[THINKPATH INC. LOGO OMITTED] THINKPATH INC.
201 Westcreek Blvd.
Brampton, Ontario
L6T 5S6 Canada
TEL: 905-460-3040
FAX: 905-460-3050
July 11, 2005
Craig Wilson
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
Division of Corporate Finance
Washington, D.C. 20549
Fax (202) 772-9210
Re: Thinkpath Inc.
Form 10-KSB: For the fiscal Year Ended December 31, 2004
Filed April 15, 2005-06-14
Form 10-QSB: For the Quarterly Period Ended March 31, 2005
Filed May 23, 2005
Your File No. 0011-14813
Dear Sirs:
We are in receipt of your comment letter dated June 1, 2005 concerning Thinkpath
Inc. ("the Company"), and hereby respond as follows (we have numbered our
responses to coincide with your comments):
1. The Company believes that contract milestones are an appropriate
measure of progress on its fixed price contracts as the milestones are
clearly defined as specific tasks or deliverables within the project
scope as presented to and accepted by the client at the beginning of
the project.
Once the deliverable or milestone is completed, a progress report is
given to the client which details the work performed to date and the
compensation for those services. The client acknowledges their
acceptance of this deliverable and authorizes the Company to remit its
milestone billing.
The Company utilizes a job cost system which contains a budgetary
module to set out the full scope of the project, the specific
individual tasks involved and estimates the total number of fully
burdened labour hours required to complete these tasks as well as any
supplies, materials or subcontractor fees.
Based on this estimate, the Company determines the costs to be incurred
and efforts to be expended at the completion of each deliverable and
establishes a corresponding contractual billing cycle. Actual costs are
tracked daily in the job cost system by both project and individual
task so that the Company can determine at each milestone the percentage
of completion. This percentage of completion co-relates to the
contractual billings as the actual costs incurred at each milestone do
not differ materially from the estimated costs used in the budgetary
process which determined the revenue to be recognized at each
milestone.
[THINKPATH INC. LOGO OMITTED] THINKPATH INC.
201 Westcreek Blvd.
Brampton, Ontario
L6T 5S6 Canada
TEL: 905-460-3040
FAX: 905-460-3050
The portion of total revenue earned is determined by the application of
Alternative B, paragraph 81 of SOP 81-1.
2. The Company has not had to apply paragraph 85 of SOP 81-1 that requires
a provision for anticipated losses on contracts to be recorded in the
period in which the loss becomes evident, as the Company has not
entered into any contracts in which losses have occurred.
The Company recognizes that its disclosure of its revenue recognition policy
should be enhanced and proposes to revise its disclosure in future filings as
follows:
The Company recognizes revenue under engineering service
contracts when a contract has been executed, the contract
price is fixed and determinable, delivery of services or
products has occurred, and collection of the contract price is
considered probable and can be reasonably estimated. Revenue
is earned under time-and-materials or fixed-price contracts.
The Company recognizes revenue on time-and-materials contracts
to the extent of billable rates times hours delivered, plus
expenses incurred. For fixed price contracts within the scope
of Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (SOP
81-1), revenue is recognized on the percentage of completion
method using costs incurred in relation to total estimated
costs or upon delivery of specific products or services, as
appropriate. The Company records provisions for estimated
losses on uncompleted contracts in the period in which those
losses are identified. The Company considers performance-based
fees under any contract type to be earned only when it can
demonstrate acceptance of a specific performance goal or it
receives contractual notification from a customer that the
services were satisfactorily performed . In all cases, the
Company recognizes revenue only when pervasive evidence of an
arrangement exists, services have been rendered, the contract
price is fixed or determinable, and collection is reasonably
assured.
Contract revenue recognition inherently involves estimation.
From time to time, facts develop that requires the Company to
revise the total estimated costs or revenues expected. In most
cases, these changes relate to changes in the contractual
scope of the work, and do not significantly impact the
expected profit rate on a contract. The Company records the
cumulative effects of any revisions to the estimated total
costs and revenues in the period in which the facts become
known.
[THINKPATH INC. LOGO OMITTED] THINKPATH INC.
