UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER
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THINKPATH INC.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
ONTARIO 52-209027
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
201 WESTCREEK BOULEVARD
BRAMPTON, ONTARIO L6T 5S6
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 460-3040
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(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 [ ]
AS OF AUGUST 20, 2004 THERE WERE 5,562,295,779 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
THINKPATH INC.
JUNE 30, 2004 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003..................................................
Interim Consolidated Statements of Operations for the three and six
months ended June 30, 2004 and 2003................................
Interim Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 2004 and the year ended
December 31, 2003..................................................
Interim Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003.......................................
Notes to Interim Consolidated Financial Statements.................
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations..................................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............
Item 4. Controls and Procedures................................................
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .....................................................
Item 2. Changes in Securities and Use of Proceeds .............................
Item 3. Defaults Upon Senior Securities .......................................
Item 4. Submission of Matters to a Vote of Security Holders ...................
Item 5. Other Information .....................................................
Item 6. Exhibits and Reports on Form 8-K ......................................
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
$ $
ASSETS
CURRENT ASSETS
Cash 766,499 483,443
Accounts receivable 2,243,143 1,766,061
Prepaid expenses 308,638 128,612
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3,318,280 2,378,116
PROPERTY AND EQUIPMENT 965,744 1,182,751
GOODWILL 3,748,732 3,748,732
INVESTMENT IN NON-RELATED COMPANIES 45,669 45,669
OTHER ASSET 57,425 53,321
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8,135,850 7,408,589
============ ============
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
$ $
LIABILITIES
CURRENT LIABILITIES
Receivable Discount Facility 935,605 1,128,444
Accounts payable 2,068,598 2,650,783
Current portion of long-term debt 123,430 279,800
Current portion of notes payable 853,491 859,936
12% Convertible Debenture 296,803 215,558
------------ ------------
4,277,927 5,134,521
LONG-TERM DEBT 171,960 13,176
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4,449,887 5,147,697
============ ============
COMMITMENTS AND CONTINGENCIES (NOTE 20)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 46,634,021 43,576,292
DEFICIT (41,627,329) (39,999,711)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,320,729) (1,315,689)
------------ ------------
3,685,963 2,260,892
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8,135,850 7,408,589
============ ============
The accompanying notes are an integral part of
these interim consolidated financial statements
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
$ $ $ $
REVENUE 3,325,184 2,471,706 6,381,885 4,961,993
COST OF SERVICES 2,050,188 1,615,654 4,107,616 3,383,606
-------------- -------------- -------------- --------------
GROSS PROFIT 1,274,996 856,052 2,274,269 1,578,387
-------------- -------------- -------------- --------------
EXPENSES
Administrative 579,321 541,999 1,152,726 1,194,042
Selling 346,235 250,385 659,151 503,017
Depreciation and amortization 138,750 184,571 281,016 376,636
-------------- -------------- -------------- --------------
1,064,306 976,955 2,092,893 2,073,695
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES 210,690 (120,903) 181,376 (495,308)
Interest Charges 1,028,551 796,120 1,777,495 5,076,882
-------------- -------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (817,861) (917,023) (1,596,119) (5,572,190)
Income Taxes 3,208 8,404 4,476 12,023
-------------- -------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (821,069) (925,427) (1,600,595) (5,584,213)
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS
(INCLUDING GAIN ON DISPOSAL) (14,319) 280,152 (27,023) 283,355
-------------- -------------- -------------- --------------
NET LOSS (835,388) (645,275) (1,627,618) (5,300,858)
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK OUTSTANDING
BASIC AND DILUTED 3,563,071,348 201,863,253 3,492,747,948 148,567,552
============== ============== ============== ==============
LOSS FROM CONTINUING OPERATIONS
PER WEIGHTED AVERAGE COMMON
STOCK BASIC AND DILUTED (0.00) (0.00) (0.00) (0.04)
============== ============== ============== ==============
The accompanying notes are an integral part of
these interim consolidated financial statements
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND THE YEAR ENDED DECEMBER 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
COMMON ACCUMULATED
STOCK CAPITAL OTHER
NUMBER OF STOCK COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNTS DEFICIT LOSS LOSS
-------------- -------------- -------------- -------------- --------------
Balance as of December 31, 2002 66,258,043 33,367,034 (30,966,083) (1,077,521)
============== ============== ============== ==============
Net loss for the year -- -- (9,033,628) (9,033,628)
--------------
Other comprehensive loss, net of tax
Foreign currency translation (238,168) (238,168)
--------------
Comprehensive loss (9,271,796)
==============
Conversion of 12% senior secured
convertible debenture 2,368,413, 224 901,891 --
Interest on 12% senior secured
convertible debenture 153,405,397 142,875 --
Debt settled through the issuance of
common stock 16,997,854 449,333 --
Common stock and warrants issued for
services 10,980,000 226,500 --
Warrants issued for cash 121,184,669 1,241,514 --
Beneficial conversion on issuance of
convertible debt -- 7,247,145 --
-------------- -------------- -------------- --------------
Balance as of December 31, 2003 2,737,239,187 43,576,292 (39,999,711) (1,315,689)
============== ============== ============== ==============
Net loss for the period -- -- (1,627,618) (1,627.618)
--------------
Other comprehensive loss, net of tax
Foreign currency translation (5,040) (5,040)
--------------
Comprehensive loss (1,632,658)
==============
Conversion of 12% senior secured
convertible debenture 1,293,665,573 222,651 --
Interest on 12% senior secured
convertible debenture 42,253,716 19,077 --
Common stock and warrants issued for
services 250,197,488 175,336 --
Warrants issued for cash 377,053,570 1,100,225 --
Beneficial conversion on issuance of
convertible debt -- 1,540,440 --
-------------- -------------- -------------- --------------
Balance as of June 30, 2004 4,700,409,534 46,634,021 (41,627,329) (1,320,729)
============== ============== ============== ==============
The accompanying notes are an integral part
of these interim consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
2004 2003
---------- ----------
$ $
Cash flows from operating activities
Net loss (1,627,618) (5,300,858)
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Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Amortization 302,969 387,023
Amortization of beneficial conversion (included in interest) 1,540,440 4,650,706
Interest on 12% senior secured convertible debentures 19,077 23,802
Decrease (increase) in accounts receivable (470,466) 866,321
Increase in prepaid expenses (180,990) (7,813)
Decrease in accounts payable (599,646) (873,870)
Decrease in long-term receivable -- 57,775
Decrease in deferred revenue -- (163,593)
Common stock and warrants issued for services 175,336 226,500
Accounts payable settled with common stock -- 449,333
Gain on disposal of IT Recruitment division -- (190,627)
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Net cash provided by (used in) operating activities (840,898) 124,699
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Cash flows from investing activities
Purchase of property and equipment (83,904) (65,209)
Proceeds on disposal of IT Recruitment division -- 146,406
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Net cash used in investing activities (83,904) 81,197
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Cash flows from financing activities
Repayment of notes payable (6,444) (7,138)
Repayment of long-term debt (234,879) (1,243,377)
Proceeds from issuance of capital stock 229,121 --
Proceeds from issuance of debentures and warrants 1,175,000 1,450,000
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Net cash provided by financing activities 1,162,798 199,485
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Effect of foreign currency exchange rate changes 45,060 58,639
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Net increase in cash 283,056 464,020
Cash
Beginning of period 483,443 114,018
---------- ----------
End of period 766,499 578,038
========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 222,592 332,963
========== ==========
Income taxes paid 8,404 12,023
========== ==========
SUPPLEMENTAL NON-CASH ITEMS:
Common shares issued for liabilities -- 449,333
========== ==========
The accompanying notes are an integral part
of these interim consolidated financial statements.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS AND GOING CONCERN
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the Company's ability to continue as
a going concern for a reasonable period of time. These conditions and
events include significant operating losses, working capital deficiencies,
and violation of certain loan covenants. At June 30, 2004, the Company had
a working capital deficiency of $959,647, a deficit of $41,627,329 and has
suffered recurring losses from operations.
With insufficient working capital from operations, the Company's primary
sources of cash are a receivable discount facility with Morrison Financial
Services Limited and proceeds from the sale of equity securities. At June
30, 2004, the balance on the receivable discount facility was approximately
$935,605. The Company is currently within margin of its receivable discount
facility with Morrison Financial Services Limited based on 75% of
qualifying accounts receivable.
During the three months ended June 30, 2004, the Company closed $700,000 in
12% senior secured convertible debentures pursuant to a financing
arrangement entered into on March 25, 2004. The funds were used for various
debt settlements and critical payables.
As at August 20, 2004 management's plans to mitigate and alleviate these
adverse conditions and events include:
a) Ongoing restructuring of debt obligations and settlement of
outstanding legal claims.
b) Focus on growth in the engineering division, including design
services and technical publications.
c) Expansion of the engineering service offerings in Ontario, Canada.
Although there can be no assurances, it is anticipated that continued cash
flow improvements will be sufficient to cover current operating costs and
will permit payments to certain vendors and interest payments on debt.
Despite its negative working capital and deficit, the Company believes that
its management has developed a business plan that if successfully
implemented could substantially improve the Company's operational results
and financial condition. However, the Company can give no assurances that
its current cash flows from operations, if any, borrowings available under
its receivable discounting facility with Morrison Financial Services
Limited, and proceeds from the sale of securities, will be adequate to fund
its expected operating and capital needs for the next twelve months. The
adequacy of cash resources over the next twelve months is primarily
dependent on its operating results, and the closing of new financing, all
of which are subject to substantial uncertainties. Cash flows from
operations for the next twelve months will be dependent, among other
factors, upon the effect of the current economic slowdown on sales, the
impact of the restructuring plan and management's ability to implement its
business plan. The failure to return to profitability and optimize
operating cash flows in the short term, and close alternate financing,
could have a material adverse effect on the Company's liquidity position
and capital resources.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Going Concern
These consolidated financial statements have been prepared on the going
concern basis, which assumes the realization of assets and liquidation of
liabilities and commitments in the normal course of business. The
application of the going concern concept is dependent on the Company's
ability to generate sufficient working capital from operations and external
investors. These consolidated financial statements do not give effect to
any adjustments should the Company be unable to continue as a going concern
and, therefore, be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts
differing from those reflected in the consolidated financial statements.
Management plans to obtain sufficient working capital from operations and
external financing to meet the Company's liabilities and commitments as
they become payable over the next twelve months. There can be no assurance
that management's plans will be successful. Failure to obtain sufficient
working capital from operations and external financing will cause the
Company to curtail operations. These consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
b) Change of Name
On June 6, 2001, the Company changed its name from Thinkpath.com Inc. to
Thinkpath Inc.
c) Principal Business Activities
Thinkpath Inc. is an engineering services company which, along with its
wholly-owned subsidiaries Thinkpath US Inc. (formerly Cad Cam Inc.),
Thinkpath Michigan Inc. (formerly Cad Cam of Michigan Inc.), Thinkpath
Technical Services Inc. (formerly Cad Cam Technical Services Inc.),
provides engineering, design, technical publications and staffing, services
to enhance the resource performance of clients. In addition, the Company
owns the following companies which are currently inactive: Systemsearch
Consulting Services Inc., International Career Specialists Ltd., Microtech
Professionals Inc., E-Wink Inc. (80%), Thinkpath Training Inc. (formerly
ObjectArts Inc.), Thinkpath Training US Inc. (formerly ObjectArts US Inc.)
and TidalBeach Inc. In 2002, the Company sold Njoyn Software Incorporated,
a wholly-owned subsidiary.
d) Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Company
and its controlled 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.
e) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts from and to banks,
and any other highly liquid investments purchased with a maturity of three
months or less. The carrying amount approximates fair value because of the
short maturity of those instruments.
f) Other Financial Instruments
The carrying amounts of the Company's other financial instruments
approximate fair values because of the short maturity of these instruments
or the current nature of interest rates borne by these instruments.
g) Long-Term Financial Instruments
The fair value of each of the Company's long-term financial assets and debt
instruments is based on the amount of future cash flows associated with
each instrument discounted using an estimate of what the Company's current
borrowing rate for similar instruments of comparable maturity would be.
h) Property and Equipment
Property and equipment are recorded at cost and are amortized over the
estimated useful lives of the assets principally using the declining
balance method.
The Company's policy is to record leases, which transfer substantially all
benefits and risks incidental to ownership of property, as acquisition of
property and equipment and to record the occurrences of corresponding
obligations as long-term liabilities. Obligations under capital leases are
reduced by rental payments net of imputed interest.
i) Net Income (Loss) and 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.
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 as described in note 13 were converted or
exercised. Stock conversions, stock options and warrants which are
anti-dilutive are not included in the calculation of diluted net income
(loss) per weighted average common stock.
j) Revenue
1) The Company provides the services of engineering staff on a project
basis. The services provided are defined by guidelines to be accomplished
by clearly defined milestones 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 reasonably assured.
2) Prior to the sale of the IT recruitment division (Note 16), the Company
provided the services of information technology consultants on a contract
basis and revenue was recognized as services were performed.
3) Prior to the sale of the IT recruitment division (Note 16), the Company
placed information technology professionals on a permanent basis and
revenue was recognized upon candidates' acceptance of employment. If the
Company received non-refundable upfront fees for "retained searches", the
revenue was recognized upon the candidates' acceptance of employment.
4) Prior to the sale of the training division (Note 16), the Company
provided advanced training and certification in a variety of technologies
and revenue was recognized on delivery.
5) Prior to the sale of the technology division (Note 16), the Company
licensed software in the form of a Human Capital Management System called
Njoyn. The revenue associated with providing this software consisted of 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 was
based on the Company's determination of the fair value of the elements if
they had been sold separately. The customers had the right to choose a
provider to host the software which was unrelated to the Company. The
set-up fee and customization revenue was recognized upon delivery of access
to the software with customization completed in accordance with milestones
determined by the contract.
Revenue was recognized on a percentage of completion basis for contracts
with significant amounts of customization and clearly defined milestones
agreed to by the customer and an enforceable right to invoice and collect
on a partial completion basis.
For contracts which required significant customization, without clearly
defined milestones, and an inability to estimate costs, revenue was
reflected on a completed contract basis. Substantial completion was
determined based on customer acceptance of the software.
6) Prior to the sale of the technology division (Note 16), the Company also
signed contracts for the customization or development of SecondWave, a web
development software in accordance with specifications of its clients. The
project plan defined milestones to be accomplished and the costs
associated. These amounts were billed as they were accomplished and revenue
was recognized as the milestones were reached. The work in progress for
costs incurred beyond the last accomplished milestone was reflected at the
period end. The contracts did not include any post-contract customer
support. Additional customer support services were provided at standard
daily rates, as services are required.
k) Goodwill
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under
the new rules, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment.
Separable intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives. The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company began applying the new
accounting rules effective January 1, 2002.
Thinkpath completed SFAS No.142 impairment test and concluded that there
was no impairment of recorded goodwill, as the fair value of its reporting
units exceeded their carrying amount.
l) Income Taxes
The Company accounts for income tax under the provision of SFAS No. 109,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statement or tax returns.
Deferred income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all significant
temporary differences between the tax and financial statement bases of
assets and liabilities.
Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected as adjustments to tax expense in the period of
enactment. Deferred tax assets may be reduced, if deemed necessary based on
a judgmental assessment of available evidence, by a valuation allowance for
the amount of any tax benefits which are more likely, based on current
circumstances, not expected to be realized.
m) Foreign Currency
The Company is a foreign private issuer and maintains its books and records
in Canadian dollars (the functional currency). The financial statements are
converted to US dollars as the Company has elected to report in US dollars
consistent with Regulation S-X, Rule 3-20. The translation method used is
the current rate method which is the method mandated by FAS 52 where the
functional currency is the foreign currency. Under the current method all
assets and liabilities are translated at the current rate, stockholders'
equity accounts are translated at historical rates and revenues and
expenses are translated at average rates for the year.
Due to the fact that items in the financial statements are being translated
at different rates according to their nature, a translation adjustment is
created. This translation adjustment has been included in accumulated other
comprehensive income. Gains and losses on foreign currency transactions are
included in financial expenses.
n) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. These estimates
are reviewed periodically and as adjustments become necessary, they are
reported in earnings in the period in which they become known.
o) Long-Lived Assets
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. SFAS No. 121 requires that long-lived assets held
and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Management used its best estimate of the undiscounted cash
flows to evaluate the carrying amount and have reflected the impairment.
In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company
adopted SFAS 144, effective January 1, 2002. The adoption of SFAS 144 did
not have a material impact on the Company's results of operations or
financial condition.
p) Comprehensive Income
In 1999, the Company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income". This standard requires companies to disclose
comprehensive income in their financial statements. In addition to items
included in net income, comprehensive income includes items currently
charged or credited directly to stockholders' equity, such as the changes
in unrealized appreciation (depreciation) of securities and foreign
currency translation adjustments.
q) Accounting for Stock-Based Compensation
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued. It introduced the use of a fair value-based method of
accounting for stock-based compensation. It encourages, but does not
require, companies to recognize stock-based compensation expenses to
employees based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the existing
accounting rules continued in Accounting Principles Board Option No. 25,
Accounting for stock issued to employees. However, SFAS No. 123 requires
companies that choose not to adopt the new fair value accounting rules to
disclose pro forma net income and earnings per share under the new method.
SFAS No. 123 is effective for financial statements for fiscal years
beginning after December 31, 1995. The Company has adopted the disclosure
provisions of SFAS No. 123. SFAS No. 123 was amended by SFAS No. 148 which
requires more prominent disclosure of stock based compensation.
r) Computer software costs
Prior to the sale of its wholly-owned subsidiary Njoyn Software
Incorporated, the Company accounted for the cost of developing computer
software. The Company recorded these costs as research and development
expenses until the technological feasibility of the product had been
established at which time the costs were deferred. At the end of each year,
the Company compared the unamortized costs represented by deferred
development costs in Other Assets to the net realizable value of the
product to determine if a reduction in carrying value is warranted. The
software developed for own use which may be sold as a separate product is
the Njoyn software and during development, the Company decided to market
the software and therefore for the costs incurred after technological
feasibility was reached has been treated as Deferred Development costs and
the amount evaluated on an annual basis to determine if a reduction in
carrying value is warranted. On March 8, 2002, Thinkpath sold all of its
shares in Njoyn Software Incorporated.
s) Investments in Non-Related Companies
The Company records its investments in companies in which it holds a 20% or
more interest and in which the Company can exercise significant influence
over the investee's operating and financial policies on the equity basis.
The Company records its investment in companies in which it holds less than
20% interest or in which the Company has a 20% or greater interest but the
Company is unable to exercise significant influence at fair market value.
Changes in fair market value are adjusted in comprehensive income, unless
the impairments are of a permanent nature, in which case the adjustments
are recorded in earnings.
t) Recent Pronouncements
In April 2002, FASB issued SFAS No. 145, which, among other factors,
changed the presentation of gains and losses on the extinguishments of
debt. Any gain or loss on extinguishments of debt that does not meet the
criteria in APB Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
shall be included in operating earnings and not presented separately as an
extraordinary item. The new standard is effective for companies with fiscal
years beginning after May 15, 2002. However, the Company has elected to
adopt the standard as the debt restructuring gain in the current period, as
permitted by SFAS No. 145.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No.146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit on Activity (including Certain Costs Incurred in a
Restructuring)". The Company will adopt the provisions of SFAS No. 146 for
restructuring activities initiated after December 31, 2002. SFAS No. 146
may affect the timing of recognizing future restructuring costs as well as
the amounts recognized.
In January 2003, FASB issued SFAS No. 148, Accounting for Stock -Based
Compensation - Transition and Disclosures. This statement provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this statement also amends the disclosure requirements of SFAS
No. 123 to require more prominent and frequent disclosures in the financial
statements about the effects of stock-based compensation. The transitional
guidance and annual disclosure provisions of this Statement was effective
for the December 31, 2002 financial statements. The interim reporting
disclosure requirements was effective for the March 31, 2003 financial
statements.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This
Interpretation elaborates on the existing disclosure requirement for most
guarantees including loan guarantees, and clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability
for the fair market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
the Interpretation apply on a prospective basis to guarantees issued or
modified after December 31, 2002.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure
used for business purposes that either (a) does not have equity investors
with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may
be essentially passive or it may engage in research and development or
other activities on behalf of another company. The objective of
Interpretation No. 46 is not to restrict the use of variable interest
entities but to improve financial reporting by companies involved with
variable interest entities. Until now, a company generally has included
another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Interpretation No. 46
changes that by requiring a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority
of the entity's residual returns or both. The consolidation requirements of
Interpretation No. 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not have any
variable interest entities, and, accordingly, adoption is not expected to
have a material effect on the Company.
In April 2003, FASB issued Statement No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. The amendments set forth in Statement 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this Statement
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in
Statement 133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. This Statement is effective for contracts entered into or
modified after June 30, 2003 with certain exceptions. The Company does not
believe that the adoption of Statement No. 149 will have a material effect
on the Company.
In May 2003, FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
The Statement specifies that certain instruments within its scope embody
obligations of the issuer and that, therefore, the issuer must classify
them as liabilities. This Statement is effective immediately for all
financial instruments entered into or modified after May 31, 2003. For all
other instruments, the Statement goes into effect at the beginning of the
first interim period beginning after June 15, 2003. For contracts that were
created or modified before May 31, 2003 and still exist at the beginning of
the first interim period beginning after June 30, 2003, entities should
record the transition to Statement No. 150 by reporting the cumulative
effect of a change in an accounting principle. Statement No. 150 prohibits
entities from restating financial statements for earlier years presented.
The Company does not believe that the adoption of Statement No. 150 will
have a material effect on the Company.
u) Advertising Costs
Advertising costs are expensed as incurred.
3. STOCK OPTION PLANS
OPTIONS WEIGHTED
AVERAGE
EXERCISE
PRICE
a) Options outstanding at December 31, 2002 1,110,492
Options forfeited during the year (13,000) 3.19
-----------
Options outstanding at December 31, 2003 1,097,492
Options forfeited during the period (6,000) 3.19
Options expired during the period (181,492) 2.10
-----------
Options outstanding at June 30, 2004 910,000
===========
Options exercisable December 31, 2003 1,097,492 1.90
Options available for future grant
December 31, 2003 20,013,000
Options exercisable June 30, 2004 910,000 1.90
Options available for future grant
June 30, 2004 20,200,492
b) Range of Exercise Prices at June 30, 2004
Outstanding Weighted Options Options Weighted
Options Average Outstanding exercisable Average
Remaining Average Exercise
Life Exercise Price Price
-----------------------------------------------------------------------------
$2.10 - $3.25 365,000 0.75 year $2.81 365,000 $2.79
$1 and under 545,000 1.66 years $0.75 545,000 $0.75
c) Pro-forma net income
At June 30, 2004, the Company has five stock-based employee compensation
plans, which are described more fully in Note 13(d). The Company accounts
for those plans under the recognition and measurement principles of APB
Opinion No.25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123 Accounting for Stock-Based
Compensation, to stock-based employee compensation. SFAS No.123 was amended
by SFAS No. 148 which requires more prominent disclosure of stock based
compensation.
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
-------- ---------- ---------- ----------
Net loss as reported (835,388) (645,275) (1,627,618) (5,300,858)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards net
of related tax effects -- (41,202) (1,895) (82,404)
-------- ---------- ---------- ----------
Pro forma net loss (835,388) (686,477) (1,629,513) (5,383,262)
======== ========== ========== ==========
Loss per share:
Basic and diluted loss per
share, as reported (0.00) (0.00) (0.00) (0.04)
======== ========== ========== ==========
Pro forma loss per share (0.00) (0.00) (0.00) (0.04)
======== ========== ========== ==========
d) Black Scholes Assumptions
The fair value of each option grant used for purposes of estimating the
pro forma amounts summarized above is estimated on the date of grant using
the Black-Scholes option price model with the weighted average assumptions
shown in the following table:
2001 GRANTS
-----------
Risk free interest rates 4.76%
Volatility factors 100%
Weighted average expected life 4.90 years
Weighted average fair value per share .74
Expected dividends --
There were no option grants in the six months ended June 30, 2004. There
were no option grants in the year ended December 31, 2003.
4. ACCOUNTS RECEIVABLE
JUNE 30, 2004 DECEMBER 31, 2003
---------- -----------
$ $
Accounts receivable 2,431,360 1,952,908
Less: Allowance for doubtful accounts (188,217) (186,847)
---------- ----------
2,243,143 1,766,061
========== ==========
Allowance for doubtful accounts
Balance, beginning of period 186,847 236,793
Provision 22,738 44,359
Recoveries (21,368) (94,305)
---------- ----------
Balance, end of period 188,217 186,847
========== ==========
5. PROPERTY AND EQUIPMENT
June 30, 2004 December 31, 2003
-------------------------------------- ------------------
Accumulated
Cost Amortization Net Net
$ $ $ $
--------------------------------------- ------------------
Furniture and equipment 507,425 363,148 144,277 162,544
Computer equipment and software 5,343,092 4,526,617 816,475 1,014,540
Leasehold improvements 92,516 87,524 4,992 5,667
--------- --------- ------
5,943,033 4,977,289 965,744 1,182,751
========= ========= ======= =========
Assets under capital lease 450,922 447,393 3,529 25,464
======= ======= ===== ======
Amortization of property and equipment for the six months ended June 30,
2004 amounted to $215,231including amortization of assets under capital
lease of $16,607.
Amortization of property and equipment for the year ended December 31, 2003
amounted to $541,309 including amortization of assets under capital lease
of $67,875.
6. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
$ $
Conexys 1 1
Digital Cement 45,668 45,668
------ ------
Total 45,669 45,669
====== ======
i) Conexys
During the year ended December 31, 1999, $383,146 of the Conexys investment
was included as a short-term investment as the Company had intended to sell
these shares on the open market. During fiscal 2000, the Company acquired
additional shares of Conexys at a cost of approximately $284,365 in
consideration of services rendered and reclassified the total investment as
available for sale.
Effective February 26, 2003, the common shares of Conexys were temporarily
suspended from trading on the Bermuda Stock Exchange as it does not have
adequate sources of funding for its immediate operating requirements and is
currently investigating various options to retain and maximize shareholder
value including the restructuring of its debt and refinancing of the
Company.
At December 31, 2002, the Company wrote down its investment by $667,510 to
a carrying value of $1. The write down was considered a permanent decline
in value and as such was recorded as a charge to operations.
ii) Digital Cement
During fiscal 2000, the Company acquired 1,125,000 shares of Digital
Cement, representing approximately 4% of that Company's shares in
consideration of the co-licensing of SecondWave, software developed by
TidalBeach Inc., a wholly-owned subsidiary of Thinkpath Inc. The value of
these shares was determined to be approximately $507,865 based on a offer
to a third party to purchase shares in the Company at a price of $0.50 per
share. During 2001, the fair value was adjusted to $346,415 with a charge
of $161,450 to comprehensive income. During 2002, the fair value was
adjusted to $45,668 with a charge of $300,747 to comprehensive income.
During 2003, the Company collected a long-term receivable in the amount of
$53,924, owed by Digital Cement.
7. GOODWILL
Goodwill is the excess of cost over the value of assets acquired over
liabilities assumed in the purchase of the subsidiaries. Goodwill has been
allocated to reporting units as follows:
December 31,
June 30, 2004 2003
------------------------------------------------------- -----------------
Accumulated
Accumulated Impairment
Cost Amortization Losses Net Net
$ $ $ $
------------------------------------------------------- -----------------
IT Recruitment
(Systemsearch Consulting
Services) 448,634 303,337 145,297 -- --
Technical Publications &
Engineering (CadCam Inc.) 5,518,858 535,164 1,234,962 3,748,732 3,748,732
--------- ------- --------- --------- ---------
5,967,492 838,501 1,380,259 3,748,732 3,748,732
========= ======= ========= ========= =========
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. This statement requires the Company to evaluate
the carrying value of goodwill and intangible assets based on assumptions
and estimates of fair value and future cash flow information. These
assumptions reflect management's best estimates and may differ from actual
results. If different assumptions and estimates are used, carrying values
could be adversely impacted, resulting in write downs that could adversely
affect the Company's earnings.
At December 31, 2003, the Company performed its annual impairment test for
goodwill and determined that no adjustment to the carrying value of
goodwill was needed.
On an ongoing basis, absent any impairment indicators, the Company expects
to perform a goodwill impairment test as of the end of the fourth quarter
of every year.
8. OTHER ASSET
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
$ $
Cash surrender value of life insurance 57,425 53,321
------ ------
Total 57,425 53,321
====== ======
Amortization of other assets amounted to nil for the six months ended June
30, 2004 and the year ended December 31, 2003.
9. RECEIVABLE DISCOUNT FACILITY
i) June 30, 2004
At June 30, 2004, the Company had a receivable discount facility in the
amount of $935,605 with Morrison Financial Services Limited which allowed
the Company to borrow up to 75% of the value of qualified accounts
receivables to a maximum of $1,500,000, bearing interest at 30% per annum.
ii) December 31, 2003
At December 31, 2003, the Company had a receivable discount facility in the
amount of $1,130,000 with Morrison Financial Services Limited which allowed
the Company to borrow up to 75% of the value of qualified accounts
receivables to a maximum of $3,000,000, bearing interest at 30% per annum.
10. CONVERTIBLE DEBENTURE
Pursuant to a share purchase agreement dated December 5, 2002, the Company
entered into an agreement (the "12% Senior Secured Convertible Debenture
Agreement"), with a syndicate of investors for debentures of up to
$3,000,000. The first debenture of $800,000 was purchased together with
50,285,714 warrants on closing. The debenture will become due twelve months
from the date of issuance. The investors will have the right to acquire up
to $800,000 worth of the Company's common stock at a price the lesser of
$.0175 or 50% of the average of the three lowest prices on three separate
trading days during the sixty-day trading period prior to conversion. The
warrants are exercisable at any time and in any amount until December 5,
2009 at a purchase price of $.0175 per share. The Company is required to
pay interest to the debenture holder on the aggregate unconverted and
outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of
common stock. On June 30, 2003 and July 22, 2003, 12,571,428 of these
warrants were repriced from $.0175 to $.00137 per share. On October 14,
2003, 12,571,428 of these warrants were repriced from $.00137 to $.00075
per share. On June 18, 2004, 1,142,857 of these warrants were repriced from
$.00075 to $.00025 per share.
On December 18, 2002, the Company entered into a share purchase agreement
with Tazbaz Holdings Limited for the issuance and sale by the Company of a
$100,000 principal amount Convertible Debenture and 5,625,000 warrants to
purchase shares of the Company's common stock. The debenture will become
due twelve months from the date of issuance. Tazbaz Holdings Limited will
have the right to acquire up to $100,000 worth of our common stock at a
price the lesser of $.0175 or 50% of the average of the three lowest prices
on three separate trading days during the sixty-day trading period prior to
conversion. The warrants are exercisable at any time and in any amount
until December 18, 2009 at a purchase price of $.0175 per share. The
Company is required to pay interest to Tazbaz Holdings Limited on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock. On April 7, 2004, all of these
warrants were repriced from $.0175 to $.0004 per share.
The proceeds of $900,000 received by the Company in 2002 were allocated
between the warrants and the debenture without warrants on a pro rata
basis. Paid in capital has been credited by the value of the warrants in
the amount of $707,050. The value of the beneficial conversion feature was
determined to be $2,898,328 which was credited to paid in capital and
charged to earnings as interest expense in 2002.
During the year ended December 31, 2003, the Company sold an additional
$2,075,000 in convertible debentures along with 770,033,457 warrants. The
debentures will become due twelve months from the date of issuance. The
investors will have the right to acquire up to $2,075,000 worth of the
Company's common stock at a price the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during
the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of seven years from
closing at purchase prices ranging from $.0175 to $.00075 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock. On April 7, 2004, 11,999,999 of
these warrants were repriced from $.0175 to $.0004 per share. On June 18,
2004, 279,324,980 of these warrants were repriced from $.00075 to $.00025
per share.
The proceeds of $2,075,000 received by the Company in 2003 were allocated
between the warrants and the debenture without warrants on a pro rata
basis. Paid in capital has been credited by the value of the warrants in
the amount of $1,150,625.
At December 31, 2003, the value of the beneficial conversion feature on all
issued convertible debentures was determined to be $6,865,928 which was
credited to paid in capital and charged to earnings as interest expense.
On January 8, 2004, the Company sold an additional $25,000 in convertible
debentures along with 1,428,571 warrants pursuant to the share purchase
agreement (the "12% Senior Secured Convertible Debenture Agreement") dated
December 5, 2002. The debentures will become due twelve months from the
date of issuance. The investors will have the right to acquire up to
$25,000 worth of the Company's common stock at a price the lesser of $.0175
or 50% of the average of the three lowest prices on three separate trading
days during the sixty-day trading period prior to conversion. The warrants
are exercisable at any time and in any amount for a period of seven years
from closing at a purchase price of $.0175 per share. The Company is
required to pay interest to the debenture holder on the aggregate
unconverted and outstanding principal amount of the debenture at the rate
of 12% per annum, payable on each conversion date and maturity date in cash
or shares of common stock. On April 7, 2004 all of these warrants were
repriced from $.0175 to $0.0004 per share
On March 25, 2004, the Company entered into a new share purchase agreement
with Bristol Investment Fund, Ltd. for the issuance and sale by the Company
of debentures of up to $1,000,000. The first debenture of $350,000 was
purchased together with 924,000,000 warrants on closing. The debenture will
become due twelve months from the date of issuance. Bristol will have the
right to acquire up to $350,000 worth of the Company's common stock at a
price the lesser of $.0175 or 50% of the average of the three lowest prices
on three separate trading days during the sixty-day trading period prior to
conversion. The warrants are exercisable at any time and in any amount
until March 25, 2011 at a purchase price of $.000417 per share. The Company
is required to pay interest to Bristol on the aggregate unconverted and
outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of
common stock. On June 18, 2004, all of these warrants were repriced from
$.000417 to $.00025 per share.
On March 29, 2004, the Company entered into a new share purchase agreement
with Tazbaz Holdings Limited for the issuance and sale by the Company of a
$100,000 principal amount Convertible Debenture and 250,000,000 warrants to
purchase shares of the Company's common stock. The debenture will become
due twelve months from the date of issuance. Tazbaz Holdings Limited will
have the right to acquire up to $100,000 worth of the Company's common
stock at a price the lesser of $.0175 or 50% of the average of the three
lowest prices on three separate trading days during the sixty-day trading
period prior to conversion. The warrants are exercisable at any time and in
any amount until March 29, 2011 at a purchase price of $.0004 per share.
The Company is required to pay interest to Tazbaz Holdings Limited on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock.
On May 20 and June 18, 2004, the Company sold an additional $400,000 in
convertible debentures together with 1,682,352,942 warrants to Bristol
Investment Fund, Ltd. pursuant to the March 25, 2004 share purchase
agreement. The debentures will become due twelve months from the date of
issuance. Bristol will have the right to acquire up to $400,000 worth of
the Company's common stock at a price the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during
the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of seven years from
closing at a purchase price of $.00025 per share. The Company is required
to pay interest to Bristol on the aggregate unconverted and outstanding
principal amount of the debenture at the rate of 12% per annum, payable on
each conversion date and maturity date in cash or shares of common stock.
On May 24, 2004 and June 18, 2004, the Company entered into new share
purchase agreements with Tazbaz Holdings Limited for the issuance and sale
by the Company of $300,000 principal amount Convertible Debentures and
1,157,142,857 warrants to purchase shares of the Company's common stock.
The debentures will become due twelve months from the date of issuance.
Tazbaz Holdings Limited will have the right to acquire up to $300,000 worth
of the Company's common stock at a price the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during
the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of seven years from
closing at a purchase price of $.00025 per share. The Company is required
to pay interest to Tazbaz Holdings Limited on the aggregate unconverted and
outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of
common stock.
The proceeds of $1,175,000 received by the Company in the six months ended
June 30, 2004 were allocated between the warrants and the debenture without
warrants on a pro rata basis. Paid in capital has been credited by the
value of the warrants in the amount of $871,104.
At June 30, 2004, the value of the beneficial conversion feature on all
issued convertible debentures was determined to be $1,488,421 which was
credited to paid in capital and charged to earnings as interest expense.
11. LONG-TERM DEBT
i) June 30, 2004
Effective March 25, 2004, the Company amended its loan agreement with Terry
Lyons. The balance of accrued interest was added to the original principal
amount of $259,356 for a new principal balance of $299,768. Monthly
payments of $10,000 began April 5, 2004 until the full amount of the note,
including interest is paid in full. The interest rate was reduced from 30%
per annum to US prime plus 14%.
ii) December 31, 2003
At December 31, 2003, the Company had a loan balance of $259,356 with Terry
Lyons and no principal payments had been made.
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
$ $
a) Included therein:
A loan with T. Lyons payable in monthly payments
of $10,000 beginning April 5, 2004 and bearing
interest at US prime plus 14% per annum. This loan
is subordinated to Morrison Financial Services Limited 282,825 259,356
Various capital leases with various payment
terms and interest rates 12,565 33,620
------ ------
295,390 292,976
Less: current portion 123,430 279,800
------- -------
Total $171,960 $13,176
======== =======
b) Future principal payments obligations as at June 30, 2004, were as
follows:
2004 65,040
2005 127,524
2006 102,826
2007 --
2008 --
---------
$ 295,390
=========
c) Interest expense related to long-term debt was $50,001 for the six
months ended June 30, 2004. Interest expense related to long-term debt was
$119,339 for the year ended December 31, 2003.
12. NOTES PAYABLE
a) On August 1, 2002, the Company restructured its note payable to Roger
Walters, reducing the principal from $675,000 to $240,000 in consideration
of the issuance of 1,000,000 shares of its common stock. Principal payments
of $4,000 were to be made monthly starting September 1, 2002 until August
1, 2007. This loan is non-interest bearing.
Also as part of the restructuring, the Company agreed to price protection
on the 1,756,655 shares that were issued to Mr. Walters in January 2002. In
the event that the bid price is less than $.27 per share when Mr. Walters
seeks to sell his shares in an open market transaction, the Company will be
obligated to issue additional shares of unregistered common stock with a
value equal to the difference between $.27 per share and the closing bid
price to a floor of $.14 per share.
The Company has accounted for its modification in the terms of its notes
payable as troubled debt restructuring. Accordingly, the Company has
recognized a gain on the restructuring of the old debt based upon the
difference between the total carrying value of the original debt (with any
accrued interest) and the total future cash flows of the restructured debt.
The gain on the restructured debt, included in expenses in the consolidated
statement of operations is as follows:
Old debt
Principal balance $ 675,000
Accrued interest --
----------
Carrying value 675,000
Common stock issued (2,631,185 shares at $0.0942) (247,858)
Principle balance of new debt (240,000)
Interest (payable through maturity) --
----------
Gain on restructured debt $ 187,142
==========
All future cash payments under the modified terms will be accounted for as
reductions of note payable and no interest expense will be recognized for
any period between the closing date and the maturity date.
The note is subordinated to Morrison Financial Services Limited and to the
12% Senior Secured Convertible Debenture holders. The Company has not made
any principal payments to Mr. Walters since December 2002 and is currently
in default of the loan agreement. As a result of the default, the principal
balance bears interest at 12% per annum until payment is made and the note
is due on demand. The entire note payable has been reclassified as current.
The Company intends to make payments as cash becomes available.
b) On August 1, 2002, the Company restructured its note payable to Denise
Dunne-Fushi, reducing the principal from $1,740,536 to $600,000 in
consideration of the issuance of 4,000,000 shares of its common stock. In
addition a prior debt conversion of $225,000 that was to be paid in capital
was forgiven. Principal payments of $10,000 per month were to begin
November 1, 2002 bearing 5% interest until October 1, 2007. In addition,
the Company agreed to cover the monthly expense associated with Ms.
Dunne-Fushi's family health benefits until May 2004 and vehicle lease until
August 2004.
The Company has accounted for its modification in the terms of its notes
payable as troubled debt restructuring. Accordingly, the Company has
recognized a gain on the restructuring of the old debt based upon the
difference between the total carrying value of the original debt (with any
accrued interest) and the total future cash flows of the restructured debt.
The gain on the restructured debt, included in expenses in the consolidated
statement of operations is as follows:
Old debt
Principal balance $1,740,536
Accrued interest --
Capital stock payable 225,000
----------
Carrying value 1,965,536
Common stock issued (4,000,000 shares at $0.0942) (376,800)
Principle balance of new debt (600,000)
Interest, insurance and vehicle lease costs (98,987)
----------
Gain on restructured debt $ 889,749
==========
All future cash payments under the modified terms will be accounted for as
reductions of note payable and no interest, insurance or vehicle expense
will be recognized for any period between the closing date and the maturity
date.
The note is secured under a general security agreement but is subordinated
to Morrison Financial Services Limited and to the 12% Senior Secured
Convertible Debenture holders. The Company has not made any principal
payments to Ms. Dunne-Fushi since December 2002 and is currently in default
of the loan agreement. As a result of the default, Ms. Dunne-Fushi has the
option of enforcing the security she holds and therefore the entire note
payable has been reclassified as current. The Company intends to make
further payments as cash becomes available.
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
$ $
Note Payable to Roger Walters 224,000 224,000
Note Payable to Denise Dunne 629,491 635,936
------- -------
853,491 859,936
Less: current portion 853,491 859,936
------- -------
Total -- --
======= =======
13. CAPITAL STOCK
a) Authorized
Unlimited Common stock, no par value
1,000,000 Preferred stock, issuable in series, rights to be
determined by the Board of Directors
b) Issued
On January 24, 2003, the Company amended its Articles of Incorporation to
increase its authorized common stock from 100,000,000 to 800,000,000.
On October 2, 2003, the Company amended its Articles of Incorporation to
increase its authorized common stock from 800,000,000 to an unlimited
number of shares.
During the year ended December 31, 2003, the Company issued 16,997,854
shares of its common stock in settlement of various accounts payable and
liabilities in the amount of $449,333. This amount includes 12,427,535
shares of common stock, no par value per share, issued and registered on
January 28, 2003 to Declan A. French, the Company's Chief Executive
Officer, pursuant to an amendment to his employment agreement. Also
included are 2,423,744 shares of common stock, no par value per share,
issued to an employee as a signing bonus pursuant to his employment
agreement. The Company also issued 2,146,575 shares to Vantage Point
Capital, an investor relations firm, in settlement of accounts payable.
During the year ended December 31, 2003, the Company issued 10,980,000
shares of its common stock and warrants as payment for a variety of
services in the amount of $226,500. This includes 4,000,000 shares of
common stock, no par value per share, issued to Rainery Barba pursuant to a
consulting agreement with the Company dated February 7, 2003 for provision
of legal and advisory services for a period of one year. Also included, are
4,200,000 shares of common stock, no par value per share issued to
Dailyfinancial.com Inc. pursuant to a consulting agreement with the Company
dated February 7, 2003 for the provision of corporate consulting services
in connection with mergers and acquisitions, corporate finance and other
financial services. The Company also issued 2,780,000 shares and warrants
to various parties in consideration of financial services rendered.
During the year ended December 31, 2003 the Company issued 121,184,669
shares of its common stock to the 12% Senior Secured Convertible Debenture
Holders on the exercise of warrants.
During the year ended December 31, 2003, the Company issued 2,521,818,621
shares of its common stock upon the conversion of 12% Senior Secured
Convertible Debentures in the amount of $2,309,712.
During the six months ended June 30, 2004, the Company issued 250,197,488
shares of common stock, no par value per share, in consideration of
consulting services in the amount of $175,336. This includes 250,000,000
shares of common stock, no par value per share, issued to Jeffrey Flannery
pursuant to a consulting agreement with the Company dated May 26, 2004 for
the provision of marketing and business development consulting services for
a period of one year.
During the six months ended June 30, 2004, the Company issued 1,335,919,289
shares of its common stock upon the conversion of 12% Senior Secured
Convertible Debentures in the amount of $552,000.
c) Warrants
On December 30, 1999, 475,000 warrants were issued in conjunction with the
private placement of the Series A, preferred stock. They are exercisable at
any time and in any amount until December 30, 2004 at a purchase price of
$3.24 per share. These warrants have been valued at $1,091,606 based on the
Black Scholes model utilizing a volatility rate of 100% and a risk-less
interest rate of 6.33%. This amount has been treated as a cumulative effect
adjustment to retained earnings. For purposes of earnings per share, this
amount has been included with preferred share dividend in the 2000
financial statements.
In connection with the Initial Public Offering, the underwriters received
110,000 warrants. They are exercisable at a purchase price of $8.25 per
share until June 1, 2004.
On April 16, 2000, we issued 50,000 warrants in connection with a private
placement of Series A stock and 300,000 warrants on the issue of Class B
preferred shares. The warrants were issued with a strike price of $3.71 and
expire April 16, 2005. These warrants have been valued at $939,981 based on
the Black Scholes model utilizing a volatility rate of 100% and a risk-less
interest rate of 6.18%. This amount has been treated as a preferred share
dividend in the 2000 financial statements.
In connection with the private placement of Series B preferred stock
225,000 warrants were issued. They are exercisable at a purchase price of
$3.58. These warrants have been valued at $533,537 based on the Black
Scholes model utilizing a volatility rate of 100% and a risk-less interest
rate of 6.13%. This amount has been treated as a preferred share dividend
in the 2000 financial statements.
In 2000, in connection with the purchase of the investment in E-Wink
500,000 warrants were issued. They are exercisable at a purchase price of
$3.25 and expire March 6, 2005. These warrants have been valued at
$1,458,700 based on the Black Scholes model utilizing a volatility rate of
100% and a risk-less interest rate of 6.50%. This amount has been treated
as part of the cost of the E-Wink investment.
In 2000, in connection with the private placement of August 22, 2000,
560,627 warrants were issued. They are exercisable at a purchase price of
$2.46 and expire August 22, 2005. These warrants have been valued at
$1,295,049 based on the Black Scholes model utilizing a volatility rate of
100% and a risk-less interest rate of 6.13%. This amount has been treated
as an allocation of the proceeds on the common stock issuance.
On January 26, 2001, the Company: (a) repriced warrants to purchase up to
100,000 shares of its common stock, which warrants weres issued to a
certain investor in the April 2000 private placement offering of Series B
8% Cumulative Preferred Stock, so that such warrants are exercisable at any
time until April 16, 2005 at a new purchase price of $1.00 per share; (b)
repriced warrants to purchase an aggregate of up to 280,693 shares of its
common stock, which warrants were issued to the placement agent, certain
financial advisors, and the placement agent's counsel in our August 2000
private placement offering of units, so that such warrants are exercisable
at any time until August 22, 2005 at a new purchase price of $1.00 per
share; and (c) issued warrants to purchase up to 250,000 shares of its
common stock exercisable at any time and in any amount until January 26,
2006 at a purchase price of $1.50 per share. In February 2001, 150,000 of
such warrants were exercised by KSH Investment Group, the placement agent
in the Company's August 2000 private placement offering. The exercise
prices of the revised and newly issued warrants are equal to, or in excess
of, the market price of our common stock on the date of such revision or
issuance.
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 it 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 is 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 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 was 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 was amortized in the period ending August 1, 2001.
During the year ended December 31, 2001, the Company issued 22,122 shares
to the Business Development Bank of Canada on the exercise of warrants at
$1.00.
During the year ended December 31, 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. As of December 31,
2003, all 723,436 warrants issued in connection with the purchase of the
Series C Preferred Stock remain outstanding and none have been exercised.
On May 24, 2002, the Company entered into an agreement with Tazbaz Holdings
Limited, pursuant to which Tazbaz securitized an overdraft position of the
Company with Bank One in the amount of $650,000 until the Bank's repayment
on December 5, 2002. Pursuant to this agreement the Company issued
10,000,000 warrants; 6,000,000 of which are exercisable at any time and in
any amount until November 15, 2009 at a purchase price of $.08 per share,
and 4,000,000 of which are exercisable at any time and in any amount until
November 15, 2009 at a purchase price of $.04 per share.
On October 1, 2002, the Company entered into consulting agreements with a
group of seven consultants with expertise in restructuring, financing,
legal and management services for one-year terms to assist the Company with
its restructuring and refinancing efforts. In consideration for such
services the Company issued 10,600,000 warrants which are exercisable at
any time and in any amount until September 30, 2003 at a purchase price of
$.025 per share. As of December 31, 2003, 7,200,000 warrants had been
exercised with net proceeds of $192,500.
On December 5, 2002, the Company issued 50,285,714 warrants to holders of
the 12% Senior Secured Convertible Debentures which are exercisable at any
time and in any amount until December 5, 2009 at a purchase price of $.0175
per share. On June 30, 2003 and July 22, 2003, 12,571,428 of these warrants
were repriced from $.0175 to $.00137 per share. On October 14, 2003,
12,571,428 of these warrants were repriced from $.00137 to $.00075 per
share. On June 18, 2004, 1,142,857 of these warrants were repriced from
$.00075 to $.00025 per share.
Pursuant to the December 18, 2002 convertible debenture, the Company issued
5,625,000 warrants to Tazbaz Holdings Limited, which are exercisable at any
time and in any amount until December 18, 2009 also at a purchase price of
$0.175 per share. On April 7, 2004, all of these warrants were repriced
from $.0175 to $.0004 per share.
During the year ended December 31, 2003, the Company issued 770,033,457
warrants to holders of the 12% Senior Secured Convertible Debentures which
are exercisable at any time and in any amount for seven years from the date
of closing at purchase prices ranging from $.0175 to $.00075 per share. On
June 30, 2003, 45,714,286 of these warrants were repriced from $.0175 to
$.00875 per share. On October 14, 2003, 314,576,307 of these warrants were
repriced from $.00137 to $.00075 per share. On April 7, 2004, 11,999,999 of
these warrants were repriced from $.0175 to $.0004 per share. On June 18,
2004, 279,324,980 of these warrants were repriced from $.00075 to $.00025
per share.
On January 8, 2004, the Company sold issued 1,428,571 warrants to holders
of the 12% Senior Secured Convertible Debentures which are exercisable at
any time and in any amount for seven years from the date of closing at a
purchase price of $.0175 per share. On April 7, 2004 all of these warrants
were repriced from $.0175 to $0.0004 per share
On March 25, 2004, the Company issued 924,000,000 warrants to Bristol
Investment Fund, Ltd. which are exercisable at any time and in any amount
until March 25, 2011 at a purchase price of $.000417 per share. On June 18,
2004, all of these warrants were repriced from $.000417 to $.00025 per
share.
On March 25, 2004 the Company issued 250,000,000 warrants to Tazbaz
Holdings Limited, which are exercisable at any time and in any amount until
March 29, 2011 at a purchase price of $0.0004 per share.
On May 20 and June 18, 2004, the Company issued 1,682,352,942 warrants to
Bristol Investment Fund, Ltd. which are exercisable at any time and in any
amount for a period of seven years from closing at a purchase price of
$.00025 per share.
On May 24, 2004 and June 18, 2004, the Company issued 1,157,142,857
warrants to Tazbaz Holdings Limited which are exercisable at any time and
in any amount for a period of seven years from closing at a purchase price
of $.00025 per share.
d) Stock Options
In June 2001, the directors approved the adoption of the 2001 Stock Option
Plan. Each of the plans provides for the issuance of 435,000 options. In
October 2002, the directors of the Company adopted and the stockholders
approved the adoption of the Company's 2002 Stock Option Plan which
provides for the issuance of 6,500,000 options. In October 2003, the
directors of the Company adopted and the stockholders approved the adoption
of the Company's 2003 Stock Option Plan which provides for the issuance of
20,000,000 options.
The plans are administrated by the Compensation Committee or the Board of
Directors, which determine 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 common stock to be issued upon the
exercise of the options and the option exercise price.
The plans are effective for a period of ten years and options may be
granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise to the Company.
Options granted under the plans generally require a three-year vesting
period, and shall be at an exercise price that may not be less than the
fair market value of the common stock on the date of the grant. Options are
non-transferable and if a participant ceases affiliation with the Company
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 90 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 the Company become available again for issuance
under the plans, subject to applicable securities regulation.
The plans may be terminated or amended at any time by the Board of
Directors, except that the number of common stock reserved for issuance
upon the exercise of options granted under the plans may not be increased
without the consent of the stockholders of the Company.
14. DEFERRED INCOME TAXES AND INCOME TAXES
a) Deferred Income Taxes
The components of the future tax liability classified by source of
temporary differences that gave rise to the benefitare as follows:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
$ $
Tax values of depreciable assets in excess of 295,550 --
accounting values
Losses available to offset future income taxes 4,128,955 4,046,200
Share issue costs 115,154 115,154
------- -------
4,539,659 4,161,354
Less: Valuation allowance (4,539,659) (4,161,354)
----------- ------------
-- --
=========== ============
As part of the acquisitions of Cad Cam Inc. and MicroTech Professionals
Inc., there was a change of control which resulted in the subsidiaries
being required to change from the cash method to the accrual method of
accounting for income tax purposes.
b) Current Income Taxes
Current income taxes consist of:
June 30, 2004 December 31, 2003
------------- -----------------
$ $
Amount calculated at Federal
and Provincial (638,448) (3,704,770)
--------- -----------
statutory rates
Increase (decrease) resulting from:
Permanent and other differences 264,619 2,978,164
Valuation allowance 378,305 756,326
------- -------
642,924 3,734,490
------- ---------
Current income taxes 4,476 29,720
===== ======
Issue expenses totaling approximately $1,300,000 may be claimed at the rate
of 20% per year until 2005. To the extent that these expenses create a
loss, the loss is available to be carried forward for seven years from the
year the loss is incurred. The Company has not reflected the benefit of
utilizing non-capital losses totaling approximately $10,300,000 or a
capital loss totaling $750,000 in the future as a deferred tax asset as at
June 30, 2004. As at the completion of the June 30, 2004 financial
statements, management believed it was more likely than not that the
results of future operations would not generate sufficient taxable income
to realize the deferred tax assets.
15. COMPREHENSIVE LOSS
Six Months Ended
June 30, 2004 December 31, 2003
------------- -----------------
$ $
Net loss (1,627,618) (9,033,628)
Other comprehensive loss
Foreign currency translation adjustments (5,040) (238,168)
------- ---------
Comprehensive loss (1,632,658) (9,271,796)
=========== ===========
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.
16. DISCONTINUED OPERATIONS
Effective March 8, 2002, the Company sold its technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. As part of the
transaction, Cognicase assumed all of the staff in the Company's technology
division, including the employees of TidalBeach Inc. The Company will not
have future revenues from either its Njoyn or Secondwave products and
therefore the technology operations have been reported as discontinued.
There was no technology revenue for the three months ended June 30, 2004
and 2003. The net loss for the three months ended June 30, was $1,300 in
2004 and $9,300 in 2003. There was no technology revenue for the six months
ended June 30, 2004 and 2003. The net loss for the six months ended June
30, was $2,700 in 2004 and $12,100 in 2003.
Effective May 1, 2002, the Company signed an agreement with triOS Training
Centres Limited, an Ontario company, for the purchase of certain assets of
the Toronto training division, Thinkpath Training for a nominal amount of
cash and the assumption of all prepaid training liabilities. As part of the
transaction, triOS assumed the Toronto training staff and is subletting the
classroom facilities.
On November 1, 2002, the Company entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the purchase of certain
assets of the New York training division, Thinkpath Training for a nominal
amount of cash and the assumption of all prepaid training liabilities. As
part of the transaction, Thinkpath Training LLC assumed the New York
training staff, some assets and is subletting the classroom facilities.
As a result of these two transactions, the Company will not have future
revenues from its training division and therefore the operations have been
reported as discontinued.
There was no training revenue for the three months ended June 30, 2004 and
$94,000 in 2003. The net loss from the training division for the three
months ended June 30, 2004 was $13,000 compared to net income of $66,000 in
2003. There was no training revenue for the six months ended June 30, 2004
and $162,000 in 2003. The net loss from the training division for the six
months ended June 30, 2004 was $24,000 compared to net income of $94,000 in
2003.
Effective June 27, 2003, the Company signed an agreement with
Brainhunter.com Ltd., an Ontario company, for the purchase of certain
assets of the Toronto IT recruitment division for a nominal amount of cash
and the assumption of all employee liabilities. As a result of this
transaction, the Company will not have future revenues from its IT
recruitment division and therefore the operations have been reported as
discontinued.
There was no IT recruitment revenue for the three months ended June 30,
2004 and $625,000 in 2003. Net income from the IT recruitment division for
the three months ended June 30, 2004 was nil and $32,000 in 2003. There was
no IT recruitment revenue for the six months ended June 30, 2004 and
$1,430,000 in 2003. Net income from the IT recruitment division for the six
months ended June 30, 2004 was nil and $11,000 in 2003.
The following table presents the revenues, loss from operations and other
components attributable to the discontinued operations of Njoyn Software
Incorporated, TidalBeach Inc., Thinkpath Training Inc. and Thinkpath
Training US Inc. and the IT recruitment division for the three months and
six months ended June 30:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
Revenues -- 719,443 -- 1,588,867
-- -- ---------
Income (loss) from operations
before income taxes (14,319) 89,525 (26,723) 93,353
Provision for Income Taxes -- -- 300 625
Gain on disposal of IT Recruitment
Division -- 190,627 -- 190,627
-- ------- -- -------
Income (loss) from discontinued
operations (14,319) 280,152 (27,023) 283,355
======== ======= ======== =======
17. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company issued common shares and warrants for the following:
Six Months Ended
June 30, 2004 December 31, 2003
------------- -----------------
$ $
Services rendered 175,336 226,500
Accounts payable -- 449,333
-- -------
175,336 675,833
======= =======
18. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
Canada 122,339 130,774 345,177 163,520
United States of America 3,202,845 2,340,932 6,036,708 4,798,473
--------- --------- -- --------- ---------
3,325,184 2,471,706 6,381,885 4,961,993
========= ========= ========= =========
b) Net Income (Loss) by Geographic Area
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
Canada (1,404,561) (932,729) (2,392,768) (5,596,248)
United States of America 569,173 287,454 765,150 295,390
------- ------- ------- -------
(835,388) (645,275) (1,627,618) (5,300,858)
========= ========= =========== ===========
c) Identifiable Assets by Geographic Area
June 30, 2004 December 31, 2003
------------- -----------------
$ $
Canada 1,678,676 1,369,904
United States of America 6,457,174 6,038,685
--------- ---------
8,135,850 7,408,589
========= =========
d) Revenue and Gross Profit by Operating Segment
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
Revenue
Tech Pubs and Engineering 3,275,178 2,371,806 6,248,100 4,726,995
IT Documentation 50,006 99,900 133,785 234,998
------ ------ ------- -------
3,325,184 2,471,706 6,381,885 4,961,993
========= ========= ========= =========
Gross Profit
Tech Pubs and Engineering 1,261,296 835,399 2,246,624 1,531,152
IT Documentation 13,700 20,653 27,645 47,235
------ ------ ------ ------
1,274,996 856,052 2,274,269 1,578,387
========= ======= ========= =========
e) Revenues from Major Customers
The consolidated entity had the following revenues from major customers:
For the three and six months ended June 30, 2004, once customer had sales
of $1,247,344 and $1,957,452 representing approximately 38% and 31% of
total revenue.
For the year ended December 31, 2003, one customer had sales of $1,568,232,
representing approximately 15% of total revenue.
f) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
19. EARNINGS PER SHARE
The Company has adopted Statement No. 128, Earnings Per Share, which
requires presentation, in the consolidated statement of income, of both
basic and diluted earnings per share.
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
$ $ $ $
NUMERATOR
Net loss from continuing operations (821,069) (925,427) (1,600,595) (5,584,213)
Income (loss) from discontinued
operations (14,319) 280,152 (27,023) 283,355
Net loss (835,388) (645,275) (1,627,618) (5,300,858)
============== ============== ============== ==============
DENOMINATOR
Weighted Average common stock 3,563,071,348 201,863,253 3,492,747,948 148,567,552
============== ============== ============== ==============
outstanding
Basic and diluted loss per common
share from continuing operations (0.00) (0.00) (0.00) (0.04)
============== ============== ============== ==============
Basic and diluted loss per common
share after discontinued operations (0.00) (0.00) (0.00) (0.04)
============== ============== ============== ==============
Average common stock outstanding 3,563,071,348 201,863,253 3,492,747,948 148,567,552
Average common stock issuable -- -- -- --
-------------- -------------- -------------- --------------
Average common stock outstanding
assuming dilution 3,563,071,348 201,863,253 3,492,747,948 148,567,552
============== ============== ============== ==============
The outstanding options and warrants as detailed in note 13 were not
included in the computation of the diluted earnings per common share as the
effect would be anti-dilutive.
The earnings per share calculation (basic and diluted) does not include any
common stock for common stock payable, as the effect would be
anti-dilutive.
As of August 20, 2004, the Company has issued a total of 4,719,624,155
shares of its common stock to the convertible debenture holders upon the
conversion of $3,186,500 of debentures and accrued interest.
20. COMMITMENTS AND CONTINGENCIES
a) Lease Commitments
Minimum payments under operating leases for premises occupied by the
Company and its subsidiaries offices, located throughout
Ontario, Canada and the United States, exclusive of most operating costs
and realty taxes, as at June 30, 2004, for the next five years are as
follows:
2004 $217,848
2005 338,315
2006 112,343
2007 112,343
2008 37,448
Thereafter --
--
--------
$818,297
========
The lease commitments do not include two operating leases for premises that
the Company is currently sub leasing to the purchasers of the Canadian and
United States training divisions. If the purchasers were to default on
payment or abandon the premises, the Company would be liable for annual
payments of$282,096 expiring August 31, 2006 and $150,534 expiring
September 30, 2010.
The lease commitments do not include an operating lease for premises
located in the United States that was closed in the fourth quarter of 2002.
The Company has not made any payments on this lease since the premises were
abandoned. The Company does not intend to make any further payments and the
lessor has not tried to enforce payment. The Company may be liable for a
lease balance of $44,597which expires November 30, 2004.
b) On October 1, 2003, SITQ National Inc. ("SITQ'), a former landlord,
filed a statement against the Company and its Directors, with the Superior
Court of Justice of Ontario, Canada, Court File No. 03-CV-256327CM3,
demanding payment of rent arrears of approximately $760,000 and alleging
damages for breach of lease for future rent in the sum of $3,250,000. The
lease covered premises located in Ontario, Canada that were abandoned by
the Company in April 2003. The term of the lease does not expire until
December 31, 2010. The rent arrears of $760,000 has been accrued but
management believes there is no merit for the breach of lease for future
rent of $3,250,000 and accordingly has made no provision in the accounts or
in these financial statements with respect to this matter. The Company
intends to defend this claim vigorously.
On October 6, 2003, the Company entered into a settlement agreement with
the Canadian Imperial Bank of Commerce ("CIBC") in the sum of $150,000.
This settlement was pursuant to a claim filed against Thinkpath Training
Inc., a subsidiary of the Company, with the Superior Court of Justice of
Ontario, Canada, Court File No. 41967, demanding payment of damages in the
sum of $150,000 pursuant to an operating account overdraft balance. The
settlement includes payment of the overdraft, accrued interest and legal
fees and will be paid in monthly installments over fifteen months beginning
October 25, 2003. At June 30, 2004, an amount of $64,000 related to the
above settlement is included in accounts payable.
On March 17, 2004, Johnston & Associates, LLC, a South Carolina
corporation, filed a statement against the Company with the Superior Court
of Justice of Ontario, Canada, Court File No. C-294-04, demanding payment
of $60,000 pursuant to a consulting agreement entered into April 2002. The
Company intends to defend this claim vigorously.
c) The Company is party to various lawsuits arising from the normal course
of business and its restructuring activities. 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.
21. SUBSEQUENT EVENTS
Subsequent to June 30, 2004, the Company has issued an additional
861,886,245 shares of its common stock to the convertible debenture holders
upon the conversion of $119,500 of debentures and accrued interest.
22. FINANCIAL INSTRUMENTS
a) Credit Risk Management
The Company is exposed to credit risk on the accounts receivable from its
customers. In order to reduce its credit risk, the Company has adopted
credit policies, which include the analysis of the financial position of
its customers and the regular review of their credit limits. In some cases,
the Company requires bank letters of credit or subscribes to credit
insurance.
b) Concentration of Credit Risk
The Company does not believe it is subject to any significant concentration
of credit risk. Cash and short-term investments are in place with major
financial institutions and corporations.
c) Interest Risk
The long-term debt bears interest rates that approximate the interest rates
of similar loans. Consequently, the long-term debt risk exposure is
minimal.
d) Fair Value of Financial Instruments
The carrying value of the accounts receivable, bank indebtedness, and
accounts payable on acquisition of subsidiary company approximates the fair
value because of the short-term maturities on these items.
The carrying amount of the long-term assets approximates the fair value of
these assets.
The fair value of the Company's long-term debt is estimated on the quoted
market prices for the same or similar debt instruments. The fair value of
the long-term debt approximates the carrying value.
23. COMPARATIVE FIGURES
Certain figures in the June 30, 2003 financial statements have been
reclassified to conform with the basis of presentation used at June 30,
2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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-Q.
The statements contained in this Form 10-Q 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, as amended
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-Q 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 10-Q 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 engineering services including design,
build, drafting, technical publishing and documentation, and on-site engineering
support. Our customers include defense contractors, aerospace, automotive,
health care and manufacturing companies, including Lockheed Martin, General
Dynamics, General Electric, General Motors, Ford Motors, Magna, ABB and Hill-Rom
Company.
On December 12, 2001, the Securities and Exchange Commission issued
FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, which encourages additional disclosure with respect to a company's
critical accounting policies, the judgments and uncertainties that affect a
company's application of those policies, and the likelihood that materially
different amounts would be reported under different conditions and using
different assumptions.
Management is required to make certain estimates and assumptions during
the preparation of the consolidated financial statements in accordance with
GAAP. These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates. Certain of our accounting policies and estimates have a more
significant impact on our financial statements than others, due to the magnitude
of the underlying financial statement elements.
CONSOLIDATION
Our determination of the appropriate accounting method with respect to
our investments in subsidiaries is based on the amount of control we have,
combined with our ownership level, in the underlying entity. Our consolidated
financial statements include the accounts of our parent company and our
wholly-owned subsidiaries. All of our investments are accounted for on the cost
method. If we had the ability to exercise significant influence over operating
and financial policies of a company, but did not control such company, we would
account for these investments on the equity method.
Accounting for an investment as either consolidated or by the equity
method would have no impact on our net income (loss) or stockholders' equity in
any accounting period, but would impact individual income statement and balance
sheet items, as consolidation would effectively "gross up" our income statement
and balance sheet. However, if control aspects of an investment accounted for by
the cost method were different, it could result in us being required to account
for an investment by consolidation or the equity method. Under the cost method,
the investor only records its share of the investee's earnings to the extent
that it receives dividends from the investee; when the dividends received exceed
the investee's earnings subsequent to the date of the investor's investment, the
investor records a reduction in the basis of its investment. Under the cost
method, the investor does not record its share of losses of the investee.
Conversely, under either consolidation or equity method accounting, the investor
effectively records its share of the investee's net income or loss, to the
extent of its investment or its guarantees of the investee's debt.
At June 30, 2004, all of our investments in non-related companies
totaling $45,669 were accounted for using the cost method. Accounting for an
investment under either the equity or cost method has no impact on evaluation of
impairment of the underlying investment; under either method, impairment losses
are recognized upon evidence of permanent losses of value.
REVENUE RECOGNITION
We recognize revenue in accordance with Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, which has four basic criteria
that must be met before revenue is recognized:
- - Existence of persuasive evidence that an arrangement exists; - Delivery has
occurred or services have been rendered; - The seller's price to the buyer is
fixed and determinable; and, - Collectibility is reasonably assured.
Our various revenue recognition policies are consistent with these
criteria. We provide the services of engineering staff on a project basis. The
services provided are defined by guidelines to be accomplished by clearly
defined milestones 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 reasonably assured.
Prior to the sale of our IT recruitment division, we provided the
services of information technology consultants on a contract basis and revenue
was recognized as services were performed. We also placed information technology
professionals on a permanent basis and revenue was recognized upon candidates'
acceptance of employment. If we received non-refundable upfront fees for
"retained searches", the revenue was recognized upon the candidates' acceptance
of employment.
Prior to the sale of our training division, we provided advanced training
and certification in a variety of technologies and revenue was recognized on
delivery.
Prior to the sale of our technology division, we licensed software in the
form of a Human Capital Management System called Njoyn. The revenue associated
with providing this software consisted of 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 was based on our determination of the fair value
of the elements if they had been sold separately. The customers had the right to
choose a provider to host the software which was unrelated to us. The set-up fee
and customization revenue was recognized upon delivery of access to the software
with customization completed in accordance with milestones determined by the
contract. Revenue was recognized on a percentage of completion basis for
contracts with significant amounts of customization and clearly defined
milestones agreed to by the customer and an enforceable right to invoice and
collect on a partial completion basis. For contracts that required significant
customization, without clearly defined milestones, and an inability to estimate
costs, revenue was reflected on a completed contract basis. Substantial
completion was determined based on customer acceptance of the software.
Prior to the sale of our technology division, we also signed contracts
for the customization or development of SecondWave, an internet development
software in accordance with specifications of our clients. The project plan
defined milestones to be accomplished and the costs associated. These amounts
were billed as they were accomplished and revenue was recognized as the
milestones were reached. The work in progress for costs incurred beyond the last
accomplished milestone was reflected at the period end. The contracts did not
include any post-contract customer support. Additional customer support services
were provided at standard daily rates, as services were required.
CARRYING VALUE GOODWILL AND INTANGIBLE ASSETS
Prior to January 1, 2002, our goodwill and intangible assets were
accounted for in accordance with Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. This statement required us to evaluate the carrying
value of our goodwill and intangible assets upon the presence of indicators of
impairment. Impairment losses were recorded when estimates of undiscounted
future cash flows were less than the value of the underlying asset. The
determination of future cash flows or fair value was based upon assumptions and
estimates of forecasted financial information that may differ from actual
results. If different assumptions and estimates were used, carrying values could
be adversely impacted, resulting in write-downs that would adversely affect our
earnings. In addition, we amortized our goodwill balances on a straight-line
basis over 30 years. The evaluation of the useful life of goodwill required our
judgment, and had we chosen a shorter time period over which to amortize
goodwill, amortization expense would have increased, adversely impacting our
operations.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. This statement requires
us to evaluate the carrying value of goodwill and intangible assets based on
assumptions and estimates of fair value and future cash flow information. These
assumptions and estimates may differ from actual results. If different
assumptions and estimates are used, carrying values could be adversely impacted,
resulting in write-downs that could adversely affect our earnings.
At December 31, 2003, we performed our annual impairment test for
goodwill and determined that no adjustment to the carrying value of goodwill was
needed.
The IT recruitment unit was tested for impairment in the third quarter
of 2002, after the annual forecasting process. Due to a decrease in margins and
the loss of key sales personnel, operating profits and cash flows were lower
than expected in the first nine months of 2002. Based on that trend, the
earnings forecast for the next two years was revised. At September 30, 2002, we
recognized a goodwill impairment loss of $57,808 in the IT recruitment unit. The
fair value of that reporting unit was estimated using the expected present value
of future cash flows.
During the fourth quarter of 2002, the IT recruitment unit experienced
further decline, indicating impairment. The fair value of the unit was estimated
using the expected present value of future cash flows. At December 31, 2002, a
further goodwill impairment loss of $87,489 was recognized.
The Technical Publications and Engineering unit was also tested for
impairment in the fourth quarter of 2002, as operating profits, cash flows and
forecasts were lower than expected. At December 31, 2002, a goodwill impairment
loss of $1,234,962 was recognized. The fair value of that reporting unit was
estimated using the expected present value of future cash flows.
On an ongoing basis, absent any impairment indicators, we expect to
perform a goodwill impairment test as of the end of the fourth quarter of each
year.
FOREIGN CURRENCY TRANSLATION
The books and records of our Canadian operations are recorded in
Canadian dollars. The financial statements are converted to US dollars as we
have elected to report in US dollars consistent with Regulation S-X, Rule 3-20.
The translation method used is the current rate method which is the method
mandated by FAS 52 where the functional currency is the foreign currency. Under
the current method all assets and liabilities are translated at the current
rate, stockholders' equity accounts are translated at historical rates and
revenues and expenses are translated at average rates for the year.
Due to the fact that items in the financial statements are being
translated at different rates according to their nature, a translation
adjustment is created. This translation adjustment has been included in
accumulated other comprehensive income.
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 MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2003
REVENUE
For the three months ended June 30, 2004, we derived 96% of our
revenue in the United States compared to 95% for the three months ended June 30,
2003. The slight increase in total revenue derived from the United States is a
result of the decrease in engineering sales in Canada to $120,000 for the three
months ended June 30, 2004 from $130,000 for the same period last year.
For the three months ended June 30, 2004, our primary source of revenue
was engineering services including engineering design and build, technical
publications and documentation and on-site engineering support. Engineering
services represented 98% of total revenue compared to 96% for the three months
ended June 30, 2003. Revenue from engineering services for the three months
ended June 30, 2004 increased by $910,000 or 38% to $3,280,000 compared to
$2,370,000 for the three months ended June 30, 2003. The increase in revenue
from engineering services is largely attributable to the significant increase in
sales to a major defense customer located in the United States pursuant to
contracts won in the fourth quarter 2003 and the first quarter 2004. This
customer represented approximately 38% of total revenue for the three months
ended June 30, 2004 compared to 17% for the same period last year.
Our engineering services include the complete planning, staffing,
development, design, implementation and testing of a project. It can also
involve enterprise-level planning and project anticipation. Our specialized
engineering services include: design, build and drafting, technical publications
and documentation. We outsource our technical publications and engineering
services on both a time and materials and project basis. For project work, 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 of
the service, and when the fee is fixed or determinable and collection is
probable. Customers we provide engineering services to include General Dynamics,
General Electric, General Motors, Lockheed Martin, Boeing, Caterpillar, Cummins
Engines, Magna and ABB.
For the three months ended June 30, 2004, information technology
documentation services represented approximately 2% of our revenue compared to
4% for the three months ended June 30, 2003. Revenue from information technology
documentation services for the three months ended June 30, 2004 decreased by
$50,000 or 50% to $50,000 compared to $100,000 for the three months ended June
30, 2003.
The substantial decrease in revenue from information technology
documentation services is primarily due to the loss of sales personnel and the
general economic slowdown in this industry. This division offers a very
specialized service, and relied on several key customers in a very localized
market. Many of these customers have either cancelled projects or have put a
number of their projects on hold. In response to these conditions, we terminated
the staff in this division in 2002 and transferred the existing contracts to
another office.
We provide outsourced information technology documentation services in
two ways: complete project management and the provision of skilled project
resources to supplement a customer's internal capabilities. Revenue is
recognized on the same basis as technical publications and engineering
outsourcing services. Selected information technology documentation services
customers include Fidelity Investments, SMD Tech Aid Corporation, CDI
Corporation, and the Gillette Company.
GROSS PROFIT
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of engineering services include wages, benefits,
software training and project expenses. The average gross profit for the
engineering division was 39% for the three months ended June 30, 2004 compared
to 35% for the three months ended June 30, 2003. Gross profit for the three
months ended June 30, 2004 increased by $420,000 or 50% to $1,260,000 compared
to $840,000 for the three months ended June 30, 2003. The increase in gross
profit for technical publications and engineering services is a result of the
increase in higher margin contracts in engineering design, technical
publications and documentation compared to the lower margins earned on
traditional on-site engineering support. In addition, we are engaging in more
time-and-materials based contracts versus fixed-cost contracts which prevents
against project and costs overruns.
The direct costs of information technology documentation services
include contractor wages, benefits, and project expenses. The average gross
profit for the information technology division for the three months ended June
30, 2004 was 27% compared to 21% for the three months ended June 30, 2003. The
increase in gross profit in the current period is a result of the loss of a
lower margin contract which expired in the second quarter.
THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2003
REVENUE
For the six months ended June 30, 2004, we derived 95% of our revenue
in the United States compared to 97% for the six months ended June 30, 2003. The
decrease in total revenue derived from the United States is a result of the
slight increase in engineering sales in Canada. At the beginning of 2003, a
division was created to focus on building engineering services in Ontario in
lieu of IT recruitment services, which had traditionally dominated our sales in
Canada. During the six months ended June 30, 2004, this division closed several
small contracts that resulted in revenues of $350,000 compared to $160,000 for
the same period last year.
For the six months ended June 30, 2004, our primary source of revenue
was engineering services including engineering design and build, technical
publications and documentation and on-site engineering support. Engineering
services represented 98% of total revenue compared to 95% for the six months
ended June 30, 2003. Revenue from engineering services for the six months ended
June 30, 2004 increased by $1,520,000 or 32% to $6,250,000 compared to
$4,730,000 for the six months ended June 30, 2003. The increase in revenue from
engineering services is largely attributable to the significant increase in
sales to a major defense customer located in the United States pursuant to
contracts won in the fourth quarter 2003 and the first quarter 2004. This
customer represented approximately 31% of total revenue for the six months ended
June 30, 2004 compared to 11% for the same period last year.
Our engineering services include the complete planning, staffing,
development, design, implementation and testing of a project. It can also
involve enterprise-level planning and project anticipation. Our specialized
engineering services include: design, build and drafting, technical publications
and documentation. We outsource our technical publications and engineering
services on both a time and materials and project basis. For project work, 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 of
the service, and when the fee is fixed or determinable and collection is
probable. Customers we provide engineering services to include General Dynamics,
General Electric, General Motors, Lockheed Martin, Boeing, Caterpillar, Cummins
Engines, Magna and ABB.
For the six months ended June 30, 2004, information technology
documentation services represented approximately 2% of our revenue compared to
5% for the six months ended June 30, 2003. Revenue from information technology
documentation services for the six months ended June 30, 2004 decreased by
$100,000 or 43% to $130,000 compared to $230,000 for the six months ended June
30, 2003.
The decrease in revenue from information technology documentation
services is primarily due to the loss of sales personnel and the general
economic slowdown in this industry. This division offers a very specialized
service, and relied on several key customers in a very localized market. Many of
these customers have either cancelled projects or have put a number of their
projects on hold. In response to these conditions, we terminated the staff in
this division in 2002 and transferred the existing contracts to another office.
We provide outsourced information technology documentation services in
two ways: complete project management and the provision of skilled project
resources to supplement a customer's internal capabilities. Revenue is
recognized on the same basis as technical publications and engineering
outsourcing services. Selected information technology documentation services
customers include Fidelity Investments, SMD Tech Aid Corporation, CDI
Corporation, and the Gillette Company.
GROSS PROFIT
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of engineering services include wages, benefits,
software training and project expenses. The average gross profit for the
engineering division was 36% for the six months ended June 30, 2004 compared to
32% for the six months ended June 30, 2003. Gross profit for the six months
ended June 30, 2004 increased by $720,000 or 47% to $2,250,000 compared to
$1,530,000 for the six months ended June 30, 2003. The increase in gross profit
for technical publications and engineering services is a result of the increase
in higher margin contracts in engineering design, technical publications and
documentation compared to the lower margins earned on traditional on-site
engineering support. In addition, we are engaging in more time-and-materials
based contracts versus fixed-cost contracts which prevents against project and
costs overruns.
The direct costs of information technology documentation services
include contractor wages, benefits, and project expenses. The average gross
profit for the information technology division for the six months ended June 30,
2004 was 21% compared to 20% for the six months ended June 30, 2003.
RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS--PERCENTAGES
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ---------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUE 100 % 100 % 100 % 100 %
---- ---- ---- ----
COST OF SERVICES 62 % 65 % 64 % 68 %
---- ---- ---- ----
GROSS PROFIT 38 % 35 % 36 % 32 %
---- ---- ---- ----
EXPENSES
Administrative 18 % 22 % 18 % 24 %
Selling 10 % 10 % 10 % 10 %
Depreciation and amortization 4 % 8 % 4 % 8 %
---- ---- ---- ----
Income (loss) from continuing
operations before interest charges 6% (5)% 4% (10)%
Interest charges 31 % 32 % 28 % 102 %
---- ---- ---- ----
Loss from continuing operations
before income taxes (25)% (37)% (24)% (112)%
Income taxes -- % -- % -- % -- %
---- ---- ---- ----
Loss from continuing operations (25)% (37)% (24)% (112)%
Income (loss) from discontinued
operations -- % 11 % -- % 6 %
Net Loss (25)% (26)% (24)% (106)%
---- ---- ---- ----
THE THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2003
Revenue. Revenue for the three months ended June 30, 2004 increased by
$860,000 or 35%, to $3,330,000, as compared to $2,470,000 for the three months
ended June 30, 2003. The increase is primarily attributable to new contracts
with existing defense, automotive, and aerospace customers that were awarded in
the fourth quarter of 2003.
Cost of Services. The cost of services for the three months ended June
30, 2004 increased by $430,000, or 27%, to $2,050,000, as compared to $1,620,000
for the three months ended June 30, 2003. The increase in cost of services is
consistent with the increase in revenue. However, the cost of services as a
percentage of revenue decreased from 65% for the three months ended June 30,
2003 to 62% for the three months ended June 30, 2004.
Gross Profit. Gross profit for the three months ended June 30, 2004
increased by $410,000, or 48%, to $1,270,000 compared to $860,000 for the three
months ended June 30, 2003. The increase in gross profit is consistent with the
increase in revenue. As a percentage of revenue, gross profit increased from 35%
for the three months ended June 30, 2003 to 38% for the three months ended June
30, 2004. The increase in gross profit is a result of the increase in higher
margin contracts in engineering design, technical publications and documentation
compared to the lower margins earned on traditional on-site engineering support.
In addition, we are engaging in more time-and-materials based contracts versus
fixed-cost contracts which prevents against project and costs overruns.
Expenses. Expenses for the three months ended June 30, 2004 increased
by $80,000, or 8%, to $1,060,000 compared to $980,000 for the three months ended
June 30, 2003.
Administrative expenses increased by $40,000 or 7% to $580,000 for the
three months ended June 30, 2004 compared to $540,000 for the three months ended
June 30, 2003. The increase reflects the additional rent and general office
costs associated with the increased project work in the engineering services
division in the second quarter of 2004.
Selling expenses for the three months ended June 30, 2004 increased by
$100,000, or 40%, to $350,000 from $250,000 for the three months ended June 30,
2003. The increase in selling expenses is consistent with the increase in sales
as the sales team's compensation is commissioned based. In addition, new sales
staff were hired in the second quarter of 2004.
For the three months ended June 30, 2004, depreciation and amortization
expenses decreased by $40,000, or 22%, to $140,000 from $180,000 for the three
months ended June 30, 2003.
0perating Income (Loss) from Continuing Operations. For the three months
ended June 30, 2004, income from continuing operations increased by $330,000 or
275% to income of $210,0000 as compared to a loss of $120,000 for the three
months ended June 30, 2003.
Interest Charges. For the three months ended June 30, 2004, interest
charges increased by $230,000, or 29%, to $1,030,000 from $800,000 for the three
months ended June 30, 2003. This increase is attributable to the higher value of
the beneficial conversion feature on all issued convertible debentures which was
determined to be $872,845 for the three months ended June 30, 2004 compared to
$539,142 for the three months ended June 30, 2003.
Loss from Continuing Operations before Income Taxes. Loss from
continuing operations before income taxes for the three months ended June 30,
2004 decreased by $100,000 or 11% to a loss of $820,000 as compared to a loss of
$920,000 for the three months ended June 30, 2003.
Income Taxes. Income taxes for the three months ended June 30, 2004
decreased by $5,000 to $3,000 as compared to $8,000 for the three months ended
June 30, 2003.
Loss from Continuing Operations. Loss from continuing operations for
the three months ended June 30, 2004 decreased by $110,000 or 12% to a loss of
$820,000 compared to a loss of $930,000 for the three months ended June 30,
2003.
Income (Loss) from Discontinued Operations. Operations of the
technology, training and IT recruitment divisions have been reported as
discontinued for the three months ended June 30, 2004 and 2003.
Effective March 8, 2002, we sold our technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. As part of the
transaction, Cognicase assumed all of the staff in our technology division,
including the employees of TidalBeach Inc. We will not have future revenues from
either the Njoyn or SecondWave products.
There was no technology revenue for the three months ended June 30,
2004 and 2003. The operating loss from the technology division for the three
months ended June 30, 2004 was $1,000 and $9,000 for the same period in 2003.
Effective May 1, 2002, we signed an agreement with triOS Training
Centres Limited, an Ontario company, for the sale of certain assets of the
Toronto training division, Thinkpath Training for a nominal amount of cash and
the assumption of all prepaid training liabilities. As part of the transaction,
triOS assumed the Toronto training staff and is subletting the classroom
facilities.
On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the sale of certain assets of
the New York training division, Thinkpath Training for a nominal amount of cash
and the assumption of all prepaid training liabilities. As part of the
transaction, Thinkpath Training LLC assumed the New York training staff, some
assets and is subletting the classroom facilities.
As a result of these two transactions, we will not have future
revenues from either training division. There was no training revenue for the
three months ended June 30, 2004 and $94,000 for the same period in 2003. The
operating loss from the training division for the three months ended June 30,
2004 was $13,000 compared to net income of $66,000 for the same period in 2003.
Effective June 27, 2003, we signed an agreement with Brainhunter.com
Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT
recruitment division for a nominal amount of cash and the assumption of all
employee liabilities. The gain on disposal of $190,627 has been reflected in the
Income (loss) from discontinued operations in 2003. As a result of this
transaction, we will not have future revenues from the IT recruitment division
and therefore the operations have been reported as discontinued.
There was no IT recruitment revenue for the three months ended June 30,
2004 and $625,000 for the same period in 2003. Net income from the IT
recruitment division for the three months ended June 30, 2004 was nil and
$32,000 in 2003.
Net Loss. Net loss increased by $190,000 or 29% to $840,000 for the
three months ended June 30, 2004 compared to $650,000 for the three months ended
June 30, 2003.
THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2003
Revenue. Revenue for the six months ended June 30, 2004 increased by
$1,420,000 or 29%, to $6,380,000, as compared to $4,960,000 for the six months
ended June 30, 2003. The increase is primarily attributable to new contracts
with existing defense, automotive, and aerospace customers that were awarded in
the fourth quarter of 2003.
Cost of Services. The cost of services for the six months ended June
30, 2004 increased by $730,000, or 22%, to $4,110,000, as compared to $3,380,000
for the six months ended June 30, 2003. The increase in cost of services is
consistent with the increase in revenue. However, the cost of services as a
percentage of revenue decreased from 68% for the six months ended June 30, 2003
to 64% for the six months ended June 30, 2004.
Gross Profit. Gross profit for the six months ended June 30, 2004
increased by $690,000, or 44%, to $2,270,000 compared to $1,580,000 for the six
months ended June 30, 2003. The increase in gross profit is consistent with the
increase in revenue. As a percentage of revenue, gross profit increased from 32%
for the six months ended June 30, 2003 to 36% for the six months ended June 30,
2004. The increase in gross profit is a result of the increase in higher margin
contracts in engineering design, technical publications and documentation
compared to the lower margins earned on traditional on-site engineering support.
In addition, we are engaging in more time-and-materials based contracts versus
fixed-cost contracts which prevents against project and costs overruns.
Expenses. Expenses for the six months ended June 30, 2004 increased by
$20,000, or 1%, to $2,090,000 compared to $2,070,000 for the six months ended
June 30, 2003.
Administrative expenses decreased by $40,000 or 3% to $1,150,000 for
the six months ended June 30, 2004 compared to $1,190,000 for the six months
ended June 30, 2003. The decrease reflects the reduction in administrative
expenses as a result of cost cutting in the first quarter of 2004 specifically
in the areas of salaries and general office expenses.
Selling expenses for the six months ended June 30, 2004 increased by
$160,000, or 32%, to $660,000 from $500,000 for the six months ended June 30,
2003. The increase in selling expenses is consistent with the increase in sales
as the sales team's compensation is commissioned based. In addition, new sales
staff were hired in the second quarter of 2004.
For the six months ended June 30, 2004, depreciation and amortization
expenses decreased by $100,000, or 26%, to $280,000 from $380,000 for the six
months ended June 30, 2003.
0perating Income (Loss) from Continuing Operations. For the six months
ended June 30, 2004, income from continuing operations increased by $680,000 or
136% to income of $180,000 as compared to a loss of $500,000 for the six months
ended June 30, 2003.
Interest Charges. For the six months ended June 30, 2004, interest
charges decreased by $3,300,000, or 65%, to $1,780,000 from $5,080,000 for the
six months ended June 30, 2003. This decrease is attributable to the higher
value of the beneficial conversion feature on all issued convertible debentures
at June 30, 2003, which was determined to be $4,474,826 compared to $1,488,421
for the six months ended June 30, 2004.
Loss from Continuing Operations before Income Taxes. Loss from
continuing operations before income taxes for the six months ended June 30, 2004
decreased by $3,970,000 or 71% to a loss of $1,600,000 as compared to a loss of
$5,570,000 for the six months ended June 30, 2003.
Income Taxes. Income taxes for the six months ended June 30, 2004
decreased by $8,000 to $4,000 as compared to $12,000 for the six months ended
June 30, 2003.
Loss from Continuing Operations. Loss from continuing operations for
the six months ended June 30, 2004 decreased by $3,980,000 or 71% to a loss of
$1,600,000 compared to a loss of $5,580,000 for the six months ended June 30,
2003.
Income (Loss) from Discontinued Operations. Operations of the
technology, training and IT recruitment divisions have been reported as
discontinued for the six months ended June 30, 2004 and 2003.
There was no technology revenue for the six months ended June 30, 2004
and 2003. The operating loss from the technology division for the six months
ended June 30, 2004 was $3,000 and $12,000 for the same period in 2003.
There was no training revenue for the six months ended June 30, 2004
and $162,000 for the same period in 2003. The operating loss from the training
division for the six months ended June 30, 2004 was $24,000 compared to net
income of $94,000 for the same period in 2003.
There was no IT recruitment revenue for the six months ended June 30,
2004 and $1,430,000 for the same period in 2003. Net income from the IT
recruitment division for the six months ended June 30, 2004 was nil and $11,000
in 2003. The gain on disposal of the IT recruitment division of $190,627 has
been reflected in the Income (loss) from discontinued operations in 2003.
Net Loss. Net loss decreased by $3,670,000 or 69% to $1,630,000 for the
six months ended June 30, 2004 compared to $5,300,000 for the six months ended
June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
With insufficient working capital from operations, our primary sources
of cash are a receivable discount facility with Morrison Financial Services
Limited and proceeds from the sale of convertible debentures. Our primary
capital requirements include debt service and working capital needs.
Our facility with Morrison Financial Services Limited is a receivable
discount facility whereby we are able to borrow up to 75% of qualifying
receivables at 30% interest per annum. At June 30, 2004, the balance on the
receivable discount facility was $935,000 based on 75% of qualifying accounts
receivable.
On January 8, 2004, we sold $25,000 in convertible debentures along
with 1,428,571 warrants pursuant to the share purchase agreement (the "12%
Senior Secured Convertible Debenture Agreement") dated December 5, 2002. The
debentures will become due twelve months from the date of issuance. The
investors will have the right to acquire up to $25,000 worth of our common stock
at a price the lesser of $.0175 or 50% of the average of the three lowest prices
on three separate trading days during the sixty-day trading period prior to
conversion. The warrants are exercisable at any time and in any amount for a
period of seven years from closing at a purchase price of $.0175 per share. We
are required to pay interest to the debenture holder on the aggregate
unconverted and outstanding principal amount of the debenture at the rate of 12%
per annum, payable on each conversion date and maturity date in cash or shares
of common stock. On April 7, 2004 all of these warrants were repriced from
$.0175 to $0.0004 per share
On March 25, 2004, we entered into a new share purchase agreement
with Bristol Investment Fund, Ltd. for the issuance and sale of debentures of up
to $1,000,000. The first debenture of $350,000 was purchased together with
924,000,000 warrants on closing. The debenture will become due twelve months
from the date of issuance. Bristol will have the right to acquire up to $350,000
worth of our common stock at a price the lesser of $.0175 or 50% of the average
of the three lowest prices on three separate trading days during the sixty-day
trading period prior to conversion. The warrants are exercisable at any time and
in any amount until March 25, 2011 at a purchase price of $.000417 per share. We
are required to pay interest to Bristol on the aggregate unconverted and
outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of common
stock. On June 18, 2004, all of these warrants were repriced from $.000417 to
$.00025 per share.
On March 29, 2004, we entered into a new share purchase agreement with
Tazbaz Holdings Limited for the issuance and sale of a $100,000 Convertible
Debenture and 250,000,000 warrants. The debenture will become due twelve months
from the date of issuance. Tazbaz Holdings Limited will have the right to
acquire up to $100,000 worth of our common stock at a price the lesser of $.0175
or 50% of the average of the three lowest prices on three separate trading days
during the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount until March 29, 2011 at a purchase
price of $.0004 per share. We are required to pay interest to Tazbaz Holdings
Limited on the aggregate unconverted and outstanding principal amount of the
debenture at the rate of 12% per annum, payable on each conversion date and
maturity date in cash or shares of common stock.
On May 20 and June 18, 2004, we sold an additional $400,000 in
convertible debentures together with 1,682,352,942 warrants to Bristol
Investment Fund, Ltd. pursuant to the March 25, 2004 share purchase agreement.
The debentures will become due twelve months from the date of issuance. Bristol
will have the right to acquire up to $400,000 worth of our common stock at a
price the lesser of $.0175 or 50% of the average of the three lowest prices on
three separate trading days during the sixty-day trading period prior to
conversion. The warrants are exercisable at any time and in any amount for a
period of seven years from closing at a purchase price of $.00025 per share. We
are required to pay interest to Bristol on the aggregate unconverted and
outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of common
stock.
On May 24, 2004 and June 18, 2004, we entered into new share purchase
agreements with Tazbaz Holdings Limited for the issuance and sale of $300,000
principal amount Convertible Debentures and 1,157,142,857 warrants. The
debentures will become due twelve months from the date of issuance. Tazbaz
Holdings Limited will have the right to acquire up to $300,000 worth of our
common stock at a price the lesser of $.0175 or 50% of the average of the three
lowest prices on three separate trading days during the sixty-day trading period
prior to conversion. The warrants are exercisable at any time and in any amount
for a period of seven years from closing at a purchase price of $.00025 per
share. We are required to pay interest to Tazbaz Holdings Limited on the
aggregate unconverted and outstanding principal amount of the debenture at the
rate of 12% per annum, payable on each conversion date and maturity date in cash
or shares of common stock.
The proceeds of $1,175,000 received by us in the six months ended
June 30, 2004 were allocated between the warrants and the debenture without
warrants on a pro rata basis. Paid in capital has been credited by the value of
the warrants in the amount of $871,104.
At June 30, 2004, the value of the beneficial conversion feature on
all issued convertible debentures was determined to be $1,488,421 which was
credited to paid in capital and charged to earnings as interest expense.
At June 30, 2004, we had cash of $770,000 and a working capital
deficiency of $960,000. At June 30, 2004, we had a cash flow deficiency from
operations of $840,000, largely attributable to the increase in accounts
receivable of $470,000 and the decrease in accounts payable of $600,000. At June
30, 2003, we had cash of $580,000 and a working capital deficiency of
$2,470,000. At June 30, 2003, we had cash flow from operations of $120,000.
At June 30, 2004, we had a cash flow deficiency from investing
activities of $80,000 related to the purchase of capital assets. At June 30,
2003, we had cash flow from investing activities of $80,000 largely attributable
to the proceeds received on the disposal of our IT Recruitment division of
$150,000.
At June 30, 2004 we had cash flow from financing activities of
$1,160,000 attributable primarily to proceeds of $1,175,000 from the sale of
convertible debentures and proceeds of $230,000 from the exercise of warrants.
At June 30, 2003, we had a cash flow from financing activities of $200,000
attributable primarily to proceeds of $1,450,000 from the sale of convertible
debentures, which was offset by the reduction in the receivable discount
facility of $1,240,000.
At June 30, 2004 we had a loan balance of $280,000 with an individual,
Terry Lyons. Effective March 25, 2004, we amended our loan agreement with Terry
Lyons. The balance of accrued interest was added to the original principal
amount of $259,356 for a new principal balance of $299,768. Monthly payments of
$10,000 began April 5, 2004 and will continue until the full amount of the note,
including interest is paid in full. The interest rate was reduced from 30% per
annum to US prime plus 14%. This loan is subordinated to Morrison Financial
Services Limited.
At June 30, 2004, we had approximately $12,000 outstanding on various
capital leases with various payment terms and interest rates. The average
balance on the terms of leases are 12 months and cover primarily the hardware
and various software applications required to support our engineering division.
At June 30, 2004, we had a note payable of $224,000 owed to Roger
Walters, the former shareholder of CadCam Inc. Principal payments of $4,000 per
month were to begin September 1, 2002 until August 1, 2007. This note is
non-interest bearing and is subordinated to Morrison Financial Services Limited
and the 12% Senior Secured Convertible Debenture holders. We have not made any
principal payments to Mr. Walters since December 2002 and we are currently in
default of the loan agreement. As a result of the default, the principal balance
bears interest at 12% per annum until payment is made.
At June 30, 2004, we had a note payable of $630,000 owed to Denise
Dunne-Fushi, the vendor of MicroTech Professionals Inc. Principal payments of
$10,000 per month were to begin November 1, 2002 bearing 5% interest until
October 1, 2007. In addition, we were obligated to cover the monthly expense
associated with Ms. Dunne-Fushi's family health benefits and a vehicle lease
until May 2004.
The note is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and the 12% Senior Secured
Convertible Debenture holders. We have not made scheduled principal payments to
Ms. Dunne-Fushi since December 2002 and are currently in default of the loan
agreement. As a result of the default, Ms. Dunne-Fushi has the option of
enforcing the security she holds.
Although we believe that our current working capital and cash flows
from restructured operations will be adequate to meet our anticipated cash
requirements going forward, we have accrued liabilities and potential
settlements of outstanding claims that may require additional funds. We will
have to raise these funds through equity or debt financing. There can be no
assurance that additional financing will be available at all or that if
available, such financing will be obtainable on terms favorable to us and would
not be dilutive.
Despite our recurring losses and negative working capital, we believe
that we have developed a business plan that, if successfully implemented, could
substantially improve our operational results and financial condition. However,
we can give no assurances that our current cash flows from operations, if any,
borrowings available under our receivable discount facility, and proceeds from
the sale of securities, will be adequate to fund our expected operating and
capital needs for the next twelve months. The adequacy of our cash resources
over the next twelve months is primarily dependent on our operating results and
our ability to raise additional financing, which are subject to substantial
uncertainties. Cash flow from operations for the next twelve months will depend,
among other things, upon the effect of the current economic slowdown on our
sales and management's ability to implement our business plan. The failure to
return to profitability and optimize operating cash flow in the short term, and
to successfully raise additional financing, could have a material adverse effect
on our liquidity position and capital resources, which may force us to curtail
our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, which, among other
factors, changed the presentation of gains and losses on the extinguishments of
debt. Any gain or loss on extinguishments of debt that does not meet the
criteria in APB Opinion 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", shall be included in operating
earnings and not presented separately as an extraordinary item. We will adopt
SFAS No. 145 at the beginning of fiscal year 2003 and do not expect the
provisions of SFAS No. 145 to have any impact on our financial position, results
of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No.146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit on Activity (including Certain Costs Incurred in a Restructuring)". We
will adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized.
In January 2003, the FASB issued SFAS No. 148, Accounting for Stock
- -Based Compensation - Transition and Disclosures. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement also amends the disclosure requirements of SFAS No. 123 to require
more prominent and frequent disclosures in the financial statements about the
effects of stock-based compensation. The transitional guidance and annual
disclosure provisions of this Statement is effective for the December 31, 2002
financial statements. The interim reporting disclosure requirements is effective
for our March 31, 2003 financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirement for most guarantees including
loan guarantees, and clarifies that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair market value of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
measurement provisions of the Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which
addresses consolidation by business enterprises of variable interest entities.
In general, a variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The objective of Interpretation No. 46
is not to restrict the use of variable interest entities but to improve
financial reporting by companies involved with variable interest entities. Until
now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
Interpretation No. 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation No. 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
entities created before January 31, 2003, in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements
apply in all financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. We do not have any variable
interest entities, and, accordingly, adoption is not expected to have a material
effect on our financial position, results of operations or cash flows.
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". The Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. The amendments set
forth in Statement 149 improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, this
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in Statement
133. In addition, it clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. This Statement
is effective for contracts entered into or modified after June 30, 2003 with
certain exceptions. We do not believe that the adoption of Statement No. 149
will have a material effect on our financial position, results of operations or
cash flows.
In May 2003, the Financial Accounting Standards Board issued Statement
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity". The Statement specifies that certain instruments
within its scope embody obligations of the issuer and that, therefore, the
issuer must classify them as liabilities. This Statement is effective
immediately for all financial instruments entered into or modified after May 31,
2003. For all other instruments, the Statement goes into effect at the beginning
of the first interim period beginning after June 15, 2003. For contracts that
were created or modified before May 31, 2003 and still exist at the beginning of
the first interim period beginning after June 30, 2003, entities should record
the transition to Statement No. 150 by reporting the cumulative effect of a
change in an accounting principle. Statement No. 150 prohibits entities from
restating financial statements for earlier years presented. We do not believe
that the adoption of Statement No. 150 will have a material effect on our
financial position, results of operations or cash flows.
RECENT EVENTS
Subsequent to June 30, 2004, we have issued an additional 861,886,245
shares of our common stock to the convertible debenture holders upon the
conversion of $119,500 of debentures and accrued interest.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See heading "Foreign Currency Translation" in Management's Discussion
and Analysis of Financial Condition and Results Of Operations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934,
as amended (the "Exchange Act")) as of a date within 45 days prior to the filing
date of this Form 10-Q filed for the three months ended June 30, 2004 (the
"Evaluation Date"). Based on such evaluation, such officers have concluded that,
as of the Evaluation Date, our disclosure controls and procedures are effective
in alerting the officers on a timely basis to material information relating to
us (including our wholly owned subsidiaries) required to be included in our
reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in our
internal controls or in other factors that could significantly affect such
controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to the following pending legal proceedings:
On October 1, 2003, SITQ National Inc. ("SITQ'), a former landlord,
filed a statement against us and our Directors, with the Superior Court of
Justice of Ontario, Canada, Court File No. 03-CV-256327CM3, demanding payment of
rent arrears of approximately $760,000 and alleging damages for breach of lease
for future rent in the sum of $3,250,000. The lease covered premises located in
Ontario, Canada that we abandoned in April 2003. The term of the lease does not
expire until December 31, 2010. The rent arrears of $760,000 has been accrued
but we believe there is no merit for the breach of lease for future rent of
$3,250,000 and accordingly have made no provision in the accounts with respect
to this matter. We intend to defend this claim vigorously.
On March 17, 2004, Johnston & Associates, LLC, a South Carolina
corporation, filed a statement against us with the Superior Court of Justice of
Ontario, Canada, Court File No. C-294-04, demanding payment of $60,000 pursuant
to a consulting agreement entered into April 2002. We intend to defend this
claim vigorously.
We are not party to any other material litigation, pending or
otherwise.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the second quarter 2004, we sold convertible debentures
and warrants for an aggregate of $700,000 pursuant to a share purchase agreement
dated March 25, 2004. The debt is convertible into common stock at a discount to
the market. In connection with the offering, we issued an aggregate of
2,839,495,799 warrants to purchase common stock. Pursuant to the terms of the
initial offering as reported in the Form 8-K that we filed with the SEC on March
30, 2004, investors in that offering were granted the right to purchase
$1,000,000 of convertible debt. As a result of the sales made during the second
quarter 2004, there remain no convertible debentures and warrants available for
purchase by the investors as at June 30, 2004.
The proceeds from the sale of convertible debentures and warrants were
used to repay debt obligations and for working capital. The offering, which was
made to non-U.S. residents only, was exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act") pursuant to
Regulation S promulgated thereunder.
During the second quarter 2004, we issued 250,000,000 shares
of common stock, no par value per share, to Jeffrey W. Flannery pursuant to an
Advisory and Consulting Agreement dated May 26, 2004. Under the terms of the
agreement, Mr. Flannery will provide marketing and business development
consulting services to the company for a period of one year. The shares were
registered under Form S-8 as filed with the SEC on June 1, 2004
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 AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31. Rule 13a-14(a)/15d-14(a) Certifications.
Exhibit 32.1 Certification by the Chief Executive Officer Relating to a Periodic
Report Containing Financial Statements.* Exhibit 32.2 Certification by the Chief
Financial Officer Relating to a Periodic Report Containing Financial
Statements.*
(b) Reports on Form 8-K.
* The Exhibit attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
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: August 23, 2004 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer