UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER __________
THINKPATH INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
ONTARIO 52-209027
------------------------- --------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
201 WESTCREEK BOULEVARD
BRAMPTON, ONTARIO L6T 5S6
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 460-3040
-------------------
(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 MAY 20, 2005 THERE WERE 21,667,024,425 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
THINKPATH INC.
MARCH 31, 2005 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004..................................................
Interim Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004......................................
Interim Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2005 and the year ended
December 31, 2004..................................................
Interim Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004......................................
Notes to Interim Consolidated Financial Statements.................
Item 2. Management's Discussion and Analysis or Plan of Operation............
Item 3. Controls and Procedures..............................................
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................
Item 2. Unregistered Sales of Equity 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 MARCH 31, 2005
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
31-Mar-05 31-Dec-04
$ $
ASSETS
CURRENT ASSETS
Cash 224,636 180,121
Accounts receivable 2,716,921 2,243,513
Prepaid expenses 179,157 88,403
--------- ---------
3,120,714 2,512,037
PROPERTY AND EQUIPMENT 565,958 494,003
GOODWILL 3,967,243 3,748,732
OTHER ASSETS 151,112 61,562
--------- ---------
7,805,027 6,816,334
========== =========
The accompanying notes are an integral part of
these interim consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
31-Mar-05 31-Dec-04
$ $
LIABILITIES
CURRENT LIABILITIES
Receivable Discount Facility 1,025,637 723,995
Bank indebtedness 57,803 --
Accounts payable 1,495,981 1,257,799
Current portion of long-term debt 114,146 85,099
12% Convertible Debentures 433,278 566,653
--------- ---------
3,126,845 2,633,546
LONG-TERM DEBT 155,537 182,837
--------- ---------
3,282,382 2,816,383
========= =========
COMMITMENTS AND CONTINGENCIES (NOTE 20)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 50,204,682 49,531,299
DEFICIT (44,350,023) (44,204,935)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,332,014) (1,326,413)
----------- ----------
4,522,645 3,999,951
----------- ----------
7,805,027 6,816,334
=========== ==========
The accompanying notes are an integral part of
these interim consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
2005 2004
$ $
REVENUE 3,602,939 3,056,700
COST OF SERVICES 2,330,770 2,057,428
--------- ---------
GROSS PROFIT 1,272,169 999,272
--------- ---------
EXPENSES
Administrative 584,498 573,405
Selling 368,034 312,916
Depreciation and amortization 81,538 142,265
Write down of property and equipment 3,851 --
--------- ---------
1,037,921 1,028,586
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES 234,248 (29,314)
Interest Charges 362,763 748,944
--------- ---------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (128,515) (778,258)
Income Taxes 7,440 1,268
--------- ---------
LOSS FROM CONTINUING OPERATIONS (135,955) (779,526)
LOSS FROM DISCONTINUED OPERATIONS (9,133) (12,704)
NET LOSS (145,088) (792,230)
--------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK OUTSTANDING
BASIC AND DILUTED 18,428,447,908 3,261,427,500
============== =============
LOSS FROM CONTINUING OPERATIONS
PER WEIGHTED AVERAGE COMMON
STOCK BASIC AND DILUTED (0.00) (0.00)
============== =============
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 THREE MONTHS ENDED MARCH 31, 2005 AND THE YEAR ENDED DECEMBER 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
COMMON STOCK ACCUMULATED
NUMBER OF CAPITAL OTHER
SHARES STOCK OMPREHENSIVE COMPREHENSIVE
AMOUNTS DEFICIT LOSS LOSS
--------------- ----------- ------------ ---------------- ---------------
Balance as of December 31, 2003 2,737,239,187 43,576,292 (39,999,711) (1,315,689)
=============== =========== ============ ===============
Net loss for the year -- -- (4,205,224) (4,205,224)
--------------
Other comprehensive loss, net of tax:
Foreign currency translation (10,724) (10,724)
--------------
Comprehensive loss (4,215,948)
==============
Conversion of 12% senior secured 9,603,054,463 379,906 --
convertible debentures
Interest on 12% senior secured convertible 634,917,670 44,813 --
debentures
Common stock and warrants issued for 250,197,488 175,336 --
services
Warrants issued for cash 377,053,570 1,548,120 --
Beneficial conversion on issuance of -- 3,806,832 --
convertible debt
--------------- ----------- ------------ ---------------
Balance as of December 31, 2004 13,602,462,378 49,531,299 (44,204,935) (1,326,413)
=============== =========== ============ ===============
Net loss for the period -- -- (145,088) (145,088)
Other comprehensive loss, net of tax:
Foreign currency translation (5,601) (5,601)
--------------
Comprehensive loss (150,689)
==============
Conversion of 12% senior secured 6,175,500,000 133,375 --
convertible debentures
Interest on 12% senior secured convertible 656,976,500 21,448 --
debentures
Common stock issued for investment 1,232,250,000 246,609 --
Beneficial conversion on issuance of -- 271,951 --
convertible debt
--------------- ----------- ------------ ---------------
Balance as of March 31, 2005 21,667,188,878 50,204,682 (44,350,023) (1,332,014)
=============== =========== ============ ===============
The accompanying notes are an integral part of
these interim consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
2005 2004
$ $
Cash flows from operating activities
Net loss (145,088) (792,230)
-------- --------
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 81,538 153,460
Beneficial conversion on issuance of convertible debt 271,951 624,211
Interest on 12% senior secured convertible debentures 21,448 11,114
Write down of property and equipment 3,851 --
Increase in accounts receivable (462,788) (321,761)
Increase in prepaid expenses (90,729) (13,775)
Increase (decrease) in accounts payable 241,449 (424,759)
Common stock and warrants issued for services -- 336
-------- --------
Net cash used in operating activities (78,368) (763,404)
-------- --------
Cash flows from investing activities
Purchase of property and equipment (134,702) (41,488)
-------- --------
Net cash used in investing activities (134,702) (41,488)
-------- --------
Cash flows from financing activities
Proceeds from (repayment of) receivable discount facility 300,614 (62,928)
Repayment of notes payable -- (3,566)
Repayment of long-term debt (42,512) (18,806)
Proceeds from issuance of common stock -- 193,500
Proceeds from issuance of debentures and warrants -- 475,000
-------- --------
Net cash provided by financing activities 258,102 583,200
-------- --------
Effect of foreign currency exchange rate changes (517) (34,626)
-------- --------
Net increase (decrease) in cash 44,515 (256,318)
Cash
Beginning of year 180,121 483,443
-------- --------
End of year 224,636 227,125
======== ========
SUPPLEMENTAL CASH ITEMS:
Interest paid 73,947 125,859
======== ========
Income taxes paid 12,037 2,031
======== ========
The accompanying notes are an integral part of
these interim consolidated financial statements.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(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 recurring operating losses and working capital
deficiencies. At March 31, 2005, the Company had a working capital
deficiency of $6,131 and a deficit of $44,350,023 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 March
31, 2005, the balance on the receivable discount facility was $1,025,637.