201 Westcreek Blvd.
Brampton, Ontario
L6T 5S6 Canada
TEL: 905-460-3040
FAX: 905-460-3050
3. When the Company wrote off its remaining investment of $45,668 in
Digital Cement at December 31, 2004, it left the previous adjustments
to fair value of $161,450 and $300,747 in other comprehensive income.
These prior adjustments should have also been recorded as losses at the
date of transfer and reflected in the statement of operations at
December 31, 2004. The details of the accumulated other comprehensive
income account at December 31, 2004 were as follows:
Foreign currency translation $ (940,764)
Adjustment to market value - Digital Cement (462,197)
Adjustment to market value - Conexys 76,548
------------
$(1,326,413)
===========
4. At December 31, 2004, the Company completed the SFAS No. 142 impairment
test (attached hereto as Schedule A) and concluded that there was no
impairment of recorded goodwill because the fair value of its reporting
unit exceeded the carrying amount of goodwill. In accordance with
paragraphs 19 and 20 of SFAS No. 142, the Company compared the fair
value of the engineering reporting unit with its carrying amount,
including goodwill. The fair value was determined using the present
value technique based on certain key assumptions. As the fair value of
the engineering unit exceeded its carrying amount, the goodwill was
considered not to be impaired and the second step of the impairment
test was unnecessary. However, the Company proceeded with the second
step of the goodwill impairment test and compared the implied fair
value of the engineering unit's goodwill with the carrying value of
that goodwill. The implied fair value of the engineering unit's
goodwill was estimated by allocating the fair value of the unit to all
of the assets and liabilities of that unit. The excess of the fair
value of the reporting unit over the amounts assigned to its assets and
liabilities was the implied fair value of goodwill. As the carrying
amount of the engineering unit's goodwill did not exceed the implied
fair value of that goodwill, no impairment loss was recognized.
The fair value of the engineering unit at December 31, 2004 was
$8,966,470 which exceeded the Company's market capitalization of
$1,360,246. The Company believes that the significant difference
between its market capitalization and the fair value of the engineering
unit is related to the Company's "corporate" or parent company's
operations and the many liabilities it has assumed from discontinued
reporting units (Information Technology, Technology, Training) of which
the related goodwill has been written off. Further, the Company
believes that its market capitalization has been negatively impacted by
the issuance of convertible debentures and the related dilution of its
common stock. The convertible debentures were sold by the Company
primarily to raise capital to settle the various debt obligations and
legal claims related to its discontinued operations and not the
engineering reporting unit.
As per paragraph 23 of SFAS No. 142, the Company does not feel that the
market capitalization of the Company as a whole is representative of
the fair value of the engineering reporting unit in light of the parent
company's debt obligations related to its discontinued operations.
5. In accordance with SFAS 121, the impairment of the IT Documentation
unit's goodwill resulted in the write down of all of its goodwill in
the amount of $2,762,718 in 2001.
[THINKPATH INC. LOGO OMITTED] THINKPATH INC.
201 Westcreek Blvd.
Brampton, Ontario
L6T 5S6 Canada
TEL: 905-460-3040
FAX: 905-460-3050
6. The convertible debenture documents issued by the Company do not
specify a stated redemption date. In the absence of a stated redemption
date, the Company believed that it was prudent to record a beneficial
conversion feature as an expense immediately, consistent with EITF
98-5.
7. The calculated beneficial conversion feature was recorded without
reference to paragraph 6 of EITF 98-5. That is, the Company did not
limit the value of this feature to the amount of proceeds allocated to
the convertible instrument. The reference material used to assist the
Company in determining the proper accounting treatment for the
convertible debentures did not indicate that the value of the
calculated beneficial conversion feature should be limited. In both
2003 and 2004, the beneficial conversion feature recorded as interest
expense exceeded the amount of the proceeds allocated to the
convertible instrument (Attached hereto as Schedule B).
