its accounts receivable balances. The Company does not require collateral for its accounts receivable balances. None of the Company's customers accounted for more than 10% of the Company's consolidated net sales during the three months ended June 30, 2007.

7.    DEFERRED REVENUES

The Company defers revenues for its maintenance contracts and for its collaborative software sales that are not considered earned. The Company defers its maintenance revenues when the maintenance contracts are sold, and then recognizes the maintenance revenues over the term of the maintenance contracts. The Company defers its collaborative software sales revenues if it invoices or receives payment prior to the completion of a project, and then recognizes these revenues upon completion of the project when no significant obligations remain.

8.    SEGMENT AND GEOGRAPHIC DATA

The Company is a business process outsourcing services provider. The Company's operating segments are:

o
 Enterprise content management (ECM) 
o
 Information Technology services outsourcing (ITO) and 
o
 Human resources outsourcing (HRO) 
 
The Company applies the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires segments to be determined and reported based on how management measures performance and makes decisions about allocating resources. The Company's management monitors unallocable expenses related to the Company's corporate activities in a separate "Corporate," which is reflected in the tables below.

The significant components of worldwide operations by reportable operating segment are:

21
 
   
 Three Months Ended
  
Six Months Ended
  
   
 June 30,
  
June 30,
  
   
 2007
  
2006
  
2007
  
2006
  
                    
Net revenues
                   
ECM
  
$
1,206,791
  
$
727,952
  
$
2,362,044
  
$
1,797,330
  
ITO
    
1,146,090
   
428,483
   
1,980,913
   
869,598
 
HRO
    
3,299
   
111,306
   
13,817
   
222,681
 
Consolidated
  
$
2,356,180
  
$
1,267,741
  
$
4,356,774
  
$
2,889,609
  
                           
                           
Operating loss
                          
ECM
  
$
(138,148
)
$
(216,983
)
$
(503,721
)
$
(273,483
)
ITO
    
(169,140
)
  
(83,936
)
  
(185,784
)
  
(187,234
)
HRO
    
(77,694
)
  
(258,258
)
  
(148,510
)
  
(538,211
)
Corporate
    
(659,044
)
  
(30,110
)
  
(1,071,487
)
  
(62,749
)
Consolidated
  
$
(1,044,026
)
$
(589,287
)
$
(1,909,502
)
$
(1,061,677
)
                           
                           
Depreciation and amortization expense
                          
ECM
  
$
17,336
  
$
6,100
  
$
39,168
  
$
14,326
  
ITO
    
35,823
   
7,497
   
64,962
   
37,410
 
HRO
    
2,561
   
-
   
5,159
   
-
 
Corporate
    
62,222
   
577
   
115,355
   
5,197
 
Consolidated
  
$
117,942
  
$
14,174
  
$
224,644
  
$
56,933
  

The Company's operations are based in foreign and domestic subsidiaries and branch offices in the U.S., Canada and Germany. The following are significant components of worldwide operations by geographic location:
 
   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2007
  
2006
  
2007
  
2006
  
                   
Net revenues
                  
North America
  
$
2,127,584
  
$
1,267,741
  
$
4,011,895
  
$
2,889,609
  
Europe
    
228,596
   
-
   
344,879
   
-
 
Consolidated
  
$
2,356,180
  
$
1,267,741
  
$
4,356,774
  
$
2,889,609
  
                           
                           
 
    
At
    
At
             
 
    
June 30,
    
December 31,
              
Long-Lived Assets
    
2007
    
2006
              
North America
  
$
10,633,088
  
$
5,638,220
              
Europe
    
-
   
25,874
             
Consolidated
  
$
10,633,088
  
$
5,664,094
              

9.    COMMITMENTS AND CONTINGENCIES

Financial Results, Liquidity and Management's Plan activities

22
 
The Company has incurred net losses in the six month period ended June 30, 2007 of $2,653,487 and a negative cash flow from operations of $1,931,753 over the same period. The Company has been able to obtain operating capital through a private debt funding source, the sale of shares of its common stock and through the exercise of warrants to purchase shares of its common stock. Management's plans include the continued development and implementation of its business plan.

No assurances can be given that the Company can obtain sufficient working capital through the sale of the Company's common stock and borrowing or that the continued implementation of its business plan will generate sufficient revenues in the future to sustain ongoing operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

AMOUNT DUE FORMER SHAREHOLDERS OF ACQUIRED COMPANIES

The purchase agreements pursuant to which the Company acquired certain companies provides for the cash portion of the purchase price to be paid in installments within the year.
 