The Company is currently within margin of its receivable discount facility
with Morrison Financial Services Limited based on 75% of qualifying
accounts receivable.
As at May 20, 2005, 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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 acquired prior to June 30, 2001 and
accounted for by the pooling of interest method, 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 amounts approximates fair values 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 (loss) 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
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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 were 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
of its Canadian companies in Canadian dollars (their functional currency).
The financial statements of the Canadian companies 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 SFAS No. 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 and these
differences could be material. These estimates are reviewed periodically
and as adjustments become necessary, they are reported in earnings in the
period in which they become known.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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 No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
Company adopted SFAS No. 144, effective January 1, 2002. The adoption of
SFAS No. 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) Leases
Leases are classified as either capital or operating. Those leases that
transfer substantially all the benefits and risks of ownership of property
to the Company are accounted for as capital leases. All other leases are
accounted for as operating leases. Capital leases are accounted for as
assets and are fully amortized on a straight-line basis over the lesser of
the period of expected use of the assets or the lease term. Commitments to
repay the principal amounts arising under capital lease obligations are
included in current liabilities to the extent that the amount is repayable
within one year, otherwise the principal is included in long term debt
obligations. The capitalized lease obligation reflects the present value of
future lease payments. The financing element of the lease payments is
charged to interest expense in the consolidated statement of operations
over the term of the lease. Operating lease costs are charged to
administrative expense in the consolidated statement of operations on a
straight-line basis.
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 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The amendments set forth in SFAS No. 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, SFAS No. 149
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS
No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June
30, 2003 with certain exceptions. The Company does not believe that the
adoption of SFAS No. 149 will have a material impact, if any, on its
results of operations or financial position.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
This statement specifies that certain instruments within its scope embody
obligations of the issuer and that, therefore, the issuer must classify
them as liabilities. SFAS No. 150 is effective immediately for all
financial instruments entered into or modified after May 31, 2003. For all
other instruments, SFAS No. 150 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 SFAS No. 150 by reporting the cumulative effect of
a change in an accounting principle. SFAS No. 150 prohibits entities from
restating financial statements for earlier years presented. The Company
does not believe that the adoption of SFAS No. 150 will have a material
impact, if any, on its results of operations or financial position.
In December 2003, the FASB issued SFAS No. 132 (Revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment
of FASB Statements No. 87, 88 and 106". This statement revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. SFAS No. 132
(Revised) will retain and revise the disclosure requirements contained in
the original SFAS No. 132. It also requires additional disclosures about
the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other postretirement benefit plans. SFAS
No. 132 (Revised) generally is effective for fiscal years ending after
December 15, 2003. The Company does not believe that the adoption of SFAS
No. 132 (Revised) will have a material impact, if any, on its results of
operations or financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43". This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). This statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company
does not believe that the adoption of SFAS No. 151 will have a material
impact, if any, on its results of operations or financial position as it
does not have inventory.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67",
which references the financial accounting and reporting guidance for real
estate time-sharing transactions in AICPA Statement of Position (SOP) 04-2,
"Accounting for Real Estate Time-Sharing Transactions". SFAS No. 152 is
effective for years beginning after June 15, 2005, with restatements of
previously issued financial statements prohibited. The Company does not
believe that the adoption of SFAS No. 152 will have a material impact, if
any, on its results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29", effective for nonmonetary
asset exchanges occurring in the fiscal year beginning January 1, 2006.
This statement requires that exchanges of productive assets be accounted
for at fair value unless fair value cannot be reasonably determined or the
transaction lacks commercial substance. The Company does not believe that
the adoption of SFAS No. 153 will have an impact, if any, on its results of
operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-based
Payment". This statement requires employers to expense costs related to
share-based payment transactions with employees. With limited exceptions,
SFAS No. 123 (Revised) requires that the fair value of share-based payments
to employees be expensed over the period service is received. SFAS No. 123
(Revised) becomes effective for annual reporting periods that begin after
December 15, 2005.. The Company intends to adopt this standard using the
modified retrospective method of transition. This method requires that
issued financial statements be restated based on the amounts previously
calculated and reported in the pro forma footnote disclosures required by
SFAS No. 123. SFAS No. 123 (Revised) allows the use of both closed form
models (e.g., Black-Scholes Model) and open form models (e.g., lattice
models) to measure the fair value of the share-based payment as long as
that model is capable of incorporating all of the substantive
characteristics unique to share-based awards. In accordance with the
transition provisions of SFAS No. 123 (Revised), the expense attributable
to an award will be measured in accordance with the company's measurement
model at that award's date of grant. The Company believes the pro forma
disclosures in Note 3 (c) provide an appropriate short-term indicator of
the level of expense that will be recognized in accordance with SFAS No.