The Company valued the warrants and prorated the amount to the warrants
based on the proportion of the warrant fair market value over the total
of the warrants and the debt principal amount (Attached hereto as
Schedule C). The amount allocated to the debt then became the basis for
evaluating the embedded beneficial conversion feature as required by
EITF 00-27 paragraph 5. As per paragraph 5 of EITF 00-27, the Company
used the effective conversion price based on the proceeds received for
or allocated to the convertible instrument to compute the intrinsic
value of the embedded conversion option. The proceeds received were
first allocated to the convertible instrument and the detachable
warrants on a relative fair value basis. Then, the Issue 98-5 model was
applied to the amount allocated to the convertible instrument, and an
effective conversion price was calculated and used to measure the
intrinsic value of the embedded conversion option.
In accordance with paragraph 8 of EITF 98-5, the discount resulting
from allocation of proceeds to the beneficial conversion feature was
recognized as interest expense over the minimum period from the date of
issuance to the date at which the debt holder can realize that return.
In the Company's circumstances as the debt could be immediately
converted to shares, the full amount of the beneficial conversion
feature was expensed.
8. Neither Roger Walters nor Denise Dunne-Fushi are related parties as
defined in SFAS. No. 57. The Company had loans outstanding to Roger
Walters to Denise Dunne-Fushi since September 1999 and April 2000
respectively. These loans were subordinated to the Company's senior
lenders and as a result of the Company's negative working capital and
defaults on it senior loans, payments had not been made to either party
on a regular basis for a couple of years. Although the loan agreements
with each party allowed for them to enforce their security interests in
the event of default, it was understood by all parties that no proceeds
would be realized in the event of a bankruptcy or liquidation. As part
of the Company's debt restructuring that occurred in November 2004,
both parties were unwilling to agree to revised long-term payment
schedules and opted instead, to receive one time discounted cash
payments.
9. As disclosed in Note 19. Earnings Per Share and Note 2(i). Summary of
Significant Accounting Policies, the Company does not include the
outstanding warrants in its basic earnings per share.
[THINKPATH INC. LOGO OMITTED] THINKPATH INC.
201 Westcreek Blvd.
Brampton, Ontario
L6T 5S6 Canada
TEL: 905-460-3040
FAX: 905-460-3050
We trust these responses and the attached materials address the comments raised
in your review of our filings. Please do not hesitate to contact the undersigned
if you require clarification or additional materials.
In submitting this response, we acknowledge the following:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under federal
securities laws of the United States.
Yours truly,
Kelly L. Hankinson
Chief Financial Officer
Thinkpath Inc.
Tel (905) 460-3042
Fax (905) 460-3050
Schedule "A"
ENGINEERING UNIT GOODWILL IMPAIRMENT ANALYSIS* F G
D = (A x 7%) E = (B-C-D)
A B C D E 40% 20%
Remaining Gross Remaining Branch Costs to Base Upper Lower
Active Contract Profit Gross Overhead Maintain Corporate Estimated Range Range
Contracts Value 2004 Profit 2004 Contracts Overhead Cashflow Cashflow Cashflow
- --------- ----- ---- ------ ---- --------- -------- -------- -------- --------
DETROIT $ 7,895,305 39% $ 3,079,169 35% $ 1,077,709 $ 552,671 $ 1,448,788 $ 2,028,304 $ 1,159,031
COLUMBUS $ 2,425,159 37% $ 897,309 26% $ 233,300 $ 169,761 $ 494,247 $ 691,946 $ 395,398
CINCINNATI $ 907,520 23% $ 208,729 78% $ 162,809 $ 63,526 $ (17,606) $ (24,648) $ (14,085)
DAYTON $ 5,267,117 31% $ 1,632,806 54% $ 881,715 $ 368,698 $ 382,393 $ 535,350 $ 305,914
SOUTHEAST REGION $ 452,072 27% $ 122,059 55% $ 67,133 $ 31,645 $ 23,282 $ 32,594 $ 18,625
$16,947,172 31% $ 5,940,073 50% $ 2,422,666 $ 1,186,302 $ 2,331,104 $ 3,263,546 $ 1,864,883
Probability of occurrence 60% 20% 20%
$ 1,398,663 $ 652,709 $ 372,977
----------- ----------- -----------
Assumed Cashflow (E+F+G) $ 2,424,348
Riskless Interest Rate 3.21%
Present Value $ 8,966,470
H
===========
Carrying Value of Engineering Unit $ 4,989,937
Impairment (if negative) $ 3,976,534
FMV Carrying Value
KEY ASSUMPTIONS
* Based on expected cashflow approach.
