UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB-A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER __________
THINKPATH INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
ONTARIO 52-209027
------------------------------------ --------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR
ORGANIZATION) IDENTIFICATION NO.)
55 UNIVERSITY AVENUE, SUITE 505
TORONTO, ONTARIO, CANADA M5J 2H7
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(416) 364-8800
--------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 |_|
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
BASED UPON THE LAST SALE PRICE ON OCTOBER 22, 2001 WAS APPROXIMATELY $4,196,561.
AS OF OCTOBER 22, 2001 THERE WERE 15,536,601 SHARES OF
COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES X NO _____
THINKPATH INC.
JUNE 30, 2001 QUARTERLY REPORT ON FORM 10-QSB-A
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Revised Interim Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000...................................................4,5
Revised Interim Consolidated Statements of Income for the three months and
six months ended June 30, 2001 and 2000...................................6
Revised Interim Consolidated Statements of Stockholders' Equity for the three
and six months ended June 30, 2001 and the year ended December 31,
2000.......7
Revised Interim Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and 2000..............................................8
Notes to Revised Interim Consolidated Financial Statements.....................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................21
Item 2. Changes in Securities and Use of Proceeds ...........................21
Item 3. Defaults Upon Senior Securities .....................................23
Item 4. Submission of Matters to a Vote of Security Holders .................23
Item 5. Other Information ...................................................26
Item 6. Exhibits and Reports on Form 8-K ....................................26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB-A contains forward-looking
statements as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements, which are other than statements of historical facts. These
statements are subject to uncertainties and risks including, but not limited to,
product and service demand and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, government regulation, and
other risks defined in this document and in statements filed from time to time
with the Securities and Exchange Commission. All such forward-looking statements
are expressly qualified by these cautionary statements and any other cautionary
statements that may accompany the forward-looking statements. In addition,
Thinkpath Inc. disclaims any obligations to update any forward-looking
statements to reflect events or circumstances after the date hereof.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
REVISED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
REVISED INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
2001 2000
---- ----
$ $
ASSETS
CURRENT ASSETS
Accounts receivable 6,954,557 7,857,999
Inventory 62,967 93,670
Income taxes receivable 331,948 358,436
Prepaid expenses 389,474 335,930
---------- ---------
7,738,946 8,646,035
CAPITAL ASSETS 3,341,973 3,596,759
GOODWILL 8,424,854 8,585,290
INVESTMENT IN NON-RELATED COMPANIES 1,502,565 1,318,091
LONG-TERM RECEIVABLE 273,530 83,450
OTHER ASSETS 1,374,671 1,812,889
DEFERRED INCOME TAXES 436,103 1,643,426
---------- ---------
23,092,642 25,685,940
========== ==========
-4-
THINKPATH INC.
REVISED INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
2001 2000
---- ----
$ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 4,083,542 5,061,410
Accounts payable 3,998,054 3,822,984
Deferred revenue 177,425 219,308
Current portion of long-term debt 412,384 946,131
Current portion of notes payable 1,519,515 1,683,333
---------- ----------
10,190,920 11,733,166
LONG-TERM DEBT 883,474 760,313
NOTES PAYABLE 1,639,456 1,641,667
CAPITAL STOCK PAYABLE 751,788 751,788
---------- ----------
13,465,638 14,886,934
---------- ----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (Note 5) 25,605,830 23,759,415
DEFICIT (15,080,923) (12,306,862)
ACCUMULATED OTHER COMPREHENSIVE LOSS (897,903) (653,547)
---------- ----------
9,627,004 10,799,006
---------- ----------
23,092,642 25,685,940
=========== ==========
The accompanying notes are an integral part of these revised
interim consolidated financial statements.
-5-
THINKPATH INC.
REVISED INTERIM CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
(RESTATED) (RESTATED)
3 MONTHS ENDED 3 MONTHS ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
$ $ $ $
REVENUE 10,015,284 12,196,894 20,717,885 22,037,865
COST OF SERVICES 6,598,474 7,378,442 13,476,901 13,320,779
----------- ----------- ----------- -----------
GROSS PROFIT 3,416,810 4,818,452 7,240,984 8,717,086
----------- ----------- ----------- -----------
EXPENSES
Administrative 2,285,805 1,606,423 3,039,695 3,277,860
Selling 1,619,886 2,279,282 3,263,646 3,791,066
Financing expenses (51,111) -- 573,525 --
Interest Charges 246,937 303,573 492,986 552,001
Depreciation and amortization 560,986 432,498 1,123,706 714,162
Restructuring costs 173,311 -- 452,764 --
----------- ----------- ----------- -----------
4,835,814 4,621,776 8,946,322 8,335,089
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE
INCOME TAXES (1,419,004) 196,676 (1,705,338) 381,997
Income taxes 200,030 (36,291) 403,992 42,031
----------- ----------- ----------- -----------
NET INCOME (LOSS) (1,619,034) 232,967 (2,109,330) 339,966
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK OUTSTANDING
BASIC AND FULLY DILUTED 14,713,383 4,449,048 13,869,253 4,278,762
=========== =========== =========== ===========
INCOME (LOSS) PER WEIGHTED
AVERAGE COMMON STOCK
AFTER PREFERRED DIVIDENDS
BASIC AND FULLY DILUTED (0.11) (0.05) (0.15) 0.08
=========== =========== =========== ===========
The accompanying notes are an integral part of these revised
interim consolidated financial statements.
-6-
THINKPATH INC.
REVISED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND JUNE 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK CAPITAL OTHER
NUMBER OF PREFERRED STOCK NUMBER OF STOCK RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES SHARES AMOUNTS EARNINGS INCOME (LOSS) INCOME (LOSS)
A B C
Balance as at December 31, 2000 11,915,138 1,050 750 - 23,759,415 (12,306,862) (653,547)
Net loss for the period - - - - - (490,296) (490,296)
-------------
Other comprehensive loss, net of tax:
Foreign currency translation - - - - - - (589,297)
Adjustment to market value - - - - - - (1,735)
-------------
Other comprehensive loss (591,032) (591,032)
-------------
Comprehensive loss (1,081,328)
=============
Issuance of common stock for cash
525,000 - - - 400,000 -
Common stock and warrants
issued in consideration of
services 30,632 - - - 246,980 -
Dividend on preferred stock - - - - 226,500 (226,500)
Conversion of preferred stock to
common stock 1,875,839 (1,050) (750) - - -
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of March 31, 2001 14,346,609 - - - 24,632,895 (13,023,658) (1,244,579)
Net loss for the period - - - - - (1,619,034) (1,619,034)
-------------
Other comprehensive income (loss), net of tax:
Foreign currency translation - - - - - - 345,732
Adjustment to market value - - - - - - 944
-------------
Other comprehensive income 346,676 346,676
-------------
Comprehensive loss (1,272,358)
=============
Issuance of preferred stock - - - 1,230 1,230,000 -
Common stock and warrants issued, and
repriced in consideration of
services 150,000 - - - 107,702 -
Dividend on preferred stock - - - - 141,140 (154,138)
Conversion of preferred stock to
common stock 266,774 - - (120) - -
Beneficial conversion on
Issuance of preferred stock - - - - 284,093 (284,093)
Allowance for deferred taxes recoverable
On issue expenses (790,000)
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of June 30, 2001 14,763,383 - - 1,110 25,605,830 (15,080,923) (897,903)
-------------- --------- -------- -------- ------------ ------------- ------------
The accompanying notes are an integral part of these revised
interim consolidated financial statements.
-7-
THINKPATH INC.