123 (Revised). However, the total expense recorded in future periods will
depend on several variables, including the number of shared-based awards
that vest and the fair value of those vested awards.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations". FIN 47 clarifies that the term
conditional asset retirement obligation as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations", refers to a legal obligation
to perform an asset retirement activity in which the timing and/or method
of settlement are conditional on a future event that may or may not be
within the control of the entity. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005. Retrospective
application of interim financial information is permitted but is not
required. The Company does not believe that the adoption of FIN 47 will
have an impact, if any, on its results of operations or financial position.
u) Advertising Costs
Advertising costs are expensed as incurred.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
3. STOCK OPTION PLANS
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
a) Options outstanding at December 31, 2004 559,500
=======
Options forfeited during the period --
Options expired during the period (82,500) 3.07
-------
Options outstanding at March 31, 2005 477,000
========
Options exercisable December 31, 2004 559,500 1.22
Options exercisable March 31, 2005 477,000 0.92
Options available for future grant December 31, 2004 7,810,500
Options available for future grant March 31, 2005 7,893,000
b) Range of Exercise Prices at March 31, 2005
Options
Weighted Outstanding Weighted
Outstanding Average Average Options Average
Options Remaining Life Exercise Price Exercisable Exercise Price
------- -------------- -------------- ----------- --------------
$3.25 42,000 0.74 3.25 42,000 3.25
$0.67-$0.70 435,000 1.07 0.70 435,000 0.70
c) Pro-forma net income
At March 31, 2005, the Company has four 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 Three Months Ended Ended March 31, 2005 March
31, 2004
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
Net loss as reported (145,088) (792,230)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards net of - (1,895)
related tax effects
Pro forma net loss (145,088) (794,125)
======== ========
Loss per share:
Basic and diluted loss per share, as reported 0.00 (0.00)
Pro forma loss per share 0.00 (0.00)
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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 three months ended March 31, 2005.
There were no option grants in the year ended December 31, 2004.
4. ACQUISITIONS
On January 17, 2005, the Company acquired TBM Technologies Inc., an Ontario
Corporation which provides design engineering services. Pursuant to the
Share Purchase Agreement, the Company purchased TBM for approximately
$246,600 payable in shares of the Company's common stock, no par value. The
Share Purchase Agreement also provided for price protection for the vendors
for a period of two years from closing. In the event that the vendors seek
to sell their shares in an open market transaction within the two years
following closing and the bid price is less than the price of the shares on
issuance, the Company will be obligated to issue additional shares of
unregistered common stock with a value equal to the difference up to a
maximum of $246,600. The acquisition was accounted for by the purchase
method and the operations have been included in the consolidated operations
from January 17, 2005.
The net acquired assets have been valued as follows:
Current assets $23,616
Property and equipment 11,240
Other assets 100,900
Liabilities assumed (107,667)
Consideration 246,600
--------
Goodwill $218,511
========
5. ACCOUNTS RECEIVABLE
March 31, 2005 December 31, 2004
-------------- -----------------
$ $
Accounts receivable 2,915,100 2,423,161
Less: Allowance for doubtful accounts (198,179) (179,648)
--------- ---------
2,716,921 2,243,513
========= =========
Allowance for doubtful accounts
Balance, beginning of period 179,648 186,847
Provision 18,530 25,738
Recoveries -- (32,937)
--------- ---------
Balance, end of period 198,179 179,648
========= =========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
6. PROPERTY AND EQUIPMENT
March 31, 2005 December 31, 2004
------------------------------------------- ------------------
ACCUMULATED
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 168,257 134,958 33,299 35,245
Computer equipment and software 3,538,104 3,018,757 519,347 448,773
Leasehold improvements 45,079 31,767 13,312 9,985
3,751,440 3,185,482 565,958 494,003
Assets under capital lease 243,363 134,287 109,076 90,689
Amortization of property and equipment for the three months ended March 31,
2005 amounted to $68,849 including amortization of assets under capital
lease of $15,255.
Amortization of property and equipment for the year ended December 31, 2004
amounted to $568,069 including amortization of assets under capital lease
of $51,278.
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:
March 31, December 31,
2005 2004
ACCUMULATED
ACCUMULATED IMPAIRMENT
COST AMORTIZATION LOSSES NET NET
---------- ----------------- ---------------- ------------ ---------------
$ $ $ $ $
Technical Publications &
Engineering (CadCam Inc.
and TBM Technologies Inc.) 5,757,369 535,164 1,234,962 3,967,243 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, 2004 and 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 ASSETS
March 31, 2005 December 31, 2004
-------------- -----------------
$ $
Cash surrender value of life insurance 62,901 61,562
Customer Lists 88,211 -
Total 151,112 61,562
Amortization of other assets amounted to $12,689 for the three months ended
March 31, 2005 and nil for the year ended December 31, 2004.
9. RECEIVABLE DISCOUNT FACILITY
i) March 31, 2005
At March 31, 2005, the Company had a receivable discount facility in the
amount of $1,025,637 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 24% per annum.
ii) December 31, 2004
At December 31, 2004, the Company had a receivable discount facility in the
amount of $723,995 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.
10. BANK INDEBTEDNESS
At March 31, 2005, the Company had $57,803 outstanding on a revolving line
of credit with the Royal Bank of Canada. This liability was assumed by the
Company on January 17, 2005 as a result of the acquisition of TBM
Technologies Inc. The line bears interest at 7% per annum. Subsequent to
March 31, 2005, the line of credit was paid in full by the Company.
11. CONVERTIBLE DEBENTURE
During the year ended December 31, 2004, the Company sold $2,050,000 in
convertible debentures with 8,702,424,370 warrants to various investors.
The debentures will become due twelve months from the date of issuance at
various conversion prices and the warrants are exercisable at any time and
in any amount for a period of seven years from closing at various purchase
prices as outlined below:
Original # of New
Date of Debenture Conversion # of Exercise Warrants Exercise
Issuance Amount Price Warrants Price Repriced Price
Issued
-------------- ------------- -------------- ---------------- ------------ ---------------- --------
1/8/04 $25,000 $.0175* 1,428,571 $.0175 1,428,571 $.0004
3/25/04 $350,000 $.0175* 924,000,000 $.000417 84,000,000 $.00025
840,000,000 $.0002
3/29/04 $100,000 $.0175* 250,000,000 $.0004 -- --
5/20/04 $150,000 $.0175* 582,352,942 $.00025 529,411,766 $.0002
5/24/04 $100,000 $.0175* 357,142,857 $.00028 -- --
6/18/04 $250,000 $.0175* 1,100,000,000 $.00025 1,000,000,000 $.0002
6/18/04 $200,000 $.0175* 800,000,000 $.00025 -- --
11/12/04 $875,000 $.0002** 4,687,500,000 $.0002 -- --
-------------- ------------- -------------- ---------------- ------------ ---------------- --------
$2,050,000 8,702,424,370 2,454,840,337
============== ============= ============== ================ ============ ================ ========
* Conversion price is 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.