OPERATING LEASES

The Company leases certain facilities and equipment under non-cancelable operating leases. The facility leases include options to extend the lease terms and provisions for payment of property taxes, insurance and maintenance expenses.

At June 2007, future minimum annual rental commitments under these lease obligations were as follows:

For the twelve months ending June 30:

2008
  
$
601,991
  
2009
    
405,886
 
2010
    
258,557
 
2011
    
116,242
 
2012
    
2,749
 
Thereafter
    
229
 
         
   
$
1,385,654
  
 
For the three months June 30, 2007 and 2006 rent expense was $158,415 and $62,075, respectively. For the six months ended June 30, 2007 and 2006 rent expense was $308,633 and 246,178, respectively.

LITIGATION

The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

FORWARD-LOOKING STATEMENTS

This amended quarterly report on Form 10-QSB/A  contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). We intend that those forward-looking statements be subject to the safe harbors created by those sections. These forward-looking statements generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance, and can generally be identified by the use of the words "believe," "intend," "plan," "expect," "forecast," "project," "may," "should," "could," "seek," "pro forma," "goal," "estimates," "continues," "anticipate" and similar words. The forward-looking statements and associated risks may include, relate to, or be qualified by other important factors, including, without limitation:

23
 
    o  
Our ability to continue as a going concern;
    o  
Our ability to obtain additional debt or equity financing to the extent needed for our continued operations or for planned expansion, particularly if we are unable to attain and maintain profitable operations in the future;
    o  
Our ability to successfully implement our business plans and the possibility of strategic acquisitions;
    o  
Our ability to attract and retain strategic partners and alliances;
    o  
Our ability to hire and retain qualified personnel;
    o  
The risks of uncertainty of protection of our intellectual property;
    o  
Risks associated with existing and future governmental regulation to which we are subject; and
    o  
Uncertainties relating to economic conditions in the markets in which we currently operate and in which we intend to operate in the future.
 
These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. We do not undertake to update, revise or correct any forward-looking statements.

Any of the factors described above or in the "Risk Factors" section of this  amended quarterly report on Form 10-QSB/A could cause our future financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

OVERVIEW

The Company was incorporated in Delaware and commenced operations on July 26, 2005. On December 15, 2006, the Company acquired all of the outstanding common stock of publicly-held NetGuru, Inc. in a reverse merger ("Merger"). Upon the closing of the Merger, we adopted Former BPOMS’ (as the accounting acquirer) the accounting year end of December 31.

We provide business process outsourcing (BPO) services to enterprises in the United States, Canada and Europe. "BPO" refers to the outsourcing of entire business processes, typically to reduce cost and/or to improve the performance of that process. Our objective is to provide a comprehensive suite of BPO functions to support the back-office business requirements of middle-market enterprises throughout North America and Europe on an outsourced and/or recurring revenue basis.

Our primary business offerings are:

    o  
Document and data management solutions, also known as enterprise content management or "ECM" including Finance and Accounting Services Outsourcing or "FAO";
    o  
Information technology services outsourcing or "ITO"; and
    o  
Human resources outsourcing or "HRO".

CRITICAL ACCOUNTING POLICIES

We have identified the following as accounting policies that are the most critical to aid in understanding and evaluating our financial results:

    o  
revenue recognition;
    o  
allowance for doubtful accounts receivable; and
    o  
impairment of long-lived assets, including goodwill.

24
 
REVENUE RECOGNITION

We derive revenues from:

    o  
Enterprise content management services, including collaborative software products and services;
    o  
IT outsourcing services; and
    o  
Human resources outsourcing services.

We recognize revenues when the following criteria are met:

    o  
Persuasive evidence of an arrangement, such as agreements, purchase orders or written or online requests, exists;
    o  
Delivery has been completed and no significant obligations remain;
    o  
Our price to the buyer is fixed or determinable; and
    o  
Collection is reasonably assured.

PERSUASIVE EVIDENCE OF AN ARRANGEMENT

We document all terms of an arrangement in a written contract signed by the customer prior to recognizing revenue.

DELIVERY HAS OCCURRED OR SERVICES HAVE BEEN PERFORMED

We perform all services or deliver all products prior to recognizing revenue. Monthly services are considered to be performed ratably over the term of the arrangement. Professional consulting services are considered to be performed when the services are complete. Equipment is considered delivered upon delivery to a customer's designated location.