REVISED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
RESTATED
2001 2000
---- ----
$ $
Cashflows from operating activities
Net income (loss) (2,109,330) 339,966
---------- ----------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Amortization 1,123,705 774,162
Decrease (increase) in accounts receivable 840,226 (1,471,182)
Decrease (increase) in prepaid expenses (50,568) (96,550)
Increase (decrease) in accounts payable 167,969 1,032,538
Increase in income taxes payable (receivable) -- (167,204)
Decrease (increase) in short term investments -- (1,608,429)
Decrease (increase) in deferred income taxes 397,362 (41,485)
Decrease (increase) in inventory 30,472 (70,567)
Increase (decrease) in deferred revenue (44,685) --
Common stock and warrants issued for services 354.682 --
Long-term investment received for services (205,242) --
---------- ----------
Total adjustments 2,613,921 (1,648,717)
---------- ----------
Net cash used in operating activities 504,591 (1,308,751)
---------- ----------
Cash flows from investing activities
Purchase of capital assets (214,691) (805,254)
Purchase of other assets (294,202) (212,650)
Increase in long-term receivable (188,626) --
Cash payment for subsidiaries -- (1,788,950)
---------- ----------
Net cash used in investing activities (697,519) (2,806,854)
---------- ----------
Cash flows from financing activities
Repayment of notes payable (192,164) 496,068
Repayment of long-term debt (475,845) (70,373)
Cash received from long-term debt 225,000 --
Proceeds from issuance of common stock 400,000 124,420
Proceeds from issuance of preferred stock 1,100,000 1,580,833
Increase (decrease) in bank indebtedness (812,515) 1,152,381
---------- ----------
Net cash provided by financing activities 244,476 3,283,329
---------- ----------
Effect of foreign currency exchange rate changes (51,548) 83,775
---------- ----------
Net increase (decrease) in cash and cash equivalents -- (748,501)
Cash and cash equivalents
-Beginning of period -- 1,904,588
---------- ----------
-End of period -- 1,156,087
---------- ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 300,434 410,881
========== ==========
Income taxes paid 3,992 42,031
========== ==========
SUPPLEMENTAL NON-CASH ITEM:
Preferred stock dividend 664,731 29,600
========== ==========
The accompanying notes are an integral part of these revised
interim consolidated financial statements.
-8-
THINKPATH INC.
NOTES TO REVISED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) PRINCIPAL BUSINESS ACTIVITIES Thinkpath Inc. is an information
technology and engineering services company which, along with its
subsidiaries Systemsearch Consulting Services Inc., Cad Cam Inc., Cad
Cam of Michigan Inc., Cad Cam Integrated Manufacturing Services Inc. and
Cad Cam Technical Services Inc., Thinkpath Training Inc., Microtech
Professionals Inc., Njoyn Software Inc., and TidalBeach Development
Inc., provides outsourcing, recruiting, training and technology services
to enhance the resource performance of clients.
B) BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION The accompanying
consolidated interim financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated interim financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
In the opinion of the Company, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation have
been included in the consolidated interim financial statements. The
consolidated interim financial statements are based in part on estimates
and have not been audited by independent accountants. Independent
accountants will audit the annual consolidated financial statements.
The consolidated financial statements include the accounts of the
company and its wholly-owned subsidiaries. The earnings of the
subsidiaries are included from the date of acquisition for acquisitions
accounted for using the purchase method. For subsidiaries accounted for
by the pooling of interest method their earnings have been included for
all periods reported. All significant inter-company accounts and
transactions have been eliminated.
C) NET INCOME (LOSS) AND FULLY DILUTED NET INCOME (LOSS) PER
WEIGHTED AVERAGE COMMON STOCK
Net income (Loss) per common stock is computed by dividing net income
(loss) for the year by the weighted average number of common stock
outstanding during the year.
Fully diluted net income (loss) per common stock is computed by dividing
net income for the year by the weighted average number of common stock
outstanding during the year, assuming that all convertible preferred
stock, stock options and warrants were converted or exercised. Stock
conversions stock options and warrants, which are anti-dilutive, are not
included in the calculation of fully diluted net income (loss) per
weighted average common stock.
D) REVENUE RECOGNITION
1) The company provides the services of engineering and information
technology staff on a project basis. The services provided are
defined by guidelines to be accomplished by milestone and revenue is
recognized upon the accomplishment of the relevant milestone. As
services are rendered, the costs incurred are reflected as Work in
Progress. Revenue is recognized upon the persuasive evidence of an
agreement, delivery has occurred, the fee is fixed or determinable
and collection is probable.
-9-
THINKPATH INC.
NOTES TO REVISED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
2) The company provides the services of information technology
consultants on a contract basis and revenue is recognized as
services are performed.
3) The company places engineering and information technology
professionals on a permanent basis and revenue is recognized upon
candidates' acceptance of employment. If the company receives
non-refundable upfront fees for "retained searches", the revenue is
recognized upon candidates' acceptance of employment.
4) The company provides advanced training and certification in a
variety of technologies and revenue is recognized on delivery.
5) The company licenses software in the form of a Human Capital
Management System called Njoyn. The revenue associated with
providing this software is allocated to an initial set up fee,
customization and training as agreed and an ongoing monthly per user
fee. The allocation of revenue to the various elements is based on
the company's determination of the fair value of the elements if
they had been sold separately. The set-up fee and customization
revenue is recognized upon delivery of access to the software with
customization completed in accordance with milestones determined by
the contract. Revenue for the training is recorded as the services
are rendered and the ongoing monthly fee is recorded each calendar
month. There is no additional fee for hosting.
The company signs contracts for the customization or development of
SecondWave in accordance with specifications of its clients. The
project plan defines milestones to be accomplished and the costs
associated. These amounts are billed as they are accomplished and
revenue is recognized as the milestones are reached. The work in
progress for costs incurred beyond the last accomplished milestone
is reflected at the period end. To date these amounts have not been
material and have not been set up at the period ends. The contracts
do not include any post-contract customer support. Additional
customer support services are provided at standard daily rates, as
services are required.
2. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
Conexys $667,511
Digital Cement 507,865
Lifelogix 121,947
Tillyard Management 130,242
SCM Dialtone 75,000
----------
Total $1,502,565
==========
During the three months ended June 30, 2001, the company acquired an
interest worth $130,242 in Tillyard Management Inc., a property
management company, in consideration of a real estate management
software system developed by Thinkpath Inc. This investment has been
accounted for using the cost method.
-10-
THINKPATH INC.
NOTES TO REVISED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
The company also acquired an interest worth $75,000 in SCM Dialtone, a
real time supply chain management (SCM) service provider, in
consideration of placement and consulting services rendered. This
investment has been accounted for using the cost method.
3. LONG-TERM DEBT
At June 30, 2001, the Company continued to be in breach of the Bank
One loan covenants and accordingly the Bank continues to charge higher
interest rates and enforce its restriction on the Company's repayment
of certain subordinated loans and notes payable. In compliance with
this restriction, the Business Development Bank of Canada has agreed
to a principal repayment deferral of its subordinated loans.
4. NOTES PAYABLE
In compliance with Bank One's restriction, the Company is making
interest only payments on its notes payable to the vendors of Cad Cam
Inc. and Micro Tech Professiionals Inc.
5. CAPITAL STOCK
a) Authorized
30,000,000 Common stock, no par value
1,000,000 Preferred stock, issuable in series,
rights to be determined by the Board of Directors
b) Issued
During the three months ended June 30, 2001, the Company issued 150,000
shares of its common stock in consideration of $78,000 cash received.
On June 6, 2001, the Company amended its Articles of Organization to
increase its authorized common stock from 15,000,000 to 30,000,000.
c) Preferred Stock
Pursuant to a share purchase agreement dated April 18, 2001, the Company
issued 1,105 shares of Series C 7% Cumulative Convertible Preferred Stock
(Series C Preferred Stock). Each share of Series C Preferred Stock has a
stated value of $1,000 per share. The shares of Series C Preferred Stock
are convertible into shares of the Company's common stock at the option
of the holders, at any time after issuance until such shares of Series C
Preferred Stock are manditorily converted or redeemed by the Company,
under certain conditions. The Company is required to register 200% of the
shares of common stock issuable upon the conversion of the 1,105 shares
of Series C Preferred Stock. In addition, upon the effective date of such
registration statement, the Company is obligated to issue to the holders
of Series C Preferred Stock an aggregate of 500 shares of Series C
Preferred Stock in consideration for $500,000, under certain conditions.
The holders of the shares of Series C Preferred Stock are entitled to
receive preferential dividends in cash, on a quarterly basis commencing
on June 30, 2001, out of any of the Company's funds legally available at
the time of declaration of dividends before any other dividend
distribution will be paid or declared and set apart for payment on any
shares of the Company's common stock, or other class of stock presently
authorized, at the rate of 7% simple interest per annum on the stated
value per share plus any accrued but unpaid dividends, when as and if
declared. The Company has the option to pay such dividends in shares of
the Company's common stock to be paid (based on an assumed value of
$1,000 per share) in full shares only, with a cash payment equal to any
fractional shares.
-11-
THINKPATH INC.
NOTES TO REVISED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
The number of shares of the Company's common stock into which the Series
C Preferred stock shall be convertible into that number of shares of
common stock equal to (i) the sum of (A) the stated value per share and
(B) at the holder's election, accrued and unpaid dividends on such share,
divided by (ii) the Conversion Price". The "Conversion Price" shall be
the lesser of (x) 87.5% of the average of the 5 lowest daily volume
weighted average prices of the Company's common stock during the period
of 60 consecutive trading days immediately prior the date of the
conversion notice; or (y) 90% of the average of the daily volume weighted
average prices during the period of the 5 trading days prior to the
applicable closing date ($.4798 with respect to the 1,105 shares of
Series C 7% Preferred Stock issued and outstanding). The Conversion Price
is subject to certain floor and time limitations. At any time prior to
October 24, 2001, the Company may, in its sole discretion, redeem in
whole or in part, the then issued and outstanding shares of Series C
Preferred Stock at a price equal to $1,150 per share, plus all accrued
and unpaid dividends, and after October 24, 2001 at a price equal to
$1,200 per share, plus all accrued and unpaid dividends.
During the three months ended June 30, 2001, the Company issued 266,774
common stock on the conversion of 120 Series C preferred stock. The
Company paid dividends of $154,138 on the conversions. The proceeds
received on the issue of Class C preferred shares have been allocated
between the value of detachable warrants issued and the preferred shares
outstanding on the basis of their relative fair values. Paid in capital
has been credited by the value of the warrants and retained earnings
charged for the amount of preferred dividends effectively paid. The
conversion benefit existing at the time of issue of the preferred Class C
shares has been computed and this amount has been credited to paid in
capital for the Class C preferred shares and charged to retained earnings
as dividends on the Class C preferred shares.
d) Warrants
During the three months ended June 30, 2001, the Company issued 723,436
warrants to the Series C Preferred Stock investors of which 663,484 have
a strike price of $0.54 and expire on April 18, 2005. The balance of
59,952 have a strike price of $0.63 and expire on June 8, 2005.
Following verbal agreements in December 2000, on January 24, 2001, the
company signed an agreement with The Del Mar Consulting Group, a
California corporation, to represent us in investors' communications and
public relations with existing shareholders, brokers, dealers and other
investment professionals. The company issued a non-refundable retainer of
400,000 shares to Del Mar and are required to pay $4,000 per month for
on-going consulting services. In addition, Del Mar has a warrant to
purchase 400,000 shares of common stock at $1.00 per share and 100,000
shares at $2.00 which expires January 24, 2005 and which are exercisable
commencing August 1, 2001. As the agreement to issue the non- refundable
retainer was reached in December 2000, the 400,000 shares with a value of
$268,000 has been included in the shares issued for services rendered and
has been included in Acquisition costs and financing expenses for
December 31, 2000. The commitment to issue the non-refundable deposit was
effected in December 2000. The value of the warrants of $216,348 has been
included in paid in capital in January 2001 and the expense is being
reflected over the six month period ending August 1, 2001. In April 2001,
the warrants were cancelled and new warrants were issued which are
exercisable at $0.55. 200,000 of the warrants are exercisable commencing
April 2001 and the balance are exercisable commencing August 1, 2001. The
value of the change in the warrants of $29,702 has been included in the
paid in capital in April 2001 and the additional expense is being
amortized in the period to August 1, 2001.
6. RESTRUCTURING COSTS
During the three months ended June 30, 2001, the Company recorded a
restructuring charge of $173,311 for a year to date total of $452,764 as
a result of certain of the Company's actions to better align its cost
structure with expected revenue growth rates. The restructuring charge
includes severance paid to employees of the London training office and
the staff involved with software development for Njoyn. The support and
marketing team for Njoyn continue to operate.
-12-
THINKPATH INC.
NOTES TO REVISED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
7. OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended June 30, 2001:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments 345,732 - 345,732
Adjustment to market value 1,349 (405) 944
--------- ------- ---------
Other comprehensive income (loss) 347,081 (405) 346,676
========= ======== =========
Comprehensive income (loss) for the three months ended March 31, 2001:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments (589,297) - (589,297)
Adjustment to market value (2,479) 744 (1,735)
-------- -------- ----------
Other comprehensive loss (291,776) 744 (591,032)
========= ======== ==========
The foreign currency translation adjustments are not currently adjusted for
income taxes since the company is situated in Canada and the adjustments
relate to the translation of the financial statements from Canadian dollars
into United States dollars done only for the convenience of the reader.
8. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Three Months Six Months Six Months
Ended June 30, 2001 Ended June 30, 2000 Ended June 30, 2001 Ended June 30, 2000
------------------- ------------------- ------------------- -------------------
$ $ $ $
Canada 3,443,590 4,062,336 8,627,421 7,970,538
United States of America 6,571,694 8,134,558 12,090,464 14,067,327
---------- ---------- ---------- ----------
10,015,284 12,196,894 20,717,885 22,037,865
========== ========== ========== ==========
b) Net Income (Loss) by Geographic Area
Three Months Three Months Six Months Six Months
Ended June 30, 2001 Ended June 30, 2000 Ended June 30, 2001 Ended June 30, 2000
------------------- ------------------- ------------------- -------------------
$ $ $ $
Canada (1,194,448) (489,364) (1,906,989) (568,328)
United States of America (424,586) 722,331 (202,341) 908,294
------- ------- ----------- ----------
(1,619,034) 232,967 (2,109,330) 339,966
========== ======= =========== ==========
-13-
THINKPATH INC.
NOTES TO REVISED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
8. SEGMENTED INFORMATION (CONT'D)
c) Identifiable Assets by Geographic Area
June 30, December 31,
2001 2000
---- ----
$ $
Canada 6,933,549 8,979,711
United States of America 16,159,093 16,706,229
---------- ----------
23,092,642 25,685,940
========== ==========
d) Revenue and Gross Profit by Operating Segment
Three Months Three Months Six Months Six Months
Ended June 30, 2001 Ended June 30, 2000 Ended June 30, 2001 Ended June 30, 2000
------------------- ------------------- ------------------- -------------------
$ $ $ $
Revenue
IT Recruitment 4,537,653 2,967,343 8,979,438 6,221,836
Tech Pubs and Engineering 3,239,012 4,988,221 7,020,485 10,133,863
IT Documentation 932,395 1,738,046 2,219,169 1,738,046
Training 1,101,826 2,393,275 2,020,046 3,720,195
Technology 204,398 110,010 478,747 223,925
---------- ---------- ---------- ----------
10,015,284 12,196,894 20,717,885 22,037,865
========== ========== ========== ==========
Gross Profit
IT Recruitment 1,345,573 1,169,916 2,591,961 3,404,882
Tech Pubs and Engineering 957,049 1,772,011 2,017,011 3,291,931
IT Documentation 285,398 928,954 1,001,944 928,954
Training 634,292 866,572 1,174,663 931,692
Technology 194,498 80,999 455,405 159,627
---------- ---------- ---------- ----------
3,416,810 4,818,452 7,240,984 8,717,086
========== ========== ========== ==========
e) Revenues from Major Customers
The consolidated entity had the following revenues from major Customers:
No single customer consisted of more than 10% of the revenues.
f) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
9. CONTINGENCIES
a) The vendor of Southport Consulting Co. is seeking damages for the
consideration of $250,000 on the acquisition which was funded by shares of
the company. The vendor contends that the shares received do not satisfy
the purchase price. No provision has been recorded in the accounts for
possible losses. Should any expenditure be incurred by the company for the
resolution of this lawsuits, they will be charged to the operations of the
year in which such expenditures are incurred.
b) Three former employees are alleging wrongful dismissal for the termination
of their employment. No provision has been recorded in the accounts for
possible losses. Should any expenditure be incurred by the company for the
resolution of these lawsuits, they will be charged to the operations of
the year in which such expenditures are incurred.
c) The Company is party to various lawsuits arising from the normal course of
business and its restructuring activities. In management's opinion, the
litigation will not materially affect the company's financial position,
results of operations or cash flows. No material provision has been
recorded in the accounts for possible losses or gains. Should any
expenditure be incurred by the Company for the resolution of these
lawsuits, they will be charged to the operations of the year in which such
expenditures are incurred.
-14-
THINKPATH INC.
NOTES TO REVISED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
10. SUBSEQUENT EVENTS
a) The Company has restructured its note payable to Roger Walters in
September 2001, so that 1,200,000 shares will be issued in lieu of
$450,000 cash reducing the balance of the note to $750,000. The balance
will be paid over 3 years beginning January 1, 2003. The Company is
current in its interest obligations to Roger Walters.
b) As a result of Bank One's restriction on subordinated debt payments, the
Company is in breach of its payment schedule to Denise Dunne. The
Company is in negotiations to restructure its note payable to Denise
Dunne. The Company hopes to reduce the cash amount owing and extend the
payment terms. The Company is current in its interest obligations to
Denise Dunne.
c) On July 20, 2001, the Company received a Nasdaq Staff Determination
indicating that the company is not in compliance with the bid price
requirements for continued listing, as set forth in Nasdaq's Marketplace
Rule 4310 (c)(8)(B). . On September 27, 2001, Nasdaq announced a
moratorium on the minimum bid and public float requirements for
continued listing on the exchange until January 2, 2002. The Company's
stock will continue to be listed on Nasdaq during this period.
d) During July 2001, 22,125 shares were issued for the options exercised by
the Business Development Bank of Canada.
e) On September 11, 2001, the Company's branch office located in the World
Trade Centre was destroyed and its branch office at 195 Broadway was
damaged and closed for a period of four weeks. The company cannot yet
provide a reliable estimate of the effect of this destruction and
closure on its operating results and financial condition.
11. MANAGEMENT'S INTENTIONS
Management has initiated substantial changes in operational procedures in
an effort to return the company to profitability and to improve its
cashflow and financial condition. Management has continued to coordinate
its sales efforts to maximize organic and cross- selling initiatives. In
addition, Management has continued its cost cutting initiatives including
the termination of personnel and closure of non-productive offices and
business lines. Management has successfully restructured some of its
long-term debt obligations in addition to postponing significant
obligations. The Company is currently making interest payments only on all
long-term debt and notes payable. Effective June 2001, the Company retained
Banc One Capital Markets to represent the company in certain investment
banking opportunities. Management believes that despite the recent losses
and negative working capital, it has developed a business plan that if
successfully implemented, can substantially improve operational results and
its financial condition.
12. RESTATEMENT
The financial statements as at December 31, 2000 have been restated to
reflect the beneficial conversion on the issuance of preferred shares in
the amount of $805,698 The financial statements as at March 31, 2001 have
been restated to include warrants issued to Del Mar valued at $216,348 and
the amortization of that expense reflected in financing costs in the amount
of $72,116 The financial statements as of June 30, 2001 reflects an
additional $29,702 for the re-pricing of the warrants for Del Mar in April
2001 and the amortization of the financing costs in the amount of $132,926.
The un-amortized balance of $41,008 which will be amortized in the 3rd
quarter of 2001 has been included in Prepaid expenses. The financial
statements for March 31, 2001 and June 30, 2001 reflect additional
allowances against the deferred income tax asset in the amounts of $200,000
and $990,000 respectively. Of these amounts $790,000 has been reflected as
a reduction of paid in capital as the issue expenses were reduced by the
estimated future tax benefit available on claiming the issue expenses as a
Canadian income tax expense.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto and the other historical
financial information of Thinkpath Inc. contained elsewhere in this Form 10-QSB.
The statements contained in this Form 10-QSB that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, including
statements regarding Thinkpath Inc.'s expectations, intentions, beliefs or
strategies regarding the future. Forward-looking statements include Thinkpath
Inc.'s statements regarding liquidity, anticipated cash needs and availability
and anticipated expense levels. All forward-looking statements included in this
Form 10-QSB are based on information available to Thinkpath Inc. on the date
hereof, and Thinkpath Inc. assumes no obligation to update any such
forward-looking statement. It is important to note that Thinkpath Inc.'s actual
results could differ materially from those in such forward-looking statements.
All dollar amounts stated throughout this Form-10QSB are in United States
dollars unless otherwise indicated. Unless otherwise indicated, all reference to
"Thinkpath," "us," "our," and "we," refer to Thinkpath Inc. and its
subsidiaries.
Overview
We are a global provider of information technology and engineering,
project outsourcing, recruitment, technical training and consulting and
ASP-based skills management technology. Our customers include financial service
companies, software and other technology companies, Canadian and American
governmental entities and large multinational companies, including Bank of
Montreal, General Electric, Bell Canada, Goldman Sachs, Chapters, Lucent
Technologies, Cummins Engine, General Motors, CIBC, Xerox Corporation, American
Express and Universal Industrial Corp.
The books and records of our Canadian operations are recorded in
Canadian dollars. For purposes of financial statement presentation, we convert
balance sheet data to United States dollars using the exchange rate in effect at
the balance sheet date. Income and expense accounts are translated using an
average exchange rate prevailing during the relevant reporting period. There can
be no assurance that we would have been able to exchange currency on the rates
used in these calculations. We do not engage in exchange rate-hedging
transactions. A material change in exchange rates between United States and
Canadian dollars could have a material effect on our reported results.
The Three and Six Months Ended June 30, 2001 Compared to the Three and Six
Months ended June 30, 2000
For the three months ended June 30, 2001, we derived 66% of our revenue
in the United States, which is consistent with the three months ended June 30,
2000. For the six months ended June 30, 2001, we derived 58% of our revenue in
the United States compared to 64% for the six months ended June 30, 2000.
For the three months ended June 30, 2001, our primary source of revenue
was recruitment, representing 45% of total revenue compared to 24% for the three
months ended June 30, 2000. For the six months ended June 30, 2001, our primary
source of revenue was recruitment, representing 43% of total revenue compared to
28% for the six months ended June 30, 2000. The increase in revenue from
recruitment is a result of the postponement of contracts and resulting decline
in revenue from our technical publications and engineering outsourcing service
division. We perform permanent, contract and executive searches for IT and
engineering professionals. Most searches are performed on a contingency basis
with fees due upon candidate acceptance of permanent employment or on a
time-and-materials basis for contracts. Retained searches are also offered, and
are paid by a non-refundable portion of one fee prior to performing any
services, with the balance due upon candidates' acceptance. The revenue for
retained searches is recognized upon candidates' acceptance of employment.
Selected recruitment clients include DMR, Bank of Montreal, Goldman
Sachs, and Sprint Canada. In the case of contract services, we provide our
customers with independent contractors or "contract workers" who usually work
under the supervision of the client's management. Generally, we enter into a
time-and-materials contract with our customer whereby the client pays us an
agreed upon hourly rate for the contract worker. We pay the contract worker
pursuant to a separate consulting agreement. The contract worker generally
receives between 75% and 80% of the amount paid to us by the customer; however,
such payment is usually not based on any formula and may vary for different
engagements. We seek to gain "preferred supplier status" with our larger clients
to secure a larger percentage of those clients' businesses. While such status is
likely to result in increased revenue and gross profit, it is likely to reduce
gross margin percentage because we are likely to accept a lower hourly rate from
our customers and there can be no assurance that we will be able to reduce the
hourly rate paid to our consultants. In the case of permanent placement
services, we identify and provide candidates to fill permanent positions for our
clients.
-16-
For the three months ended June 30, 2001, 32% of our revenue came from
technical publications and engineering outsourcing services compared to 41% for
the three months ended June 30, 2000. For the six months ended June 30, 2001,
34% of our revenue came from technical publications and engineering outsourcing
services compared to 46% for the six months ended June 30, 2000. The decline in
revenue from technical publications and engineering outsourcing services is a
result of the postponement of start dates of several major contracts with
established clients until the fourth quarter of 2001. Our technical publications
and engineering outsourcing services include the complete planning, staffing,
development, implementation and testing of a project. Outsourcing can also
involve enterprise-level planning and project anticipation. Our specialized
outsourcing services include: technical publications and engineering
documentation, Web development and engineering services. We outsource our
technical publications and engineering services on a project basis. The services
provided are defined by guidelines to be accomplished by milestone and revenue
is recognized upon the accomplishment of the relevant milestone. As services are
rendered, the costs incurred are reflected as Work in Progress. Revenue is
recognized upon the persuasive evidence of an agreement, delivery has occurred,
the fee is fixed or determinable and collection is probable. Clients we provide
outsourcing to include General Electric, FedEx, Boeing, Caterpillar, Cummins
Engines and Intel.
For the three months ended June 30, 2001, information technology
documentation services represented approximately 9% of our revenue compared to
14% for the three months ended June 30, 2000. For the six months ended June 30,
2001, information technology documentation services represented approximately
11% of our revenue compared to 8% for the six months ended June 30, 2000. We
provide outsourced information technology documentation services in two ways:
complete project management or the provision of skilled project resources to
supplement a client's internal capabilities. Revenue is recognized on the same
basis as technical publications and engineering outsourcing services. Selected
information technology documentation services clients include Fidelity
Investments, SMD Tech Aid Corporation, CDI Corporation, and the Gillette
Company.
For the three months ended June 30, 2001, technical training
represented approximately 12% of our revenue compared to 20% for the three
months ended June 30, 2000. For the six months ended June 30, 2001, technical
training represented approximately 10% of our revenue compared to 17% for the
six months ended June 30, 2000. The decline in revenue from technical training
is a result of both the restructuring of this division and a general decline in
the industry resulting in the cancellation of technical training contracts. Our
training services include advanced training and certification in Microsoft, Java
and Linux technologies, as well as Microsoft applications such as Outlook and
Access. Training services include training requirements analysis, skills
assessment, instructor-led classroom training for small groups (10 - 16
students), mentoring, e-learning, and self-paced learning materials. We offer
both public and private classes. Selected training clients include Microsoft,
Chase Manhattan Bank, Goldman Sachs, City of New York and Consumers Gas. Revenue
is recognized on delivery of services.
For the three months ended June 30, 2001, technology sales represented
2% of total revenue compared to 1% for the three months ended June 30, 2000. For
the six months ended June 30, 2001, technology sales represented 2% of total
revenue compared to 1% for the six months ended June 30, 2000. We have developed
proprietary software applications in two areas: human capital management and Web
development. Njoyn is our human capital management system. Njoyn is a Web-based
application that automates and manages the entire hiring process. The revenue
associated with providing this software is allocated to an initial set up fee,
customization and training as agreed and an ongoing monthly per user fee. The
allocation of revenue to the various elements is based on our determination of
the fair value of the elements as if they had been sold separately. The set-up
fee and customization revenue is recognized upon delivery of access to the
software with customization completed in accordance with milestones determined
by the contract. Revenue for the training is recorded as the services are
rendered and the ongoing monthly fee is recorded each calendar month. There is
no additional fee for hosting.
-17-
SecondWave is our Web development software. SecondWave allows companies
to create, manage and automate their own dynamic, adaptive Web sites. The
software learns from each visitor's behavior and targets his or her needs and
interests with customized content and communications. We sign contracts for the
customization or development of SecondWave in accordance with specifications of
our clients. The project plan defines milestones to be accomplished and the
costs associated. These amounts are billed as they are accomplished and revenue
is recognized as the milestones are reached. The work in progress for costs
incurred beyond the last accomplished milestone is reflected at the period end.
To date these amounts have not been material and have not been set up at the
period ends. The contracts do not include any post-contract customer support.
Additional customer support services are provided at standard daily rates, as
services are required. Selected technology clients include Microsoft, CIBC,
Investors Group, and Digital Cement.
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of contract recruitment include contractor fees and
benefits, resulting in an average gross profit of 29%. We do not attribute any
direct costs to permanent placement services, therefore the gross profit on such
services is 100% of revenue. The direct costs of technical publications and
engineering outsourcing include wages, benefits, software training and project
expenses. The average gross profit for outsourcing is 29%. The direct costs of
information technology documentation services include wages, benefits, and
project expenses. The average gross profit for information technology
documentation is 31%. The direct costs of training include trainer salaries,
benefits and travel as well as courseware. The average gross profit on training
is 58%. The direct costs of our technology services are minimal and include
hosting fees and software expenses. The average gross profit on technology is
95%.
Results of Operations
The Three and Six Months Ended June 30, 2001 Compared to the Three and Six
Months ended June 30, 2000
Revenue. Revenue for the three months ended June 30, 2001 decreased by
$2,185,000 or 18%, to $10,015,000, as compared to $12,200,000 for the three
months ended June 30, 2000. The decrease is primarily attributable to the
decline in revenue of our technical publications and engineering services,
information technology documentation and training divisions and the postponement
or cancellation of contract start dates, as well as the general downturn in the
economy.
Revenue for the six months ended June 30, 2001 decreased by $1,320,000
or 6%, to $20,720,000, as compared to $22,040,000 for the six months ended June
30, 2000. The decrease is primarily attributable to the decline in revenue of
our technical publications and engineering services, and training divisions and
the postponement or cancellation of contract start dates, as well as the general
downturn in the economy.
Cost of Sales. The cost of sales for the three months ended June 30,
2001 decreased by $780,000, or 11%, to $6,600,000, as compared to $7,380,000 for
the three months ended June 30, 2000. This decrease was a direct result of the
decline in revenue. As a percentage of revenue, the cost of sales was 66%
compared to 61% for the three months ended June 30, 2000. The cost of sales
increased as a result of the increase in information technology contract sales,
from which we derive a lower margin.
The cost of sales for the six months ended June 30, 2001 increased by
$160,000, or 1%, to $13,480,000, as compared to $13,320,000 for the six months
ended June 30, 2000. This increase, despite the decline in sales, was a direct
result of the increase in contract sales, from which we derive a lower margin.
As a percentage of revenue, the cost of sales was 65% compared to 60% for the
six months ended June 30, 2000.
Gross Profit. Gross profit for the three months ended June 30, 2001
decreased by $1,400,000, or 29%, to $3,420,000, as compared to $4,820,000 for
the three months ended June 30, 2000. This decrease was attributable to the
decrease in revenue discussed above during the three months ended June 30, 2001.
As a percentage of revenue, gross profit decreased from 39% to 34% for the three
months ended June 30, 2001.
Gross profit for the six months ended June 30, 2001 decreased by
$1,480,000, or 17%, to $7,240,000, as compared to $8,720,000 for the six months
ended June 30, 2000. This decrease was attributable to the decrease in revenue
and the increase in cost of sales during the six months ended June 30, 2001. As
a percentage of revenue, gross profit decreased from 40% to 35% for the six
months ended June 30, 2001.
-18-
Expenses. Expenses for the three months ended June 30, 2001 increased
by $200,000 or 5% to $4,840,000 compared to $4,620,000 for the three months
ended June 30, 2000. Administrative expenses increased $690,000 or 43% to
$2,290,000 compared to $1,600,000 for the three months ended June 30, 2000. This
increase is a result of increased corporate and technology overheads. Selling
expenses for the three months ended June 30, 2001 decreased by $660,000 or 30%
to $1,620,000 from $2,280,000 for the three months ended June 30, 2000. This
decrease is attributable to the decrease in revenue. For the three months ended
June 30, 2001, interest charges decreased by $50,000 or 17% to $250,000 from
$300,000 for the three months ended June 30, 2000, primarily due to a reduction
of long-term debt. For the three months ended June 30, 2001, depreciation and
amortization expenses increased $130,000 or 30% to $560,000 from $430,000 for
the three months ended June 30, 2000. This increase is primarily attributable to
the increase in capital assets and the acquisition of other assets. For the
three months ended June 30, 2001, restructuring charges related to the
termination of personnel and the closure of non-productive branch offices were
$170,000 compared to zero for the three months ended June 30, 2000.
Expenses for the six months ended June 30, 2001 increased by $610,000 or
7% to $8,950,000 compared to $8,340,000 for the six months ended June 30, 2000.
Administrative expenses decreased $240,000 or 7% to $3,040,000 compared to
$3,280,000 for the six months ended June 30, 2000. Selling expenses for the six
months ended June 30, 2001 decreased by $530,000 or 14% to $3,260,000 from
$3,790,000 for the six months ended June 30, 2000. This decrease is attributable
to the decrease in revenue. Financing costs increased $570,000 for the six
months ended June 30, 2001 to $570,000 compared to $0 for the six months ended
June 30, 2000 and relate primarily to the series C preferred share placement
that occurred in April 2001. For the six months ended June 30, 2001, interest
charges decreased by $60,000 or 11% to $490,000 from $550,000 for the six months
ended June 30, 2000, primarily due to a reduction of long-term debt. For the six
months ended June 30, 2001, depreciation and amortization expenses increased
$410,000 or 58% to $1,120,000 from $710,000 for the six months ended June 30,
2000. This increase is primarily attributable to the increase in capital assets
and the acquisition of other assets. For the six months ended June 30, 2001,
restructuring charges related to the termination of personnel and the closure of
non-productive branch offices were $450,000 compared to $0 for the six months
ended June 30, 2000.
Net Income (Loss) Before Income Tax. Net income before income tax for
the three months ended June 30, 2001 decreased by $1,620,000, to a net loss of
$1,420,000 as compared to net income before income tax of $200,000 for the three
months ended June 30, 2000.
Net income before income tax for the six months ended June 30, 2001
decreased by $2,090,000, to a net loss of $1,710,000 as compared to net income
before income tax of $380,000 for the six months ended June 30, 2000.
Liquidity and Capital Resources
Our primary sources of cash are a credit facility of $7,000,000 with
Bank One and proceeds from the sale of equity securities. At June 30, 2001, we
had $4,084,000 outstanding on our Bank One credit facility. For the six months
ended June 30, 2001, we raised $1,500,000 from the issuance of common and
preferred stock.
At June 30, 2001, we had negative cash or cash equivalents and a
working capital deficiency of $2,450,000. At June 31, 2001, we had cash flow
from operations of $500,000. At June 30, 2000, we had cash and cash equivalents
of 1,160,000 and a working capital deficiency of $190,000. At June 30, 2000, we
had a cash flow deficiency from operations of $1,310,000, due primarily to
expenditures in short-term investments.
At June 30, 2001, we had cash flow from financing activities of
$240,000 attributable primarily to proceeds from long-term debt of $225,000, the
issuance of common stock of $400,000, the issuance of preferred stock of
$1,100,000 and the repayment of debt of $1,500,000. At June 30, 2000, we had
cash flow from financing activities of $3,280,000, attributable primarily to an
increase in bank indebtedness of $1,150,000 and proceeds from the issuance of
common stock of $120,000 and preferred stock of $1,580,000.
At June 30, 2001, we had a cash flow deficit from investing activities
of $700,000 attributable primarily to the purchase of capital assets of $210,000
increase in long-term investments of $290,000 and long-term receivables of
$190,000. At June 30, 2000, we had a cash flow deficit from investing activities
of $2,810,000 attributable primarily to the purchase of capital assets of
$810,000, other assets of $210,000 and cash payment for subsidiaries of
$1,790,000.
-19-
At June 30, 2001, we were in breach of the loan covenants governing our
credit line facility with Bank One. As a result, the bank has enforced a
restriction on principal repayment of all subordinated loans and notes payable.
The parties affected by this restriction include the Business Development Bank
of Canada, Roger Walters and Denise Dunne to whom we owe approximately $450,000,
$1,200,000, and $1,900,000 respectively.
At June 30, 2001, we were also in breach of the working capital
covenants governing our operating loans with the Business Development Bank of
Canada. The bank has agreed to a temporary deferment of principal payments until
January 2002. We are current in our interest obligations to the Business
Development Bank of Canada.
As a result of Bank One's restriction on subordinated debt payments, we
are currently in breach of our payment schedule to Roger Walters. We have
restructured our note payable to Roger Walters, so that 1,200,000 shares will be
issued in lieu of $450,000 cash reducing the balance of the note to $750,000.
The balance will be paid over 3 years beginning January 1, 2003. We are current
in our interest obligations to Roger Walters.
As a result of Bank One's restriction on subordinated debt payments, we
are in breach of our payment schedule to Denise Dunne. We are currently in the
process of restructuring our note payable to Denise Dunne. We hope to reduce the
cash amount owing and extend the payment terms. We are current in our interest
obligations to Denise Dunne.
During the last few months, we have initiated substantial changes in
operational procedures in an effort to return to profitability and to improve
our cash flow and financial condition. We have continued to coordinate our sales
efforts to maximize organic and cross-selling initiatives. In addition, we have
continued our cost cutting initiatives including the termination of personnel
and closure of non-productive offices and business lines. We have also
successfully restructured some of our long-term debt obligations in addition to
postponing significant obligations.
In June 2001, we retained Banc One Capital Markets to represent us in
certain investment banking opportunities. We are exploring several
opportunities, including joint ventures, strategic partnerships, spin-offs of
subsidiaries, and the potential sale or downsizing of other smaller business
units.
We believe, despite our recent losses and negative working capital,
that we have developed a business plan that if successfully implemented could
substantially improve our operational results and financial condition.
Recent Events
On June 6, 2001, we changed our corporate name from Thinkpath.com Inc.
to Thinkpath Inc. in order to more accurately reflect our expanded suite of
services.
On July 20, 2001, we received a Nasdaq Staff Determination letter
indicating that we are not in compliance with the bid price requirements for
continued listing, as set forth in Nasdaq's Marketplace Rule 4310 (c)(8)(B). On
September 27, 2001, Nasdaq announced a moratorium on the minimum bid and public
float requirements for continued listing on the exchange until January 2, 2002.
Our common stock will continue to be listed on the Nasdaq SmallCap Market during
this period.
As a result of the September 11, 2001 terrorist attack our branch
office located in the World Trade Center in New York City was destroyed and our
branch office located at 195 Broadway was damaged and closed for a period of
four weeks. We are currently unable to provide a reliable estimate of the effect
of the destruction and closure of our offices on our operating results and
financial condition.
-20-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to the following pending legal proceedings:
Michael Carrazza, as assignee of Southport Consulting Co., instituted
an action against us in the Supreme Court of the State of New York, County of
New York, Index No. 600553/01, alleging breach of contract and unjust
enrichment. Mr. Carrazza is seeking $250,000 in damages. Specifically, Mr.
Carrazza claims that we failed to deliver cash or stock to Mr. Carrazza under
the asset purchase agreement pursuant to which we acquired the assets of
Southport Consulting Co. We have filed a counterclaim against Mr. Carrazza,
seeking $162,000.00 in damages, plus punitive damages and attorneys' fees, on
the ground that Mr. Carrazza, as then president and sole shareholder of
Southport Consulting Co., fraudulently induced us into executing the asset
purchase agreement by misrepresenting the value of the assets being purchased.
As of the date hereof, Mr. Carrazza has filed a motion seeking summary judgment
and other relief, which we are opposing vigorously.
Norbert Mika, a former employee of Thinkpath Training Inc. (formerly
Object Arts Inc.), instituted an action against us in the Ontario Superior Court
of Justice, City of Kitchener, Regional Municipality of Waterloo, Ontario, Court
File No.C-745/01, alleging wrongful dismissal. Specifically, Mr. Mika claims
that we terminated him without cause and he is seeking $195,000 in damages, plus
punitive damages and attorneys' fees. We have filed a statement of defense, and
as of the date hereof, discovery has commenced, and we intend to defend
ourselves and prosecute our claim vigorously.
Glenn Cressman, a former employee of Thinkpath Training Inc. (formerly
Object Arts Inc.), instituted an action against us in the Ontario Superior Court
of Justice, City of London, Ontario, Court File No. 37208, alleging wrongful
dismissal. Specifically, Mr. Cressman claims that we terminated him without
cause and he is seeking $100,000 in damages, plus punitive damages and
attorneys' fees. We have filed a statement of defense, and as of the date
hereof, discovery has commenced, and we intend to defend ourselves and prosecute
our claim vigorously.
John James Silver, a former employee, commenced an action against us in
the Supreme Court of the State of New York, County of New York, Index No.
1113642/01, alleging breach of contract, quantum meruit, and account stated. Mr.
Silver is seeking $81,147 in damages. Specifically, Mr. Silver alleges that we
have breached an employment agreement with him, claiming that we owe him damages
representing unpaid salary, vacation time, a car allowance, severance pay and
stock options. Mr. Silver also claims that we owe him damages for allegedly
having defaulted on payment for certain services that he performed. We are in
the process of answering Mr. Silver's complaint, which was recently filed, and
will defend this action vigorously.
We are not party to any other litigation, pending or otherwise.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to a share purchase agreement dated April 18, 2001 (Series C
Preferred Stock Purchase Agreement), we issued 1,105 shares of Series C 7%
Cumulative Convertible Preferred Stock (Series C Preferred Stock) and 663,484
common stock purchase warrants. The Series C Preferred Stock and the common
stock purchase warrants were issued pursuant to Section 4(2) of the Securities
Act and each of the investors was a sophisticated, accredited investor who took
the shares for investment purposes. There was no underwriter involved in the
transaction.
Each share of our Series C Preferred Stock has a stated value of $1,000
per share. The shares of Series C Preferred Stock are convertible into shares of
our common stock at the option of the holders of the Series C Preferred Stock at
any time after issuance until we force the conversion of the shares of Series C
Preferred Stock. We are required to convert all such shares of Series C
Preferred Stock that remain outstanding after April 18, 2003.
Each of the 663,484 warrants is exercisable at any time and in any
amount until April 18, 2005 at a purchase price of $.5445.
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Pursuant to the registration requirements under the Series C Preferred
Stock Purchase Agreement, we filed a registration statement on June 7, 2001
(Registration Statement) registering 200% of the shares of common stock issuable
upon the conversion of all the shares of Series C Preferred Stock issued and to
be issued and 100% of the shares of common stock issuable upon exercise of the
common stock purchase warrants. Upon the effective date of this registration
statement, we will be obligated to issue to the investors an aggregate of 500
shares of Series C Preferred Stock and additional common stock purchase warrants
in consideration for an additional $500,000. The issuance of the additional 500
shares of Series C Preferred Stock and warrants is subject to the satisfaction
or waiver of the following conditions: (a) that immediately available funds have
been delivered by each investor; (b) that all representations and warranties by
the parties shall have remained true and correct and (c) that all permits and
qualifications required by any state shall have been obtained.
On June 6, 2001 the Series C Preferred Stock Purchase Agreement was
amended (Amended Series C Preferred Stock Purchase Agreement) to restructure the
terms of the issuance of the additional 500 shares of Series C Preferred Stock.
Pursuant to the Amended Series C Preferred Stock Purchase Agreement, we issued
125 shares of the 500 shares of Series C Preferred Stock to be issued and 59,592
warrants to one investor in consideration for $125,000. Pursuant to the Amended
Series C Preferred Stock Purchase Agreement we are obligated to issue the
remaining 375 shares of Series C Preferred Stock and 112,500 warrants to the
investors.
Each of the 59,952 warrants is exercisable at any time and in any
amount until June 8, 2005 at an exercise price of $.6225 per share.
At any time prior to October 24, 2001, we may, in our sole discretion,
redeem in whole or in part, the then issued and outstanding shares of Series C
Preferred Stock at a price equal to $1,150 per share, plus all accrued and
unpaid dividends, and after October 24, 2001 at a price equal to $1,200 per
share, plus all accrued and unpaid dividends. As of the date of this prospectus,
there are 1,110 shares of Series C 7% Convertible Preferred Stock and 723,436
common stock purchase warrants outstanding.
At any time prior to October 24, 2001, we may, in our sole discretion,
redeem in whole or in part, the then issued and outstanding shares of Series C
Preferred Stock at a price equal to $1,150 per share, plus all accrued and
unpaid dividends, and after October 24, 2001 at a price equal to $1,200 per
share, plus all accrued and unpaid dividends. As of the date of this prospectus,
there are 985 shares of Series C 7% Convertible Preferred Stock and 663,484
warrants outstanding.
On April 18, 2001, an additional 140,000 shares were issued to
International Consulting Group for financial consulting services rendered
pursuant to a December 14, 2000 consulting agreement.
On April 30, 2001, we issued the following in satisfaction of finder's
fees related to the Series C Preferred Stock placement: 79,134 shares to KSH
Investment; 23,622 shares to Bakara Corp; 23,622 shares to Flimwell Investments;
and 23,622 shares to Robert B. Prag.
On April 30, 2001, we issued 90,000 shares of our common stock to
DailyFinancial.com, Inc. in consideration of investors' communications and
public relations services. The agreement was for a term commencing on April 1,
2001 and ending on September 30, 2001.
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ITEM 3. DEFAULTS IN SENIOR SECURITIES
We are in breach of the loan covenants governing our credit line
facility with Bank One. As a result, the bank has enforced a restriction on
principal repayment of all subordinated loans and notes payable. The parties
affected by this restriction include the Business Development Bank of Canada,
Roger Walters and Denise Dunne to whom we owe approximately $450,000,
$1,200,000, and $1,900,000 respectively.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 6, 2001, we held an Annual Meeting of Shareholders at which the
shareholders: (i) elected the Board of Directors for the ensuing year; (ii)
ratified the appointment of Schwartz, Levitsky, Feldman, llp, as our independent
chartered accountants for the ensuing year; (iii) ratified the adoption of our
2001 Stock Option Plan; (iv) approved the change of our corporate name from
Thinkpath.com Inc. to Thinkpath Inc.; (v) amended our Articles of Organization
to increase the authorized number of shares of our common stock from 15,000,000
to 30,000,000 shares; (vi) ratified the issuance of more than 2,712,979 shares
of our common stock upon: 1) the conversion of our Series C 7% Preferred Stock;
and 2) the exercise of warrants, which were issued in our April 2001 private
placement offering; and, (vii) ratified the issuance of more than 2,760,979
shares of our common stock, if necessary, upon the issuance of shares of our
common stock and/or shares of our common stock upon the exercise of warrants
pursuant to a contemplated equity line of credit, which shares and/or warrants
will be issued at a discount of up to 20% of the then prevailing market price of
our common stock.
(i) The following directors were elected to the Board of Directors and
received the votes indicated:
For Against Withheld
Declan A. French 7,106,199 - -
Kelly Hankinson 7,106,199 - -
John Dunne 7,106,199 - -
Arthur S. Marcus 7,106,199 - -
Ronan McGrath 7,106,199 - -
Joel Schoenfeld 7,106,199 - -
Robert Escobio 7,106,199 - -
Set forth below is a biographical description of each of our directors
elected at our Annual Meeting of Shareholders held on June 6, 2001:
Declan A. French has served as our Chairman of the Board of Directors
and Chief Executive Officer since our inception in February 1994. Prior to
founding Thinkpath, Mr. French was President and Chief Executive Officer of TEC
Partners Ltd., an information technology recruiting firm in Toronto, Canada. Mr.
French has a diploma in Psychology and Philosophy from the University of St.
Thomas in Rome, Italy.
Kelly Hankinson has served as our Chief Financial Officer since May
1999, on our Board of Directors since June 2000 and as our Secretary and
Treasurer since March 2001. Ms. Hankinson served as our Vice President, Finance
and administration and Group Controller from February 1994 to May 1999. Ms.
Hankinson has a Masters Degree and a Bachelors Degree from York University.
John Dunne has served on our Board of Directors since June 1998. Mr.
Dunne has been Chairman and Chief Executive Officer of the Great Atlantic &
Pacific Company of Canada, Ltd. since August 1997, where he also served as
President and Chief Operating Officer from September 1996 until August 1997.
From November 1995 until September 1996, Mr. Dunne was Chairman and Chief
Executive Officer of Food Basics Ltd.
Arthur S. Marcus has served on our Board of Directors since April 2000.
Mr. Marcus is a partner at the New York law firm of Gersten, Savage & Kaplowitz,
LLP, our United States securities counsel. Mr. Marcus joined Gersten, Savage &
Kaplowitz, LLP in 1991 and became a partner in 1996. Mr. Marcus specializes in
the practice of United States Securities Law and has been involved in
approximately 50 initial public offerings and numerous mergers and acquisitions.
Mr. Marcus received a Juris Doctorate from Benjamin N. Cardozo School of Law in
1989.
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Ronan McGrath has served on our Board of Directors since June 2000. Mr.
McGrath has served as the Chief Information Technology Officer of Rogers
Communications Inc. and the President of Rogers Shares Services Inc., since
their inceptions in 1996. Mr. McGrath was the Chief Information Technology
Officer of Canadian National Railways from 1992 to 1996 and was a Senior Manager
of Arthur Andersen from 1977 to 1979. Mr. McGrath was awarded the Canadian Chief
Information Technology Officer of the Year Award in 1995. Mr. McGrath currently
serves on Compaq Computer's Board of Advisers and is a member of the Board of
Directors of The Information Technology Association of Canada.
Joel Schoenfeld has served on our Board of Directors since April 2001.
Mr. Schoenfeld has served as an Executive Vice President and General Counsel of
BMG Entertainment (BMG), the entertainment division of Bertelsmann AG, since
1989, with responsibility for all legal and business affairs of BMG worldwide.
In his capacity as Executive Vice President and General Counsel, Mr. Schoenfeld
is responsible for negotiating and analyzing new and existing business ventures
and territorial expansion on a global level; international intellectual policy
issues; international antitrust and competition legal matters; and privacy and
database protection compliance. Mr. Schoenfeld has focused on policy matters
impacting the entertainment business, and particularly e-commerce. In
recognition of this, he was appointed 1 of 12 Commissioners on the Industry
Advisory Commission to the World Intellectual Property Organization.
Mr.Schoenfeld is a member of the Executive Board and Central Board of Directors
of the IFPI, the international trade federation for the worldwide music
business. He was elected Chairman of the IFPI Council in 1999, a position he
still holds. Mr. Schoenfeld served as General Counsel and Executive Vice
President at the RIAA (the trade association of U.S. record producing
companies), where he worked for 12 years prior to joining BMG, and then served
on RIAA's Board of Directors for the next 10 years.
Robert Escobio has served on our Board of Directors since May 2001.
Mr.Escobio is the President and Chief Executive Officer of Capital Investment
Services, Inc., an investment brokerage firm based in Florida. In these roles,
Mr. Escobio is responsible for all aspects of a "broker/dealer" including
financial, compliance, sales and operational procedures. Mr. Escobio is also a
Portfolio Manager for many prominent individuals and works with various
international institutions, brokers, and dealers. Prior to being employed by
Capital Investment Services, Inc, Mr. Escobio served as the Executive Vice
President and International Director for Brill Securities Inc. where he managed
portfolios for numerous high net-worth customers and performed institutional
trading. Mr. Escobio also had numerous managerial roles in companies such as
Cardinal Capital Management, Smith Barney, Prudential Securities and Dean
Witter. Mr. Escobio holds an MBA and a BSBA in Finance and Management.
(ii) The appointment of Schwartz, Levitsky Feldman, llp, to serve as
our independent chartered accountants for the ensuing year was approved by the
votes indicated:
For: 7,106,199
Against: 0
Withheld: 0
Non-votes: 0
(iii) The adoption of our 2001 Stock Option Plan was approved by the
votes indicated:
For: 7,106,199
Against: 0
Withheld: 0
Non-votes: 0
The 2001 Stock Option Plan is administered by our Compensation
Committee or our Board of Directors, which determines among other things, those
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares of our common stock
issuable upon the exercise of the options and the option exercise price. As of
the date of this prospectus, we have issued options to purchase 335,000 shares
of our common stock underlying the 2001 Stock Option Plan to certain of our
directors, employees and consultants.
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The 2001 Stock Option Plan is effective for a period for ten years,
expiring in 2011. Options to acquire 1,000,000 shares of our common stock may be
granted to officers, directors, consultants, key employees, advisors and similar
parties who provide us with their skills and expertise. The 2001 Stock Option
Plan is designed to enable management to attract and retain qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the 2001 Stock Option Plan may be exercisable for up to ten years,
generally require a minimum two year vesting period, and shall be at an exercise
price all as determined by our Board of Directors provided that, pursuant to the
terms of the underwriting agreement between us and our underwriters, the
exercise price of any options may not be less than the fair market value of the
shares of our common stock on the date of the grant. Options are
non-transferable, and are exercisable only by the participant (or by his or her
guardian or legal representative) during his or her lifetime or by his or her
legal representatives following death. Upon a change in control of Thinkpath,
the acceleration date of any options that were granted but not otherwise
exercisable accelerates to the date of the change in control. Change in control
includes (i) the sale of substantially all of our assets and merger or
consolidation with another company, or (ii) a majority of the members of our
Board of Directors changes other than by election by the shareholders pursuant
to Board of Directors solicitation or by vacancies filled by the Board of
Directors caused by death or resignation of such person.
If a participant ceases affiliation with us by reason of death,
permanent disability or retirement at or after age 65, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant ninety days to
exercise the option, except for termination for cause which results in immediate
termination of the option. Any unexercised options that expire or that terminate
upon an employee's ceasing to be employed by us become available again for
issuance under the 2001 Stock Option Plan, subject to applicable securities
regulation. The 2001 Stock Option Plan may be terminated or amended at any time
by our Board of Directors, except that the number of shares of our common stock
reserved for issuance upon the exercise of options granted under the 2001 Stock
Option Plan may not be increased without the consent of our shareholders.
(iv) The approval of the change of our corporate name from
Thinkpath.com Inc. to Thinkpath Inc.
For: 7,106,199
Against: 0
Withheld: 0
Non-votes: 0
(v) The amendment of our Articles of Organization to increase the
authorized number of shares of our common stock from 15,000,000 to 30,000,000
shares.
For: 7,106,199
Against: 0
Withheld: 0
Non-votes: 0
(vi) The ratification of the issuance of more than 2,712,979 shares of
our common stock upon: 1) the conversion of our Series C 7% Preferred Stock; and
2) the exercise of warrants, which were issued in our April 2001 private
placement offering.
For: 6,556,199
Against: 0
Withheld: 550,000
Non-votes: 0
(vii) The ratification of the issuance of more than 2,760,979 shares of
our common stock, if necessary, upon the issuance of shares of our common stock
and/or shares of our common stock upon the exercise of warrants pursuant to a
contemplated equity line of credit, which shares and/or warrants will be issued
at a discount of up to 20% of the then prevailing market price of our common
stock.
For: 6,656,199
Against: 0
Withheld: 450,000
Non-votes: 0
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Incorporated by reference to our Registration Statement on Form
SB-2, as amended and filed on October 16, 2001.
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the three-month period
ended June 30, 2001.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THINKPATH INC.
Dated: October 22, 2001 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
and President
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