A - Remaining Contract Value Based on current order book including contracts
and purchase orders
B - Remaining Gross Profit Based on 12 month actual GP for each branch
office
C - Costs to Maintain Contracts Based on 12 month actual branch overheads
for each individual office
D - Corporate Overhead Based on actual allocation of 7% of revenue per
branch which covers accounting and IT support
for US operations.
E - Base Estimated Cashflow Annual Contract Value less GP less Costs and
Overheads; assumes 60% probability of base
cashflow based on current market conditions and
strong economic outlook for the industries that
Thinkpath US (CadCam) services including
medical, defense and aerospace. It is also
highly probable that these contracts will be
renewed past their current end dates based on
historic contract renewals (range betweem 12 to
60 months)
F - Upper Range Cashflow Assumes a 40% improvement over base cashflow.
This would require that existing contracts be
maintained and new contracts representing
approximately $3.4m be added. Assumes a 20%
probability of occurrence based on historic win
rate of 20% of existing sales pipeline and
outstanding bid opportunities. Assumes a 20%
reduction of base cashflow. This would require
the early cancellation of approximately $3.4m
in contracts.
G - Lower Range Cashflow Assumes only a 20% probability of occurrence as
it is not very likely that contracts would be
terminated early based on current market
conditions. Even if some contracts were
cancelled, it is highly likely that they would
be replaced by new wins and that other
contracts would be extended.
H - NPV Based on 3-yr Riskless Interest Rate of 3.21%
as listed by the Federal Reserve Bank at
12/31/04; Calculated over 4 years, based on
typical valuation of engineering firms at 4-6
times earnings.
I - Carrying Value Loan Payable Thinkpath for MTP $ 4,035,000
Paid in Capital $ 3,500,000
Original Investment $ 5,518,000
Intercompany Loan $ --
-----------
Net Investment $ 13,053,000
Less Deficiency $ (6,735,610)
Less Amortization of GW $ (535,000) Assets 2,569,117
$ 5,782,390 Liabilities (1,327,993)
Less Net Deficiency $ (792,453) Goodwill 3,748,813
-----------
Carrying Value $ 4,989,937 Carrying Value $ 4,989,937
------------ -----------
CONCLUSION:
Step 2
Assets BV FMV Increments
Current $ 2,279,509.53 $ -- $ 2,279,509.53
Fixed $ 228,045.14 $ -- $ 228,045.14
Additional Capital Assets $ -- $ 652,500.00 $ 652,500.00
Contracts $ -- $ 582,776.08 $ 582,776.08
Customer List $ -- $ 500,000.00 $ 500,000.00
-------------- ------------ --------------
$ 4,242,831
Liabilities $(1,327,993.05) $ -- $(1,327,993)
FMV Net Assets $ 2,914,838
FMV Calculation (Purchase Price) $ 8,966,470
Implied Goodwill $ 6,051,633
Carrying Value $ 4,989,937
Writedown required if positive $ (1,061,696) no impairment
============
SCHEDULE "B"
CONVERTIBLE DEBENTURES ISSUED DURING 2004
31-DEC-04
Investor: Tazbaz 5 Bristol 7 Tazbaz 6 Bristol 8 Tazbaz 7
Issue Date: 8-Jan-04 25-Mar-04 29-Mar-04 20-May-04 24-May-05
- ----------- -------- --------- --------- --------- ---------
Principal: $ 25,000 $ 350,000 $ 100,000 $ 150,000 $ 100,000
Allocate to Warrants: $ 2,778 $ 253,001 $ 68,963 $ 113,192 $ 73,871
Allocate to Debenturess: $ 22,222 $ 96,999 $ 31,037 $ 36,808 $ 26,129
Most Beneficial Conversion Price: $ 0.00115 $ 0.00050 $ 0.00045 $ 0.00040 $ 0.00040
Stock Price @ Issue Date $ 0.0023 $ 0.0010 $ 0.0009 $ 0.0008 $ 0.0008
# of Shares on Conversion 21,739,130 700,000,000 222,222,222 375,000,000 250,000,000
Effective Conversion Price $ 0.001022212 $ 0.000138570 $ 0.000139667 $ 0.000098155 $ 0.000104516