THE FEE FOR THE ARRANGEMENT IS FIXED OR DETERMINABLE

Prior to recognizing revenue, a customer's fee is either fixed or determinable under the terms of the written contract. Fees for most monthly services, professional consulting services, and equipment sales are fixed under the terms of the written contract. Fees for certain services are variable based on an objectively determinable factor such as usage. Those factors are included in the written contract such that the customer's fee is determinable. The customer's fee is negotiated at the outset of the arrangement.

COLLECTIBILITY IS REASONABLY ASSURED

We determine that collectibility is reasonably assured prior to recognizing revenue. We assess collectibility on a customer by customer basis based on criteria outlined by management. New customers are subject to a credit review process, which evaluates the customer's financial position and ultimately its ability to pay. We do not enter into arrangements unless collectibility is reasonably assured at the outset. Existing customers are subject to ongoing credit evaluations based on payment history and other factors. If it is determined during the arrangement that collectibility is not reasonably assured, revenue will be recognized on a cash basis.

We recognize revenues from software that we customize to fit a customer's requirements based on satisfactory completion of pre-determined milestones (evidenced by written acceptance from the customer) and delivery of the product to the customer, provided no significant obligations remain and collection of the resulting receivable is reasonably assured. Customers may choose to purchase ongoing maintenance contracts that include telephone, e-mail and other methods of support, and unspecified upgrades on a when-and-if available basis. Revenue from the maintenance contracts is deferred and recognized ratably over the life of the contract, usually twelve months.

In 1997, the Accounting Standards Executive Committee ("AcSec") of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 distinguishes between significant and insignificant vendor obligations as a basis for recording revenue and requires that each element of a software licensing arrangement be separately identified and accounted for based on relative fair values of each element. We determine the fair value of each element in multi-element transactions based on vendor-specific objective evidence ("VSOE"). VSOE for each element is based on the price charged when the same element is sold separately. 

25
 
In 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, "Software Revenue Recognition, With Respect to Certain Transactions," which modified SOP 97-2 to allow for use of the residual method of revenue recognition if certain criteria are met. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then we recognize revenue using the residual method. Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of the transaction fee is recognized as revenue.

We recognize revenues from our IT services primarily on a time and materials basis, with time at a marked-up rate and materials and other reasonable expenses at cost, as we perform IT services. Certain IT services contracts may be fixed price contracts where we would measure progress toward completion by mutually agreed upon pre-determined milestones and recognize revenue upon reaching those milestones. Our fixed price IT contracts typically are for a short duration of one to nine months.

ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE

We sell to our customers on credit and grant credit to those who are deemed credit worthy based on our analysis of their credit history. We review our accounts receivable balances and the collectibility of these balances on a periodic basis. Based on our analysis of the length of time that the balances have been outstanding, the pattern of customer payments, our understanding of the general business conditions of our customers and our communications with our customers, we estimate the recoverability of these balances. When recoverability is uncertain, we record bad debt expense and increase the allowance for accounts receivable by an amount equal to the amount estimated to be unrecoverable. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect our future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and our future results of operations could be materially affected.

IMPAIRMENT OF LONG-LIVED ASSETS INCLUDING GOODWILL

At inception, we adopted the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144. Pursuant to SFAS No. 142, we were required to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption.

We are required to perform reviews for impairment annually, or more frequently when events occur or circumstances change that would more likely than not reduce the fair value of the net carrying amount. The evaluation of goodwill impairment involves assumptions about the fair values of assets and liabilities of each reporting unit. If these assumptions are materially different from actual outcomes, the carrying value of goodwill will be incorrect. In addition, the Company's results of operations could be materially affected by the write-down of the carrying amount of goodwill to its estimated fair value.

We assessed the fair value of its three reporting units by considering their projected cash flows, using risk-adjusted discount rates and other valuation techniques and determined that there was no impairment to goodwill. As of June 30, 2007, our goodwill account balance was $9,703,283.

CONSOLIDATED RESULTS OF OPERATIONS -
THREE MONTHS ENDED JUNE 30, 2007 VS. THREE MONTHS ENDED JUNE 30, 2006

The privately held Former BPOMS began operations in July 26, 2005 and merged with the then publicly-held netGuru, Inc. on December 15, 2006 in a reverse merger ("Merger"). For accounting purposes, the acquisition has been treated as a recapitalization of Former BPOMS with Former BPOMS as the accounting acquirer. The historical financial statements prior to December 15, 2006, are those of the Former BPOMS.

26
 
Certain reclassifications have been made to the fiscal 2006 consolidated financial statements to conform to the fiscal 2007 presentation. The primary reclassifications relate to the presentation of the three business segments and the presentation of share and per share data giving effect to the one-for-fifteen reverse stock split, the Merger, and the resulting recapitalization of equity.

The following entities of BPOMS are included in the consolidated results of operations from the date of their respective acquisitions:
 
COMPANY
  
INCEPTION/ACQUISITION DATE
  
       
BPO Management Services, Inc.
   Inception date: July 26, 2005  
Adapsys Document Management LP
   Acquired: July 29, 2005  
Adapsys LP
   Acquired: July 29, 2005  
Digica, Inc.
   Acquired: January 1, 2006  
Novus Imaging Solutions, Inc.
   Acquired: September 30, 2006  
NetGuru Systems, Inc.    Acquired: December 15, 2006   
Research Engineers, GmbH    Acquired: December 15, 2006   
DocuCom Imaging Solutions, Inc.
   Acquired: June 21, 2007  
Human Resource Micro-Systems, Inc.
   Acquired: June 29, 2007  

Net Revenues

The following table presents our net revenues by operating segment:

   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2007
  
2006
  
2007
  
2006
  
                   
Net revenues
                  
ECM
  
$
1,352,273
  
$
727,952
  
$
2,362,044
  
$
1,797,330
  
% of total net
    
57.4
%
  
57.4
%
  
54.2
%
  
62.2
%
revenues
                          
                           
ITO
    
1,000,608
   
428,483
   
1,980,913
   
869,598
 
% of total net revenues
    
42.5
%
  
33.8
%
  
45.5
%
  
30.1
%
revenues
                          
                           
HRO
    
3,299
   
111,306
   
13,817
   
222,681
 
% of total net revenues
                          
revenues
    
0.1
%
  
8.8
%
  
0.3
%
  
7.7
%
Total net revenues
  
$
2,356,180
  
$
1,267,741
  
$
4,356,774
  
$
2,889,609
  
 
Total net revenues increased by $1,088,439 or 86% to $2,356,180 during the three months ended June 30, 2007 from $1,267,741 during the same period in the prior year. Total net revenues increased by $1,467,165 or 51% to $4,356,774 during the six months ended June 30, 2007 from $2,889,609 during the same period in the prior year. Our total net revenues primarily consisted of net revenues from (1) enterprise content management, (2) IT Outsourcing services and (3) human resource outsourcing services.

ENTERPRISE CONTENT MANAGEMENT ("ECM")

Net revenue from ECM products and services during the three months ended June 30, 2007 increased by $478,836 or 66% to $1,206,791 from $727,952 during the three months ended June 30, 2006. During the six months ended June 30, 2007 net revenue increased by $419,232 or 23% to $2,216,562 from $1,797,330 during the same period in the prior year. Net revenue in the ECM business segment in fiscal 2007 also includes net revenue from Novus Imaging Solutions, Inc. ("Novus") which was acquired in October 2006 and net revenues from netGuru, Inc. ("netGuru"), which was acquired in December 2006. The ECM segment includes our ECM solutions group and our collaborative software products and related services. The majority of our ECM solutions group services and our collaborative software revenue are generated from service-oriented projects where the revenue is recognized only upon the completion of specific project deliverables. The timing of these projects and the completion and recognition of revenue from various size projects creates variability in our ECM solutions group services revenues and collaborative software net revenues between quarters and fiscal years.

27
 
In addition, the Company completed the acquisition of DocuCom on June 21, 2007. The results of DocuCom operations from June 21 to June 30, 2007 have little impact on the results of this segment, but are expected to increase revenues of this segment in succeeding periods.

IT OUTSOURCING SERVICES ("ITO")

Net revenue from ITO during the three months ended June 30, 2007 increased by $572,125 or 167% to $1,000,608 from $428,483 during the three months ended June 30, 2006. During the six months ended June 30, 2007 net revenue increased by $1,111,315 or 145% to $1,980,913 from $869,598 during the same period in the prior year. Increases were primarily due to the additional revenues from NetGuru Systems, Inc. acquired in December 2006 in conjunction with the reverse merger with NetGuru Inc.

HUMAN RESOURCE OUTSOURCING SERVICES ("HRO")

During the second quarter of fiscal 2007, net revenues from HRO declined 97% to $3,299 from $111,306 during the second  quarter of fiscal 2006 and 94% to $13,817 from $222,681 during the six months ended June 30, 2007. The HRO segment prior to the HRMS acquisition consisted consists of a small project/consulting group that delivered HRO related services to our clients on a project basis. While no significant projects were undertaken during the three and six months ended June 30, 2007, we have developed a pipeline of HRO related opportunities which we estimate will bring increased revenues in future periods. The acquisition of HRMS which took place June 29, 2007, is expected to form the cornerstone of our HRO offering in the future and bring increasing revenues to this segment in succeeding periods.


28
OPERATING EXPENSES

The following table presents our operating expenses and the percentage of total net revenues:
 
   
Three Months Ended
 
Six Months Ended
 
   
June 30,
 
June 30,
 
   
2007
 
2006
 
2007
 
2006
 
                   
Operating Expenses
                 
Cost of services provided expenses
 
$
971,014
 
$
545,475
 
$
1,873,488
 
$
965,115
 
% of total net revenues
   
41.2%
 
  
43.0%
 
  
43.0%
 
  
33.4%
 
                           
Selling, general and administrative expenses
  $
2,309,092
 
$ 
1,291,576
  $
4,152,679
  $
2,946,218
 
% of total net revenues     98.0%     101.9%     95.3%     102.0%  
                           
Research and development expenses   $ 27,355   $ -   $ 93,366   $ -  
% of total net revenues     1.2%     0.0%     4.0%     0.0%  
                           
Share-based compensation expense   $ 92,744  
$ 
19,977   $ 146,743   $ 39,953  
% of total net revenues
   
3.9%
 
  
1.6%
 
  
3.4%
 
  
1.4%
 
                           
Total operating expenses
  $
3,400,205
  $
1,857,028
  $
6,266,275
  $
3,951,286
 
% of total net revenues
    144.3%     146.5%    
143.8%
   
136.7%
 
 
COST OF SERVICES PROVIDED EXPENSES

Cost of services provided increased by $425,539 (78%) to $971,014 during the second quarter of fiscal 2007 from $545,475 during the second quarter of fiscal 2006 primarily due to acquisitions of Novus and DocuCom and of entities acquired from NetGuru subsequent to the second quarter of fiscal 2006.

Cost of services provided expenses increased by $908,373 (94%) to $1,873,488 during the six months of fiscal 2007 from $965,115 during the six months of fiscal 2006 primarily due to acquisistions of Novus and DocuCom and of entities acquired from NetGuru subsequent to the six months of fiscal 2006.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by $1,017,516 (79%) to $2,309,092 during the second quarter of fiscal 2007 from $1,291,576 during the second quarter of fiscal 2006 primarily due to higher professional fees and higher intangible amortization expense from the assets acquired in the previous year, and higher business integration expense associated with the consolidation of the newly acquired business operations. Additionally, SG&A expenses in the second quarter of fiscal 2007 included those of Novus and DocuCom in the amount of $242,266 and of entities acquired from netGuru in the amount of $304,364 that were not present in the second quarter of 2006 since they were acquired in the fourth quarter ended December 2006 and DocuCom was acquired in June 2007.

Selling, general and administrative ("SG&A") expenses increased by $1,206,461 (41%) to $4,152,679 during the first six months of fiscal 2007 from $2,946,218 during the first six months of fiscal 2006 primarily due to higher professional fees and higher intangible amortization expense from the assets acquired in the previous year, and higher business integration expense associated with the consolidation of the newly acquired business operations. Additionally, SG&A expenses in the first six months of fiscal 2007 included those of Novus and DocuCom in the amount of $435,987 and of entities acquired from netGuru in the amount of $532,714 that were not present in the first six months of 2006 since they were acquired in the fourth quarter ended December 2006 and DocuCom was acquired in June 2007.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development ("R&D") expenses consist primarily of software developers' wages. In the first quarter and the first six months of fiscal 2006 there were no R&D expenses since the Web4 division which is the primary generator of R&D expense was acquired in the fourth quarter of fiscal 2006.

SHARE-BASED COMPENSATION EXPENSE

We recorded share-based compensation expense of $92,744 in the second quarter of fiscal 2007 compared to $19,977 in the same period in the prior year. We recorded share-based compensation expense of $146,743 in the first six months of fiscal 2007 compared to $39,953 in the same period in the prior year. Grants of employee stock options are recognized as expense in the Company’s financial statements based on their respective grant date fair values and are charged to compensation expense based on awards that are ultimately expected to vest.

29

OPERATING LOSS BY SEGMENT

Operating loss in the ECM segment decreased to $138,148 in the second quarter of fiscal 2007 from $216,983 second quarter of 2006 primarily due to higher margin project revenues in the second quarter 2007, along with higher business integration expenses and an increase in the ratio of lower margin third party product sales during the second quarter of fiscal 2006. The increase in operating loss in the ITO segment to $169,140 in the second quarter of fiscal 2007 from $83,936 in the second quarter of fiscal 2006 is primarily due to higher revenues from acquired entities and organic growth in the ITO segment during the second quarter of fiscal 2007 compared to the same period in the prior year. The decrease in operating loss in the HRO segment is primarily due to decrease in salaries in the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006. Corporate expenses increased to $659,044 in the second quarter of fiscal 2007 from $30,110 in the second quarter of 2006 primarily due to additional employees in the corporate headquarters, increased professional fees, intangible amortization expense and share-based compensation expense. The following table details the operating loss by segment:
 
   
 Three Months Ended June 30,
   
 2007
  
% of Total
  
2006
  
% of Total
  
Operating loss
                   
ECM
  
$
(138,148
)
  
13.2
%
$
(216,983
)
  
36.8
%
ITO
    
(169,140
)
  
16.2
%
  
(83,936
)
  
14.2
%
HRO
    
(77,694
)
  
7.4
%
  
(258,258
)
  
43.8
%
Corporate
    
(659,044
)
  
63.1
%
  
(30,110
)
  
5.1
%
Consolidated
  
$
(1,044,026
)
  
100.0
%
$
(589,287
)
  
100.0
%

Operating loss in the ECM segment increased to $503,721 in the first six months of fiscal 2007 from $273,483 in the second quarter of 2006 primarily due to higher margin project revenues in the second quarter 2007, along with higher business integration expenses and an increase in the ratio of lower margin third party product sales during the first six months of fiscal 2006. The operating loss in the ITO segment of $185,784 in the first six months of fiscal 2007 is little changed from $187,234 in the same period in the prior year. The decrease in operating loss in the HRO segment is primarily due to decrease in salaries in the first six months of fiscal 2007 compared to the first six months of fiscal 2006. Corporate expenses increased to $1,071,487 in the first six months of fiscal 2007 from $62,749 in the first six months of 2006 primarily due to additional employees in the corporate headquarters, increased professional fees, intangible amortization expense and share-based compensation expense. The following table details the operating loss by segment:
 
   
 Six Months Ended June 30,
   
 2007
  
% of Total
  
2006
  
% of Total
  
                    
Operating loss
                   
ECM
  
$
(503,721
)
  
26.4
%
$
(273,483
)
  
25.8
%
ITO
    
(185,784
)
  
9.7
%
  
(187,234
)
  
17.6
%
HRO
    
(148,510
)
  
7.8
%
  
(538,211
)
  
50.7
%
Corporate
    
(1,071,487
)
  
56.1
%
  
(62,749
)
  
5.9
%
Consolidated
  
$
(1,909,502
)
  
100.0
%
$
(1,061,677
)
  
100.0
%

OTHER EXPENSE (INCOME)

The following table presents our other expense (income) and its percentage of total net revenues:

30
 
   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
 2007
  
2006
  
2007
  
2006
  
                    
Other Expense (Income)
                   
Related parties interest
  
$
26,926
  
$
-
  
$
62,597
  
$
-
  
% of total net revenues
    
1.1
%
  
0.0
%
  
1.4
%
  
0.0
%
                           
Other interest, net
  
$
212,751
  
$
7,121
  
$
681,374
  
$
4,996
  
% of total net revenues
    
9.0
%
  
0.6
%
  
15.6
%
  
0.2
%
                           
Other income
  
$
12,253
 
$
668
  
$
14
 
$
911
  
% of total net revenues
    
0.05
%
  
0.1
%
  
0.0
%
  
0.0
%
                           
Total other expense (income)
  
$
251,930
  
$
7,789
  
$
743,985
  
$
5,907
  
% of total net revenues
    
10.7
%
  
0.6
%
  
17.1
%
  
0.2
%
 
INTEREST EXPENSE, NET

Net interest expense increased by $244,141 in the second quarter of fiscal 2007 to $251,930 from net interest expense of $7,789 in the second quarter of fiscal 2006 primarily due to $163,939 in amortization of the value of warrants issued pursuant to bridge loans, $26,926 in interest expense on bridge loans, $19,529 in interest expense related to purchase price payable to sellers of Novus.

Net interest expense increased by $738,078 in the first six months of fiscal 2007 to $743,985 from net interest expense of $5,907 in the first six months of fiscal 2006 primarily due to $594,029 in amortization of the value of warrants issued pursuant to bridge loans, $50,597 in interest expense on bridge loans, $37,848 in interest expense related to purchase price payable to sellers of Novus and $12,000 in loan origination fees.

INCOME TAXES

In the second quarter and first six months of fiscal 2007 and fiscal 2006, we recorded no income tax expense since we had incurred net losses from operations.
 
LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity at June 30, 2007 consisted of $5,266,044 in cash and cash equivalents. Cash and cash equivalents increased by $4,559,847 in the first six months of fiscal 2007. We incurred net losses from operations of $1,909,502 and $1,061,677 and used cash in operations of $1,931,752 and $537,459 in the first six months of 2007 and 2006, respectively.

The primary reasons for cash used in operations during the first six months of fiscal 2007 were: net loss of $2,653,487 that included non-cash charges related amortization of the loan discount in the amount of $594,031, depreciation and amortization expense of $173,111, and share-based compensation expense of $146,741. In addition, the timing differences in the payment of our current liabilities and collection of our current assets also contributed to the cash used in operations.

The primary reasons for cash used in operations during the first six months of fiscal 2006 were: net loss of $1,067,584, depreciation and amortization expense of $320,587, and share-based compensation expense of $39,953. In addition, the timing differences in the payment of our current liabilities and collection of our current assets also contributed to the cash used in operations.

Net cash used in investing activities in the first six months of fiscal 2007 was $6,162,396, primarily for purchase of DocuCom, Novus, HRMS and property and equipment.

31
 
Net cash used in investing activities in the first six months of fiscal 2006 was $501,063, primarily for purchase of Digica and $125,470 for the purchase of property and equipment.

Net cash provided by financing activities during the first six months of 2007 was $12,944,550 of which $12,410,033 came from the net proceeds from the sale of $14,000,000 of preferred shares. In the first six months of fiscal 2007, we received $400,000 in cash proceeds from bridge loans and repaid bank debt in the amount of $179,483. The bridge loan was provided by Mr. Dolan, our chief executive officer and we issued a warrant to purchase 133,333 shares of common stock pursuant to the bridge loan agreement.

We have funded our operations primarily from the private placement of shares of our common stock and preferred stock and through the founders bridge loan facility established in August 2006. During the next twelve months, we anticipate raising capital necessary to grow our business and complete additional acquisitions by issuing our equity securities and/or debt.
 
In the event that such transaction(s) do not take place at all and/or are unreasonably delayed, our future capital requirements will depend upon many factors. These factors include but are not limited to sales and marketing efforts, the development of new products and services, possible future corporate mergers or strategic acquisitions or divestitures, the progress of research and development efforts, and the status of competitive products and services. If our anticipated financing transactions do not take place at all and/or are unreasonably delayed, we may not have adequate funds to extinguish all our remaining liabilities and fund our current operations going forward.

Although we expect to meet our operating capital needs by additional private equity and/or debt transactions, additional draw down on the founders' bridge loan facility, and current economic resources, there can be no assurance that funds required will be available on terms acceptable to us, if at all. If we are unable to raise sufficient funds on acceptable terms, we may be not be able to complete our business plan. If equity financing is available to us on acceptable terms, it could result in additional dilution to our existing stockholders.

This uncertainty, recurring losses from operations, limited cash resources, and an accumulated deficit, among other factors, raised doubt about our ability to continue as a going concern and led our independent registered       

32
 
public accounting firm to include an explanatory paragraph related to our ability to continue as a going concern in their report that accompanied our financial statements for the year ended December 31, 2006. Reports of independent auditors questioning a company's ability to continue as a going concern generally are viewed unfavorably by analysts and investors. This report may make it difficult for us to raise additional debt or equity financing to the extent needed for our continued operations or for planned expansion, particularly if we are unable to attain and maintain profitable operations in the future. Consequently, future losses may adversely affect our business, prospects, financial condition, results of operations and cash flows.

The following table summarizes our contractual obligations and commercial commitments at June 30, 2007:
 
       
Less Than
          
After
  
   
Total
  
1 Year
  
1-3 Years
  
4-5 Years
  
5 Years
  
                       
Long-term debt
  
$
182,770
  
$
152,545
  
$
30,225
  
$
-
  
$
-
  
                                 
Capital lease obligations*
    
495,300
   
95,208
   
214,526
   
185,566
   
-
 
                                 
Operating leases
    
1,385,655
   
601,991
   
664,444
   
118,991
   
229
 
                                 
Purchase price payable -
                               
Novus and DocuCom
    
1,886,301
   
1,886,301
   
-
   
-
   
-
 
                                 
Short-term loan payable
    
125,000
   
125,000
   
-
   
-
   
-
 
                                 
Bridge loan payable
    
1,200,000
   
1,200,000
   
-
   
-
   
-
 
                                 
Total contractual obligations
  
$
5,275,026
  
$
4,061,045
  
$
909,195
  
$
304,557
  
$
229
  
 
     *Excludes imputed interest of $123,009
 
ITEM 3. CONTROLS AND PROCEDURES

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2007. Based on such evaluation, our principal executive officer and principal financial officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934.

During the second quarter of fiscal 2007, there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

33
 
PART II - -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

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

In January 2007, we received cash proceeds of $400,000 from Mr. Patrick Dolan as bridge loan. Pursuant to the bridge loan agreement, we issued Mr. Dolan a 7-year warrant to purchase 133,333 shares of our common stock. The exercise price of the shares is $0.035 and the warrant vested immediately. Using the Black-Scholes Merton option valuation model, a volatility of 125%, risk free rate of 4.75% and the fair value at grant date of $1.40 per share, we valued the warrant to be approximately $185,187. The value of the warrant was recorded as a discount to the bridge loan and is being amortized over the term of the loan. Unamortized loan discount balance at June 30, 2007 was $0. In addition to the warrant Mr. Dolan is also entitled to a 3% loan guarantee fee, amounting to $12,000, which has been accrued as of June 30, 2007.

In January 2007, we also issued 309 shares of Series A preferred stock as paid-in-kind dividends to Messrs. Dolan and Cortens based on 1,543,251 shares of Series A preferred stock outstanding as of December 31, 2006.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS
 
Exhibit 
Number
 Description 
   
31.1
Certification of Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) 
   
31.2 
Certification of Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) 
   
32  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) 
__________
(1) Attached as an exhibit to this amended quarterly report on Form 10-QSB/A.

34

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
  BPO MANAGEMENT SERVICES, INC.
 
 		  
 		  
 
Date: June 13, 2008 By:   /s/ Donald W. Rutherford
 
Chief Financial Officer
  (principal financial officer and duly authorized officer)
 
 
35
 
EXHIBITS ATTACHED TO THIS AMENDED QUARTERLY REPORT ON FORM 10-QSB/A
 
Exhibit 
Number
 Description 
   
31.1
Certification of Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) 
   
31.2 
Certification of Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) 
   
32  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) 
 
36
 EX-31.1 2 bpo_ex3101.htm CERTIFICATION bpo_ex3101.htm
EXHIBIT 31.1

CERTIFICATION

I, Patrick Dolan, certify that:

    1.  
I have reviewed this amended quarterly report on Form 10-QSB/A of BPO Management Services, Inc.;

    2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

    3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

    4.  
The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the small business issuer and have:

        (a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        (b)  
[Omitted pursuant to SEC Release 34-47986];

        (c)  
Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        (d)  
Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

    5.  
The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

        (a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

        (b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: June 13, 2008

/s/ Patrick A. Dolan                                   
Patrick A. Dolan, Chief Executive Officer
(principal executive officer)
 EX-31.2 3 bpo_ex3102.htm CERTIFICATION bpo_ex3102.htm
EXHIBIT 31.2

CERTIFICATION

I, Donald W. Rutherford, certify that:

    1.  
I have reviewed this amended quarterly report on Form 10-QSB/A of BPO Management Services, Inc.;

    2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

    3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

    4.  
The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the small business issuer and have:

        (a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        (b)  
[Omitted pursuant to SEC Release 34-47986];

        (c)  
Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        (d)  
Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

    5.  
The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

        (a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

        (b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: June 13, 2008

/s/ Donald W. Rutherford                                 
Donald W. Rutherford, Chief Financial Officer
(principal financial officer)
 EX-32 4 bpo_ex32.htm CERTIFICATION bpo_ex32.htm
EXHIBIT 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the amended quarterly report on Form 10-QSB/A of BPO Management Services, Inc. (the "Company") for the quarterly period ended June 30, 2007 (the "Report"), each of the undersigned hereby certifies in his capacity as Chief Executive Officer and Chief Financial Officer of the Company, respectively, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

    1.  the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

    2.  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
Date: June 13, 2008 BPO MANAGEMENT SERVICES, INC.
 
 		  
 		  
 
  By:   /s/ Patrick A. Dolan
 
Chief Executive Officer
(principal executive officer)
 
     
Date: June 13, 2008 BPO MANAGEMENT SERVICES, INC.
 
 		  
 		  
 
  By:   /s/ Donald W. Rutherford
 
Chief Financial Officer
  (principal financial officer and duly authorized officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 -----END PRIVACY-ENHANCED MESSAGE-----