**Conversion price is the lesser of $.0002 or 80% of the average of the
three lowest prices on three separate trading days during the twenty-day
trading period prior to conversion.
The proceeds of $2,050,000 received by the Company 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
$1,319,000.
At December 31, 2004, the value of the beneficial conversion feature on all
issued convertible debentures was determined to be $3,654,507 which was
credited to paid in capital and charged to earnings as interest
expense.
At March 31, 2005, the value of the beneficial conversion feature on all
issued convertible debentures was determined to be $235,833 which was
credited to paid in capital and charged to earnings as interest expense.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
12. LONG-TERM DEBT
i) March 31, 2005
At March 31, 2005, the Company had a loan balance of $218,968 with Terry
Lyons with monthly payments of $10,000. The loan bears interest at US prime
plus 14%.
ii) December 31, 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%.
March 31, 2005 December 31, 2004
$ $
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 218,968 227,951
Financial Services Limited
Various capital leases with various payment
terms and interest rates 50,715 39,985
269,683 267,936
Less: current portion 114,146 85,099
Total 155,537 182,837
b) Future principal payments obligations as at March 31, 2005, were as
follows:
2005 83,944
2006 126,119
2007 59,260
2008 --
2009 --
---------
$ 269,683
=========
c) Interest expense related to long-term debt was $15,621 for the three
months ended March 31, 2005 and $69,037 for the year ended December 31,
2004.
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
During the year ended December 31, 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 year ended December 31, 2004, the Company issued 377,053,570
shares of its common stock to the 12% Senior Secured Convertible Debenture
Holders on the exercise of warrants.
During the year ended December 31, 2004, the Company issued 10,237,972,133
shares of its common stock upon the conversion of 12% Senior Secured
Convertible Debentures in the amount of $1,025,400.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
On January 17, 2005, the Company issued 1,232,250,000 shares of its common
stock, no par value per share, to the Vendors of TBM Technologies Inc. for
a total consideration of $246,600.
During the three months ended March 31, 2005, the Company issued
6,832,476,500 shares of its common stock upon the conversion of 12% Senior
Secured Convertible Debentures in the amount of $321,900.
c) Warrants
For each of the periods presented, the following warrants for the purchase
of one common share per warrant at the following prices per common share
and expiry dates were outstanding:
Number of warrants
March 31, 2005 December 31, 2004 Exercise price per Expiry date
share
--------------- ----------------------- ------------------- -------------
-- -- $3.24 2004
475,000 975,000 $3.25 to $3.71 2005
279,934 279,934 $2.46 2005
440,645 440,645 $.63 to $1.00 2005
100,000 100,000 $1.50 2006
1,063,484 1,063,484 $.55 2006
6,000,000 6,000,000 $.08 2007
4,620,000 4,620,000 $.04 2009
26,285,714 26,285,714 $.0175 2009
-- -- $.00075 2009
-- -- $.00040 2009
1,142,857 1,142,857 $.00025 2009
21,428,571 21,428,571 $.0175 2010
14,285,714 14,285,714 $.00875 2010
166,666,667 166,666,667 $.00075 2010
-- -- $.0004 2010
45,414,297 45,414,297 $.00025 2010
167,244,016 167,244,016 $.0002 2010
250,000,000 250,000,000 $.0004 2011
257,142,857 257,142,857 $.00028 2011
1,876,941,177 1,876,941,177 $.00025 2011
6,216,911,765 6,216,911,765 $.0002 2011
--------------- ----------------------- ------------------- -------------
9,056,442,698 9,056,942,698
--------------- ----------------------- ---------------------------------
A summary of changes to number of issued warrants is as follows:
Outstanding at December 31, 2004 9,056,942,698
Issued --
Exercised --
Expired (500,000)
-------------
Outstanding at March 31, 2005 9,056,442,698
=============
On January 8, 2004, the Company 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
for a period of seven years from closing 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 November 12, 2004, 840,000,000 of these
warrants were repriced from $.00025 to $.0002 per share.
On March 29, 2004 the Company issued 250,000,000 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 $0.0004 per
share.
On May 20, 2004 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 November 12, 2004, 1,529,411,765 of these
warrants were repriced from $.00025 to $.0002 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 purchase prices
of $.00028 and $.00025 per share, respectively.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
On November 12, 2004, the Company issued 4,687,500,000 warrants to holders
of the Original Discount 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 $.0002 per share.
d) Stock Options
The Company's Board of Directors and shareholders have approved the
adoption of the 1998 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock
Option Plan, and 2002 Stock Option Plan, pursuant to which 8,370,000
options may be granted to officers, directors, consultants, key employees,
advisors and similar parties who provide their skills and expertise to the
Company
The plans are administrated by the Compensation Committee of 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.
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 benefit are as follows:
March 31, 2005 December 31, 2004
$ $
Losses available to offset future income taxes 4,628,000 4,678,000
Share issue costs 357,000 357,000
Property and equipment 872,000 877,000
5,857,000 5,912,000
Less: valuation allowance 5,857,000 5,912,000
-- --
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:
March 31, 2005 December 31, 2004
$ $
Amounts calculated at Federal and Provincial (51,406) (1,503,170)
statutory rates
Permanent differences 113,846 763,040
Valuation allowance (55,000) 758,000
58,846 1,521,040
Current income taxes 7,440 17,870
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
Issue expenses totaling approximately $900,000 may be claimed at the rate
of 20% per year until 2005. To the extent that these expenses create a
loss, which are available to be carried forward for seven years for losses
up to and including 2003 and for ten years commencing in 2004 from the year
the loss is incurred. The Company has not reflected the benefit of
utilizing non-capital losses totaling approximately $11,700,000 nor a
capital loss totaling $750,000 in the future as a deferred tax asset as at
March 31, 2005. As at the completion of the March 31, 2005 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 INCOME (LOSS)
Three Months Ended Year Ended
March 31, 2005 December 31, 2004
-------------- -----------------
$ $
Net loss (145,088) (4,205,224)
Other comprehensive loss
Foreign currency translation adjustments (5,601) (10,724)
Comprehensive income (loss) (150,689) (4,215,948)
The foreign currency translation adjustments are not currently adjusted for
income taxes since the Company is located 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 years ended December 31, 2004 and
2003. The net loss for the year ended December 31, 2004 was $17,000
compared to net income of $13,000 in 2003. Included in the loss for 2004 is
a write down of property and equipment in the amount of $14,000.