----------------------------------------------------------------------------------
Beneficial Conversion on Issue $ 27,778 $ 603,001 $ 168,963 $ 263,192 $ 173,871
==================================================================================
Bristol 8 Tazbaz 8 Bristol 10 Alpha 6 Tazbaz 9
18-Jun-04 18-Jun-04 12-Nov-04 12-Nov-04 12-Nov-04
--------- --------- --------- --------- ---------
Principal: $ 250,000 $ 200,000 $ 312,500 $ 312,500 $ 250,000
Allocate to Warrants: $ 202,231 $ 157,068 $ 169,290 $ 154,781 $ 123,825
Allocate to Debenturess: $ 47,769 $ 42,932 $ 143,210 $ 157,719 $ 126,175
Most Beneficial Conversion Price: $ 0.00050 $ 0.00050 $ 0.00016 $ 0.00016 $ 0.00016
Stock Price @ Issue Date $ 0.0010 $ 0.0010 $ 0.0002 $ 0.0002 $ 0.0002
# of Shares on Conversion 500,000,000 400,000,000 1,953,125,000 1,953,125,000 1,562,500,000
Effective Conversion Price $ 0.000095538 $ 0.000107330 $ 0.000073324 $ 0.000080752 $ 0.000080752
----------------------------------------------------------------------------------
Beneficial Conversion on Issue $ 452,231 $ 357,068 $ 247,414 $ 232,906 $ 186,235
==================================================================================
Schedule "C"
Allocation of Fair Market Value Between Debentures and Warrants
31-Dec-04
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ESTIMATED FAIR MARKET VALUE VALUE ATTRIBUTED VALUE ATTRIBUTED
DATE RECEIVED DEBENTURE WARRANTS* TOTAL TO WARRANTS TO DEBENTURES
- -----------------------------------------------------------------------------------------------------------------------
1/8/2004 $ 25,000 $ 25,000 $ 3,126 $ 28,126 $ 2,778 $ 22,222
- --------------------------------------------------------------------------------------------------------------------
3/25/2004 $ 350,000 $ 350,000 $ 912,894 $ 1,262,894 $ 253,001 $ 96,999
- --------------------------------------------------------------------------------------------------------------------
3/29/2004 $ 100,000 $ 100,000 $ 222,201 $ 322,201 $ 68,963 $ 31,037
- --------------------------------------------------------------------------------------------------------------------
5/20/2004 $ 150,000 $ 150,000 $ 461,282 $ 611,282 $ 113,192 $ 36,808
- --------------------------------------------------------------------------------------------------------------------
5/24/2004 $ 100,000 $ 100,000 $ 282,711 $ 382,711 $ 73,871 $ 26,129
- --------------------------------------------------------------------------------------------------------------------
6/18/2004 $ 250,000 $ 250,000 $ 1,058,372 $ 1,308,372 $ 202,231 $ 47,769
- --------------------------------------------------------------------------------------------------------------------
6/18/2004 $ 200,000 $ 200,000 $ 731,714 $ 931,714 $ 157,068 $ 42,932
- --------------------------------------------------------------------------------------------------------------------
11/12/2004 $ 312,500 $ 312,500 $ 369,408 $ 681,908 $ 169,290 $ 143,210
- --------------------------------------------------------------------------------------------------------------------
11/12/2004 $ 312,500 $ 312,500 $ 306,678 $ 619,178 $ 154,781 $ 157,719
- --------------------------------------------------------------------------------------------------------------------
11/12/2004 $ 250,000 $ 250,000 $ 245,343 $ 495,343 $ 123,825 $ 126,175
- --------------------------------------------------------------------------------------------------------------------
$ 1,319,000 $ 731,000
================================
* Per Black Scholes