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.
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 year ended December 31, 2004 and
$160,000 in 2003. The net loss from the training division for the year
ended December 31, 2004 was $180,000 and $20,000 in 2003. Included in the
loss for 2004 is a write down of property and equipment in the amount of
$130,000.
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. The gain on disposal of
$190,627 has been reflected in the Income (loss) from discontinued
operations in 2003. Of the $190,627, $146,627 was received in cash on
closing with the balance of $44,000 due in a promissory note payable by
June 27, 2004. As of April 12, 2005, the note remains outstanding, however,
the Company believes that it is collectable. 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 year ended December 31, 2004
and $1,460,000 in 2003. Net income from the IT recruitment division for the
year ended December 31, 2004 was nil and $75,000 in 2003.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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:
Three Months Ended Three Months
Ended
March 31, 2005 March 31, 2004
-------------- --------------
$ $
Revenues -- --
Loss from operations before income taxes (4,536) (12,404)
Provision for Income Taxes 4,597 300
Loss from discontinued operations (9,133) (12,704)
17. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company issued common shares and warrants for the following:
Three Months Ended Year Ended
March 31, 2005 December 31, 2004
-------------- -----------------
$ $
Services rendered -- 175,336
Accounts payable -- --
-- 175,336
18. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Ended Three Months
Ended
March 31, 2005 March 31, 2004
-------------- --------------
$ $
Canada 296,644 222,837
United States of America 3,306,295 2,833,863
3,602,939 3,056,700
b) Net Income (Loss) by Geographic Area
Three Months Ended Three Months
Ended
March 31, 2005 March 31, 2004
-------------- --------------
$ $
Canada (678,096) (988,208)
United States of America 533,008 195,978
(145,088) (792,230)
c) Identifiable Assets by Geographic Area
March 31, 2005 December 31, 2004
-------------- -----------------
$ $
Canada 925,437 499,483
United States of America 6,879,590 6,316,851
7,805,027 6,816,334
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
d) Revenue and Gross Profit by Operating Segment
Three Months Ended Three Months
Ended
March 31, 2005 March 31, 2004
-------------- --------------
$ $
Revenue
Tech Pubs and Engineering 3,574,559 2,972,921
Gross Profit
Tech Pubs and Engineering 1,265,715 985,327
No other segment represents 10% of the Company's revenues, operating losses
or total assets.
e) Revenues from Major Customers and Concentration of Credit Risk
The consolidated entity had the following revenues from major customers:
For the three months ended March 31, 2005, one customer had sales of
$1,385,218 representing approximately 38% of total revenue.
For the three months ended March 31, 2004, one customer had sales of
$710,109, representing approximately 23% 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 operations, of both
basic and diluted earnings per share.
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
$ $
Numerator
Loss from continuing operations (135,955) (779,526)
Loss from discontinued operations (9,133) (12,704)
------------- ------------
Net income (loss) (145,088) (792,230)
============= ============
Denominator
Weighted Average common stock outstanding 18,428,447,908 3,261,427,500
============= ============
Basic and diluted loss per common share from continuing (0.00) (0.00)
operations
============= ============
Basic and diluted loss per common share after discontinued (0.00) (0.00)
operations
============= ============
Average common stock outstanding 18,428,447,908 3,261,427,500
Average common stock issuable -- --
-------------- -------------
Average common stock outstanding assuming dilution 18,428,447,908 3,261,427,500
============= ============
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 May 20, 2005, the Company has issued a total of 15,327,100,555 shares
of its common stock to the convertible debenture holders upon the
conversion of $3,862,300 of debentures and accrued interest.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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 March 31, 2005, for the next five years are as follows:
2005 $273,970
2006 171,326
2007 171,326
2008 87,189
2009 45,120
Thereafter 3,760
--------
$752,691
========
The lease commitments do not include an operating lease for premises that
the Company is currently sub leasing to the purchaser of the United States
training division. If the purchaser was to default on payment or abandon
the premises, the Company would be liable for annual payments of $282,096
expiring August 31, 2006.
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 $44,597 which expired November 30, 2004.
b) 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
At the Annual General Meeting of Shareholders held on April 22, 2005, the
Company's shareholders elected the Board of Directors for the ensuing year,
ratified the appointment of the Company's independent auditors, approved
certain executive compensation, approved a reverse stock split of 5,000 to
1 of the Company's outstanding common shares and ratified the adoption of
the Company's 2005 Stock Option Plan.
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
Although the Company had one significant customer representing 38% of total
revenue, the Company continues to actively expand its customer base. The
Company's revenue is derived from customers of various industries and
geographic locations reducing its credit risk. Where exposed to credit
risk, the Company mitigates this risk by routinely assessing the financial
strength of its customers, establishing billing arrangements and monitoring
the collectibility of the account on an ongoing basis.
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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
d) Fair Value of Financial Instruments
The carrying values of the accounts receivable and of the accounts payable
on acquisition of subsidiary company approximates their fair values because
of the short-term maturities of 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 based on the estimated
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 March 31, 2004 financial statements have been
reclassified to conform with the basis of presentation used at March 31,
2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto and the other historical
financial information of Thinkpath Inc. contained elsewhere in this Form 10-QSB.
The statements contained in this Form 10-QSB that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, 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-QSB are based on information available to Thinkpath
Inc. on the date hereof, and Thinkpath Inc. assumes no obligation to update any
such forward-looking statement. It is important to note that Thinkpath Inc.'s
actual results could differ materially from those in such forward-looking
statements. All dollar amounts stated throughout this Form 10-QSB 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
Thinkpath provides engineering services including design, build,
drafting, technical publishing and documentation, and on-site engineering
support to customers in the defense, aerospace, automotive, health care and
manufacturing industries.
We were incorporated under the laws of the Province of Ontario, Canada
in 1994. In September 1999, we acquired an engineering services company CadCam
Inc. and its two subsidiaries, CadCam Michigan Inc. and CadCam Technical
Services Inc. CadCam Inc. was founded in 1977.
Our principal executive offices are located at 201 Westcreek Boulevard,
Brampton, Ontario, Canada and our website is www.thinkpath.com.
PLAN OF OPERATION
In 2002 we began to focus our efforts on building relationships with
customers in high growth industries such as defense and aerospace. We have since
been repositioning in growth industries and targeting customers with high growth
potential, such as those in defense. We are poised to benefit from the increased
demand generated by aerospace and defense-related customers who will
increasingly rely on our project engineering design expertise and technical
staffing services. This year we will continue to solidify our relationships to
actively increase new business opportunities with existing customers including
General Dynamics, Lockheed Martin, Boeing, General Electric, United Defense and
TACOM. We will continue to grow organically as well as through acquisitions over
the next year. Acquisitions will be limited to profitable engineering companies,
which must have an immediate accretive impact.
STATEMENTS OF OPERATIONS--PERCENTAGES
FOR THE THREE MONTHS ENDED MARCH 31,
2005 2004
---- ----
REVENUE 100 % 100 %
---- ----
COST OF SERVICES 65 % 67 %
---- ----
GROSS PROFIT 35 % 33 %
---- ----
EXPENSES
Administrative 16 % 19 %
Selling 10 % 10 %
Depreciation and amortization 2 % 5 %
Write down of property and equipment -- % -- %
---- ----
Operating income (loss) from continuing operations 7 % (1)%
before interest charges
Interest charges 10 % 25 %
---- ----
Loss from continuing operations before income taxes (3)% (26)%
Income taxes -- % -- %
---- ----
Loss from continuing operations (3)% (26)%
Loss from discontinued operations -- % -- %
Net Loss (3)% (26)%
---- ----
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2004
REVENUE
For the three months ended March 31, 2005, we derived 93% of our
revenue in the United States which is consistent with the same period in 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 99% of total revenue for
the three months ended March 31, 2005 compared to 97% for the same period last
year. No other operating segment represented more than 10% of our consolidated
revenues.
Consolidated revenues for the three months ended March 31, 2005 increased
by $540,000 or 18%, to $3,600,000 as compared to $3,060,000 for the three months
ended March 31, 2004. The increase is primarily attributable to the award of
several contracts in 2004 with existing customers in the defense industry, our
fastest growing market segment. As a result of these contracts, one customer had
sales of approximately 38% of our consolidated revenues for the three months
ended March 31, 2005. The same customer had sales of approximately 23% of our
consolidated revenues for the same period last year.
COST OF SERVICES
The cost of services for the three months ended March 31, 2005
increased by $270,000, or 13%, to $2,330,000, as compared to $2,060,000 for the
same period in 2004. This increase is consistent with the increase in revenue.
However, as a percentage of revenue, the cost of services for the three months
ended March 31, decreased from 67% in 2004 to 65% in 2005.
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 35% for the three months ended March 31, 2005 compared
to 33% for the same period in 2004. This increase is attributable to the focus
on higher margin time and material projects versus fixed cost projects which
often result in unforeseen costs. No other operating segment represented more
than 10% of our consolidated gross profit.
Consolidated gross profit for the three months ended March 31, 2005
increased by $270,000, or 27%, to $1,270,000 compared to $1,000,000 for the same
period in 2004. As a percentage of revenue, gross profit for the three months
ended March 31, 2005 was 35% compared to 33% in 2004. The increase in gross
profit is a result of the focus on higher margin time and materials projects
versus fixed price projects which often result in unforeseen costs.
EXPENSES
Total expenses for the three months ended March 31, 2005 increased by
$10,000, or 1%, to $1,040,000 compared to $1,030,000 for the three months ended
March 31, 2004.
ADMINISTRATIVE EXPENSES
Administrative expenses increased by $10,000 or 2% to $580,000 for the
three months ended March 31, 2005 compared to $570,000 for the three months
ended March 31, 2004. As a percentage of revenue, administrative expenses have
decreased from 19% for the three months ended March 31, 2004 to 16% for the same
period in 2005.
SELLING EXPENSES
Selling expenses increased by $60,000, or 19%, to $370,000 for the
three months ended March 31, 2005 compared to $310,000 for the same period in
2004. This increase is attributable to the addition of sales staff as well as
the increase in commissions which is consistent with the increase in revenue. As
a percentage of revenue, selling expenses for the three months ended March 31,
2005 are 10% which is consistent with the same period last year.
DEPRECIATION AND AMORTIZATION
For the three months ended March 31, 2005, depreciation and
amortization expenses decreased by $60,000, or 42%, to $80,000 from $140,000 for
the three months ended March 31, 2004. As a percentage of revenue, depreciation
and amortization expenses have decreased from 5% for the three months ended
March 31, 2004 to 2% for the same period in 2005.
WRITE DOWN OF PROPERTY AND EQUIPMENT
At March 31, 2005, we wrote down property and equipment in the amount
of $4,000. The fair value of the impaired asset was generally estimated by
discounting the expected future cash flows of the individual assets. Impairment
was indicated by adverse change in market prices, current period cash flow
losses combined with a history of losses, or a significant change in the manner
in which the asset is to be used.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES
For the three months ended March 31, 2005, we had income of $230,000
from continuing operations before interest charges compared to a loss of $30,000
for the three months ended March 31, 2004.
INTEREST CHARGES
For the three months ended March 31, 2005, interest charges decreased
by $390,000, or 52%, to $360,000 from $750,000 for the three months ended March
31, 2004. This decrease is largely attributable to the reduced interest expense
of $271,951 on the beneficial feature recognized on the convertible debentures
compared to an expense of $624,211 in 2004.
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
For the three months ended March 31, 2005 we had a loss from continuing
operations before income taxes of $130,000 compared to $780,000 for the same
period in 2004.
INCOME TAXES
Income tax expense for the three months ended March 31, 2005 increased
by $6,000 or 600% to $7,000 compared to $1,000 for the three months ended March
31, 2004.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the three months ended March 31,
2005 decreased by $640,000 or 82% to a loss of $140,000 compared to a loss of
$780,000 for the three months ended March 31, 2004.
INCOME (LOSS)FROM DISCONTINUED OPERATIONS
Operations of the technology, training and IT recruitment divisions
have been reported as discontinued for the three months ended March 31, 2005 and
2004.
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 our
Njoyn or Secondwave products and therefore the technology operations have been
reported as discontinued. There was no technology revenue for the three months
ended March 31, 2005 and 2004. The net loss for the three months ended March 31,
2005 was $4,500 compared to $1,000 for the three months ended March 31, 2004.
Effective May 1, 2002, we signed an agreement with triOS Training
Centres Limited, an Ontario company, for the purchase of certain assets of our
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.
On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the purchase of certain assets
of our 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 our training division and therefore the operations have been
reported as discontinued.
There was no training revenue for the three months ended March 31,
2005 and 2004. The net loss from the training division for the three months
ended March 31, 2005 was $4,500 and $11,000 for the three months ended March 31,
2004.
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. As of May 20, 2005, a promissory note which was payable by
June 27, 2004 remains outstanding, however, we believe that it is collectable.
As a result of this transaction, we will not have future revenues from our IT
recruitment division and therefore the operations have been reported as
discontinued.
There was no IT recruitment revenue or income for the three months
ended March 31, 2005 and 2004.
NET LOSS
For the three months ended March 31, 2005 we had a net loss of $150,000
compared to a net loss of $790,000 for the same period in 2004.
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 March 31, 2005, the balance on the
receivable discount facility was $1,025,000 based on 75% of qualifying accounts
receivable.
At March 31, 2005, we had cash of $220,000 and a working capital
deficiency of $6,000. At March 31, 2005, we had a cash flow deficiency from
operations of $80,000. At March 31, 2004, we had cash of $230,000 and a working
capital deficiency of $1,970,000. At March 31, 2004, we had a cash flow
deficiency from operations of $760,000, largely attributable to the increase in
accounts receivable of $320,000 and the decrease in accounts payable of
$500,000.
At March 31, 2005, we had a cash flow deficiency from investing
activities of $130,000 related to the purchase of property and equipment. At
March 31, 2004, we had a cash flow deficiency from investing activities of
$40,000 also related to the purchase of property and equipment.
At March 31, 2005 we had cash flow from financing activities of
$260,000 largely attributable to an increase in our receivable discount facility
of $300,000 which was partially offset by the repayment of long term debt in the
amount of $40,000. At March 31, 2004, we had cash flow from financing activities
of $580,000 attributable primarily to proceeds of $475,000 from the sale of
convertible debentures and $193,500 from the exercise of common stock purchase
warrants.
At March 31, 2005 we had a loan balance of $218,968 with an individual,
Terry Lyons. We are required to make monthly payments of $10,000 until the full
amount of the note, including interest is paid in full. The loan bears interest
at US prime plus 14% per annum and is subordinated to Morrison Financial
Services Limited.
At March 31, 2005, we had approximately $50,000 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.
On January 17, 2005, we acquired TBM Technologies Inc., an Ontario
Corporation which provides design engineering services. Pursuant to the Share
Purchase Agreement, we purchased TBM for approximately $246,600 payable in
shares of our common stock, no par value. The Share Purchase Agreement also
provided for price protection for the vendors for a period of two years from
closing. In the event that the vendors seek to sell their shares in an open
market transaction within the two years following closing and the bid price is
less than the price of the shares on issuance, we will be obligated to issue
additional shares of unregistered common stock with a value equal to the
difference up to a maximum of $246,600. The acquisition was accounted for by the
purchase method and the operations have been included in the consolidated
operations from January 17, 2005.
As a result of the acquisition of TBM Technologies Inc., we acquired
a revolving line of credit with the Royal Bank of Canada. At March 31, 2005 the
balance on the line of credit was $60,000, and the interest rate was 7% per
annum. Subsequent to March 31, 2005, the line of credit was paid in full.
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 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 with certain exceptions. We do not believe that the adoption
of SFAS No. 149 will have a material impact, if any, on our results of
operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". This
statement specifies that certain instruments within its scope embody obligations
of the issuer and that, therefore, the issuer must classify them as liabilities.
SFAS No. 150 is effective immediately for all financial instruments entered into
or modified after May 31, 2003. For all other instruments, SFAS No. 150 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 SFAS No. 150 by reporting the
cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits
entities from restating financial statements for earlier years presented. We do
not believe that the adoption of SFAS No. 150 will have a material impact, if
any, on our results of operations or financial position.
In December 2003, the FASB issued SFAS No. 132 (Revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
FASB Statements No. 87, 88 and 106. This statement revises employers'
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans. SFAS No. 132 (Revised)
will retain and revise the disclosure requirements contained in the original
SFAS No. 132. It also requires additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other postretirement benefit plans. SFAS No. 132 (Revised)
generally is effective for fiscal years ending after December 15, 2003. We do
not believe that the adoption of SFAS No. 132 (Revised) will have a material
impact, if any, on our results of operations or financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43". This statement clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not believe that the adoption
of SFAS No. 151 will have a material impact, if any, on our results of
operations or financial position as it does not have inventory.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and
67, which references the financial accounting and reporting guidance for real
estate time-sharing transactions in AICPA Statement of Position (SOP) 04-2,
"Accounting for Real Estate Time-Sharing Transactions. SFAS No. 152 is effective
for years beginning after June 15, 2005, with restatements of previously issued
financial statements prohibited. We do not believe that the adoption of SFAS No.
152 will have a material impact, if any, on our results of operations or
financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29", effective for
nonmonetary asset exchanges occurring in the fiscal year beginning January 1,
2006. This statement requires that exchanges of productive assets be accounted
for at fair value unless fair value cannot be reasonably determined or the
transaction lacks commercial substance. We do not believe that the adoption of
SFAS No. 153 will have an impact, if any, on our results of operations or
financial position.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-based
Payment". This statement requires employers to expense costs related to
share-based payment transactions with employees. With limited exceptions, SFAS
No. 123 (Revised) requires that the fair value of share-based payments to
employees be expensed over the period service is received. SFAS No. 123
(Revised) becomes effective for annual reporting periods that begin after
December 15, 2005. We intend to adopt this standard using the modified
retrospective method of transition. This method requires that issued financial
statements be restated based on the amounts previously calculated and reported
in the pro forma footnote disclosures required by SFAS No. 123. SFAS No. 123
(Revised) allows the use of both closed form models (e.g., Black-Scholes Model)
and open form models (e.g., lattice models) to measure the fair value of the
share-based payment as long as that model is capable of incorporating all of the
substantive characteristics unique to share-based awards. In accordance with the
transition provisions of SFAS No. 123 (Revised), the expense attributable to an
award will be measured in accordance with the company's measurement model at
that award's date of grant. We believe the pro forma disclosures in Note 3 (c)
provide an appropriate short-term indicator of the level of expense that will be
recognized in accordance with SFAS No. 123 (Revised). However, the total expense
recorded in future periods will depend on several variables, including the
number of shared-based awards that vest and the fair value of those vested
awards.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations". FIN 47 clarifies that the term
conditional asset retirement obligation as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations", refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. Retrospective application of interim financial
information is permitted but is not required. We do not believe that the
adoption of FIN 47 will have an impact, if any, on its results of operations or
financial position.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
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 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 December 31, 2004, we wrote down our investments in non-related
companies to nil.
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, 2004, we performed our 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, 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 SFAS No. 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.
ITEM 3. 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-QSB filed for the three months ended March 31, 2005 (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 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 three months ended March 31, 2005, we sold unregistered
securities as described below. There were no underwriters involved in the
transactions and there were no underwriting discounts or commissions paid in
connection therewith, except as disclosed below. The purchasers of the
securities in such transactions represented their intention to acquire the
securities for investment purposes only and not with a view to or for sales in
connection with any distribution thereof and appropriate legends were affixed to
the certificates for the securities issued in such transactions. The purchasers
of the securities in the transactions below were each sophisticated investors
who were provided information about us and were able to bear the risk of loss of
their entire investment.
On January 17, 2005, we issued 1,232,250,000 shares of our common
stock, no par value per share, to the vendors of TBM Technologies Inc., in
consideration of the purchase price of this acquisition of $246,600.
We believe all of the above issuances were exempt from registration
pursuant to the exemption provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 22, 2005, we held an Annual Meeting of Shareholders at which
the shareholders: (i) elected the Board of Directors for the ensuing year; (ii)
ratified the appointment of Schwartz, Levitsky, Feldman, LLP, as our Independent
Certified Public Accountants for the ensuing year; (iii) approved certain
executive compensation; (iv) approved a reverse stock split of 5,000 to 1 of our
outstanding common shares; and, (v) ratified the adoption of our 2005 Stock
Option Plan.
(i) The following directors were elected to the Board of Directors and
received the votes indicated:
Shares In Favor Shares Withheld
--------------- ---------------
Declan A. French 5,122,912,462 253,326,046
Lloyd MacLean 5,152,304,842 223,933,666
Patrick Power 5,152,304,842 223,933,666
Set forth below is a biographical description of each of our directors
elected at our Annual General Meeting and Special Meeting of Shareholders held
on April 22, 2005:
Declan A. French has served as our Chairman of the Board of Directors,
Chief Executive Officer and President since our inception in February 1994.
Prior to founding Thinkpath, Mr. French was President and Chief Executive
Officer of TEC Partners Ltd., an information technology recruiting firm in
Toronto, Canada. Mr. French has a diploma in Psychology and Philosophy from the
University of St. Thomas in Rome, Italy.
Lloyd MacLean has served on our Board of Directors since February 14,
2003. Mr. MacLean served as our Chief Financial Officer and a Director from
September 1997 until May 2000, at which time he departed to pursue other
business opportunities. Mr. MacLean is the sole officer and director of Globe
Capital Corporation. From 1996 to 1997, Mr. MacLean was Vice-President and Chief
Financial Officer of ING Direct Bank of Canada. From 1994 until 1996, he was
Vice-President and Chief Financial Officer of North American Trust, Inc., where
he also served as a Vice President from 1990 until 1994. Mr. MacLean has an MBA
from Harvard University and is a member of the Canadian Institute of Chartered
Accountants.
Patrick Power, is a General Manager at Netlan Technology Center. In
1997, Mr. Power opened our New York IT recruitment office where he served as
Business Development Manager from 1997 until 2001. In 2001, Mr. Power was
transferred to our New York training division. In 2002 we sold this division, to
Thinkpath Training, LLC, a privately held independent company where he was
employed as Director of Business Development 2001 until 2004. Mr. Power has a
National Diploma in Civil Engineering (NDEA) from The Waterford Institute of
Technology in Ireland. Mr. Power is the nephew of Mr. French, our Chief
Executive Officer.
(ii) The appointment of Schwartz, Levitsky Feldman, LLP, to serve as our
independent chartered accountants for the ensuing year was approved by the votes
indicated:
For Against Withheld
5,151,233,747 224,904,761 100,000
(iii) The resolution to issue certain executive compensation was approved
by the votes indicated:
For Against Withheld
2,749,337,995 416,805,346 2,210,095,167
(iv) The resolution of a reverse stock split of 5,000 to 1 of our
outstanding common shares was approved by the votes indicated:
For Against Withheld
5,052,525.907 323,712,601 0
(v) The resolution to adopt the 2005 Stock Option Plan was approved by
the votes indicated:
For Against Withheld
3,658,517,162 1,797,916,751 9,804,595
No other matters were voted upon.
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-QSB 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: May 20, 2005 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer