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 JUNE 30, 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 AUGUST 22, 2005 THERE WERE 4,737,535 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
THINKPATH INC.
JUNE 30, 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 June 30, 2005 and
December 31, 2004..................................................F-1
Interim Consolidated Statements of Operations for the three and six
months ended June 30, 2005 and 2004................................F-3
Interim Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 2005 and the year ended
December 31, 2004..................................................F-4
Interim Consolidated Statements of Cash Flows for the six months
ended June 30, 2005 and 2004.......................................F-5
Notes to Interim Consolidated Financial Statements.................F-6
Item 2. Management's Discussion and Analysis or Plan of Operation............2
Item 3. Controls and Procedures.............................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ..................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........16
Item 3. Defaults Upon Senior Securities ....................................17
Item 4. Submission of Matters to a Vote of Security Holders ................17
Item 5. Other Information ..................................................18
Item 6. Exhibits and Reports on Form 8-K ...................................18
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2005
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
30-JUN-05 31-DEC-04
--------- ---------
$ $
ASSETS
CURRENT ASSETS
Cash 607,437 180,121
Accounts receivable 2,715,520 2,243,513
Prepaid expenses 180,250 88,403
--------- ----------
3,503,207 2,512,037
PROPERTY AND EQUIPMENT 550,539 494,003
GOODWILL 3,967,243 3,748,732
OTHER ASSETS 370,715 61,562
--------- ----------
8,391,704 6,816,334
========== ==========
The accompanying notes are an integral part of these interim
consolidated financial statements.
F-1
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
30-JUN-05 31-DEC-04
--------- ---------
$ $
LIABILITIES
CURRENT LIABILITIES
Receivable Discount Facility -- 723,995
Laurus Funds 1,214,081 --
Accounts payable 1,627,646 1,257,799
Current portion of long-term debt 116,495 85,099
12% Convertible Debentures -- 566,653
----------- -----------
2,958,222 2,633,546
LONG-TERM DEBT 138,678 182,837
----------- -----------
3,096,900 2,816,383
=========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 21)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 51,801,313 49,531,299
DEFICIT (45,170,552) (44,204,935)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,335,957) (1,326,413)
----------- -----------
5,294,804 3,999,951
----------- -----------
8,391,704 6,816,334
=========== ===========
The accompanying notes are an integral part of these interim
consolidated financial statements.
F-2
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $
REVENUE 3,603,870 3,325,184 7,206,809 6,381,885
COST OF SERVICES 2,535,022 2,050,188 4,865,792 4,107,616
--------- --------- --------- ---------
GROSS PROFIT 1,068,848 1,274,996 2,341,017 2,274,269
--------- --------- --------- ---------
EXPENSES
Administrative 655,119 579,321 1,244,153 1,152,726
Selling 325,085 346,235 693,119 659,151
Depreciation and amortization 85,731 138,750 167,269 281,016
Write down of property and equipment -- -- 3,851 --
Debt forgiveness (66,150) -- (66,150) --
--------- --------- --------- ---------
999,785 1,064,306 2,042,242 2,092,893
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES 69,063 210,690 298,775 181,376
Interest Charges 849,783 1,028,551 1,212,546 1,777,495
--------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (780,720) (817,861) (913,771) (1,596,119)
Income Taxes 63,502 3,208 70,942 4,476
--------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS (844,222) (821,069) (984,713) (1,600,595)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS 23,693 (14,319) 19,096 (27,023)
NET LOSS (820,529) (835,388) (965,617) (1,627,618)
========= ========= ======== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK OUTSTANDING
BASIC AND DILUTED* 4,000,971 712,614 3,665,040 698,550
========= ========= ======== ==========
LOSS FROM CONTINUING OPERATIONS
PER WEIGHTED AVERAGE COMMON
STOCK BASIC AND DILUTED (0.21) (1.15) (0.27) (2.29)
========= ========= ======== ==========
<FN>
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
</FN>
The accompanying notes are an integral part of these interim
consolidated financial statements.
F-3
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND THE YEAR ENDED DECEMBER 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
COMMON STOCK ACCUMULATED
NUMBER OF CAPITAL OTHER
SHARES* STOCK COMPREHENSIVE COMPREHENSIVE
AMOUNTS DEFICIT LOSS LOSS
Balance as of December 31, 2003 547,448 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 1,920,611 379,906 --
convertible debentures
Interest on 12% senior secured convertible 126,984 44,813 --
debentures
Common stock and warrants issued for 50,039 175,336 --
services
Warrants issued for cash 75,411 1,548,120 --
Beneficial conversion on issuance of -- 3,806,832 --
--------- ---------- ----------- -----------
convertible debt
Balance as of December 31, 2004 2,720,493 49,531,299 (44,204,935) (1,326,413)
========= ========== =========== ==========
Net loss for the period -- -- (965,617) (965,617)
Other comprehensive loss, net of tax:
Foreign currency translation (9,544) (9,544)
----------
Comprehensive loss (975,161)
==========
Common stock repurchased for cancellation (626,384) (123,110)
Conversion of 12% senior secured 1,235,100 133,375 --
convertible debentures
Interest on 12% senior secured convertible 131,395 21,448 --
debentures
Common stock issued for investment 246,450 246,609 --
Warrants issued for cash -- 766,002 --
Beneficial conversion on issuance of -- 1,225,690 --
convertible debt
--------- ---------- ----------- -----------
Balance as of June 30, 2005 3,707,054 51,801,313 (45,170,552) (1,335,957)
========= ========== =========== ==========
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
The accompanying notes are an integral part of
these interim consolidated financial statements.
F-4
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
2005 2004
$ $
Cash flows from operating activities
Net loss (965,617) (1,627,618)
---------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 167,269 302,969
Beneficial conversion on issuance of convertible debt 276,663 1,540,440
Interest on 12% senior secured convertible debentures 21,448 19,077
Write off unamortized debt discount 729,422 --
Write down of property and equipment 3,851 --
Increase in accounts receivable (468,688) (470,466)
Increase in prepaid expenses (92,468) (180,990)
Increase (decrease) in accounts payable 283,742 (599,646)
Debt forgiveness (66,150) --
Common stock and warrants issued for services -- 175,336
---------- ----------
Net cash used in operating activities (110,528) (840,898)
---------- ----------
Cash flows from investing activities
Purchase of property and equipment (193,016) (83,904)
---------- ----------
Net cash used in investing activities (193,016) (83,904)
---------- ----------
Cash flows from financing activities
Proceeds from (repayment of) receivable discount facility (722,331) (193,196)
Proceeds from convertible financing facility 3,100,000 --
Deferred financing costs incurred (230,792) --
Repayment of notes payable -- (6,444)
Repayment of long-term debt (69,396) (41,683)
Repayment of convertible debt (1,162,700) --
Repurchase of shares for cancellation (123,110) --
Proceeds from issuance of common stock -- 229,121
Proceeds from issuance of debentures and warrants -- 1,175,000
---------- ----------
Net cash provided by financing activities 791,671 1,162,798
---------- ----------
Effect of foreign currency exchange rate changes (60,811) 45,060
---------- ----------
Net increase (decrease) in cash 427,316 283,056
Cash
Beginning of year 180,121 483,443
---------- ----------
End of year 607,437 766,499
========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 179,579 222,592
========== ==========
Income taxes paid 70,942 8,404
========== ==========
The accompanying notes are an integral part of
these interim consolidated financial statements.
F-5
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 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 June 30, 2005, the Company had a deficit of $45,170,552 and
has suffered recurring losses from operations.
With insufficient working capital from operations, the Company's primary
source of cash is a $3,500,000 convertible financing facility with Laurus
Master Fund, Ltd. ("Laurus"). At June 30, 2005, the balance on the facility
was $2,929,111. The convertible financing facility consists of a revolving
line of credit based on 90% of eligible accounts receivable which matures on
June 27, 2008 and bears interest at an annual rate equal to The Wall Street
Journal prime rate plus 3%. The principal outstanding on the secured
convertible note is convertible into common stock at a fixed conversion price
ranging from 80% to 110% of the average closing price for the previous ten
days, subject to certain conditions.
As at August 22, 2005, management's plans to mitigate and alleviate its
operating losses and working capital deficiencies include:
a) Registration of the shares underlying the Laurus convertible financing
facility, warrants and options to provide additional working capital;
b) Continued focus on securing customers with high growth potential, such as
those in the aerospace and defense industries;
c) Compliment organic growth with the acquisition of profitable engineering
companies over the next two years; and
d) Continued 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 convertible
financing facility with Laurus, 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.
F-6
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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.) and TBM
Technologies Inc., provides engineering, design, technical publications and
staffing, services to enhance the resource performance of clients. In
addition, the Company owns the following companies which are currently
inactive: Systemsearch Consulting Services Inc., International Career
Specialists Ltd., Microtech Professionals Inc., E-Wink Inc. (80%), Thinkpath
Training Inc. (formerly ObjectArts Inc.), Thinkpath Training US Inc.
(formerly ObjectArts US Inc.) and TidalBeach Inc. In 2002, the Company sold
Njoyn Software Incorporated, a wholly-owned subsidiary.
d) Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Company and
its controlled subsidiaries. The earnings of the subsidiaries are included
from the date of acquisition for acquisitions accounted for using the
purchase method. For subsidiaries 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 14 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
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, fixed-price and cost-plus contracts.
F-7
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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. For fixed price-completion
contracts that are not within the scope of SOP 81-1, revenue is generally
recognized as earned according to contract terms as the service is provided.
The Company provides its customers with a number of different services that
are generally documented through separate negotiated task orders that detail
the services to be provided and the compensation for these services. Services
rendered under each task order represent an independent earnings process and
are not dependent on any other service or product sold. The Company
recognizes revenue on cost-plus contracts to the extent of allowable costs
incurred plus a proportionate amount of the fee earned, which may be fixed or
performance-based. The Company considers fixed fees under cost-plus contracts
to be earned in proportion to the allowable costs incurred in performance of
the contract, which generally corresponds to the timing of contractual
billings. 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 satisfaction of a specific performance goal or it
receive contractual notification from a customer that the fee has been
earned. 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.
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.
F-8
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
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.
F-9
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
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.
F-10
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
3. STOCK OPTION PLANS
WEIGHTED
AVERAGE
OPTIONS* EXERCISE PRICE
-------- --------------
a) Options outstanding at December 31, 2004 112
===
Options forfeited during the period -
Options expired during the period (16) $15,371
Options granted during the period 379,572 $.0001
Options outstanding at June 30, 2005 379,668
=======
Options exercisable December 31, 2004 112 $6,100
Options exercisable June 30, 2005 379,668 $6,579
Options available for future grant December 31, 2004 1,562
Options available for future grant June 30, 2005 1,622,006
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
b) Range of Exercise Prices at June 30, 2005
OPTIONS
WEIGHTED OUTSTANDING WEIGHTED
OUTSTANDING AVERAGE AVERAGE OPTIONS AVERAGE
OPTIONS* REMAINING LIFE EXERCISE PRICE EXERCISABLE* EXERCISE PRICE
-------- -------------- -------------- ------------ --------------
$16,250 9 0.49 $16,250 9 $16,250
$3,350 to $3,500 87 0.82 $3,470 87 $3,488
$0.0001 379,572 10.00 $0.0001 379,572 $0.0001
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
F-11
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
c) Pro-forma net income
At June 30, 2005, the Company has five stock-based employee compensation
plans, which are described more fully in Note 14(d). The Company accounts for
those plans under the recognition and measurement principles of APB Opinion
No.25, Accounting for Stock Issued to Employees, and related Interpretations.
No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of FASB Statement
No. 123 Accounting for Stock-Based Compensation, to stock-based employee
compensation. SFAS No.123 was amended by SFAS No. 148 which requires more
prominent disclosure of stock based compensation.
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Net loss as reported (820,529) (835,388) (965,617) (1,627,618)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
net of related tax effects - - - (1,895)
- - - -------
Pro forma net loss (820,529) (835,388) (965,617) (1,629,513)
========= ========= ========= ===========
Loss per share:
Basic and diluted loss per share, as (0.21) (1.15) (0.27) (2.29)
====== ====== ====== ======
reported
Pro forma loss per share (0.21) (1.15) (0.27) (2.33)
====== ====== ====== ======
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:
2005 GRANTS 2001 GRANTS
----------- -----------
Risk free interest 3.9% 4.76%
rates
Volatility 100% 100%
factors
Weighted average expected 10 years 4.90 years
life
Weighted average fair value per $0.50 $3,700.00
share
Expected -- --
dividends
During the six months ended June 30, 2005, the Company granted Laurus Master
Fund, Ltd. an option to purchase up to 379,572* shares of its common stock,
no par value per share, at an exercise price of $.0001 per share. The options
are exercisable at any time and in any amount for a period of ten years from
the date of issuance.
There have been no other option grants since 2001.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
F-12
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
$ $
Accounts receivable 2,926,127 2,423,161
Less: Allowance for doubtful accounts (210,607) (179,648)
--------- ---------
2,715,520 2,243,513
========= =========
Allowance for doubtful accounts
Balance, beginning of period 179,648 186,847
Provision 32,459 25,738
Recoveries (1,500) (32,937)
------- --------
Balance, end of period 210,607 179,648
======= =======
6. PROPERTY AND EQUIPMENT
June 30, 2005 December 31, 2004
------------------------------------------- ------------------
ACCUMULATED
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 170,085 136,414 33,671 35,245
Computer equipment and software 3,581,401 3,088,327 493,074 448,773
Leasehold improvements 56,568 32,774 23,794 9,985
------ ------ ------ -----
3,808,054 3,257,515 550,539 494,003
========= ========= ======= =======
Assets under capital lease 247,664 144,251 103,413 90,689
======= ======= ======= ======
Amortization of property and equipment for the six months ended June 30,
2005 amounted to $141,948 including amortization of assets under capital
lease of $30,039.
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.
F-13
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
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:
JUNE 30, DECEMBER 31,
2005 2004
---- ----
ACCUMULATED
ACCUMULATED IMPAIRMENT
COST AMORTIZATION LOSSES NET NET
---------- ----------------- ---------------- ------------ ---------------
$ $ $ $ $
Technical Publications &
Engineering (CadCam Inc.
and TBM Technologies Inc.) 5,737,369 535,164 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
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
$ $
Cash surrender value of life insurance 64,241 61,562
Customer Lists 75,682 --
Deferred Financing Costs 230,792 --
======= ==
Total 370,715 61,562
======= ======
Included in Other Assets are deferred financing costs related to the Laurus
Convertible Financing Facility to be amortized over three years beginning
July 1, 2005. Amortization of other assets amounted to $25,320 for the six
months ended June 30, 2005 and nil for the year ended December 31, 2004.
9. RECEIVABLE DISCOUNT FACILITY
i) June 30, 2005
On June 27, 2005, the Company paid down its receivable discount facility with
Morrison Financial Services Limited in the amount of $1,073,468. The facility
allowed the Company to borrow up to 75% of the value of qualified accounts
receivables to a maximum of $1,500,000, and was subject to 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.
F-14
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
10. BANK INDEBTEDNESS
On April 19, 2005, the Company paid down its revolving line of credit with
the Royal Bank of Canada in the amount of $52,480. This liability was assumed
by the Company on January 17, 2005 as a result of the acquisition of TBM
Technologies Inc. The line was subject to interest at 7% per annum.
11. CONVERTIBLE DEBENTURE
During the year ended December 31, 2004, the Company sold $2,050,000 in
convertible debentures with 1,740,485* 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 New
Date of Debenture Conversion # of Exercise # of Exercise
Issuance Amount Price Warrants Price Warrants Price
Issued* Repriced*
-------------- ------------- -------------- ---------------- ------------ ---------------- ------------
1/8/04 $25,000 $87.50** 286 $87.50 286 $2.00
3/25/04 $350,000 $87.50** 184,800 $2.09 16,800 $1.25
168,000 $1.00
3/29/04 $100,000 $87.50** 50,000 $2.00 -- --
5/20/04 $150,000 $87.50** 116,470 $1.25 105,882 $1.00
5/24/04 $100,000 $87.50** 71,429 $1.40 -- --
6/18/04 $250,000 $87.50** 220,000 $1.25 200,000 $1.00
6/18/04 $200,000 $87.50** 160,000 $1.25 -- --
11/12/04 $875,000 $1.00*** 937,500 $1.00 -- --
-------------- ------------- -------------- ---------------- ------------ ---------------- ------------
$2,050,000 1,740,485 490,968
============== ============= ============== ================ ============ ================ ============
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
** Conversion price is the lesser of $87.50 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 $1.00 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.
On June 27, 2005, the Company paid off the principal balance of the 12%
Senior Secured Convertible Debentures in the amount of $1,162,700. The
accrued interest of $66,150 was forgiven and a total of 626,384* common
shares held by the debenture holders were repurchased for cancellation for
$123,110. In addition a total of 1,671,189 warrants held by the debenture
holders were cancelled. The unamortized debt discount remaining on the
convertible debentures of $729,422 was expensed as interest.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
12. CONVERTIBLE FINANCING FACILITY
On June 27, 2005, the Company closed a $3,500,000 convertible financing
facility with Laurus Master Fund, Ltd. The facility consists of a revolving
line of credit based on 90% of eligible accounts receivable which matures on
June 27, 2008 and bears interest at an annual rate equal to The Wall Street
Journal prime rate plus 3%. At closing, the Company received $3,100,000 in
proceeds from the facility based on its eligible accounts receivable. The
principal outstanding on the secured convertible note is convertible into
common stock at a fixed conversion price ranging from 80% to 110% of the
average closing price for the previous ten days, subject to certain
conditions.
F-15
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
In connection with the financing, the Company issued warrants to purchase up
to 2,100,000* shares of its common stock with 1,050,000* at an exercise price
of $0.55 per share and 1,050,000 at an exercise price of $0.60 per share. The
warrants are exercisable at any time and in any amount for six years from the
date of closing. The Company also issued an option to purchase up to 379,572*
shares of its common stock, no par value per share, at an exercise price of
$.0001 per share. The option is exercisable at any time and in any amount for
a period of ten years from the date of issuance.
The proceeds of $3,100,000 received by the Company were allocated between the
options, warrants and the debenture without warrants on a pro rata basis.
Paid in capital has been credited by the value of the options and the
warrants in the amount of $766,002. This unamortized debt discount will be
amortized over the three year term of the facility. At June 30, 2005, the
Company has amortized $2,099 in debt discount as interest expense.
The beneficial conversion feature was determined to be $953,739 which was
also credited to paid in capital and will be amortized over the three year
term of the facility. At June 30, 2005, the Company has amortized $2,613 in
beneficial conversion feature as interest expense.
At June 30, 2005, the balance on the facility was as follows:
Principal balance $2,929,111
Unamortized Beneficial Conversion Feature (951,126)
Unamortized Debt Discount (763,904)
----------
Total 1,214,081
==========
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
13. LONG-TERM DEBT
i) June 30, 2005
At June 30, 2005, the Company had a loan balance of $209,837 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%.
JUNE 30, 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 Financial Services Limited 209,837 227,951
Various capital leases with various payment
terms and interest rates 45,336 39,985
------ ------
255,173 267,936
Less: current portion 116,495 85,099
------- ------
138,678 182,837
======= =======
F-16
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
b) Future principal payments obligations as at June 30, 2005, were as
follows:
2005 56,009
2006 125,487
2007 73,677
2008 --
2009 --
-----------
$255,173
===========
c) Interest expense related to long-term debt was $29,924 for the six months
ended June 30, 2005 and $69,037 for the year ended December 31, 2004.
14. 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
Effective June 29, 2005, the Company implemented a one-for-five thousand
reverse split of its common stock. At the time of the reverse stock split,
each five thousand shares of the Company's issued and outstanding common
stock were combined into one share of its common stock. The reverse stock
split did not change the number of authorized shares of the Company's common
stock. The one-for-five thousand reverse split was approved by the Company's
shareholders at its Annual General Meeting on April 22, 2005, and
subsequently approved by its Board of Directors. All common share and per
share amounts throughout these financial statements have been adjusted to
give effect to this reverse stock split.
b) Issued
During the year ended December 31, 2004, the Company issued 50,039* shares of
common stock, no par value per share, in consideration of consulting services
in the amount of $175,336. This includes 50,000* 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 75,411* 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 2,047,594* shares
of its common stock to the 12% Senior Secured Convertible Debenture Holders
upon the conversion of $1,025,400 principal balance and accrued interest.
On January 17, 2005, the Company issued 246,450* 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 six months ended June 30, 2005, the Company issued 1,366,495*
shares of its common stock to the 12% Senior Secured Convertible Debenture
holders upon the conversion of $321,900 principal balance and accrued
interest.
On June 27, 2005, the Company repurchased for cancellation 626,384* common
shares held by the debenture holders for $123,110, representing approximately
a sixty per cent discount to market value.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
F-17
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
c) Warrants
For each of the periods presented, the following warrants for the purchase of
one common share per warrant (as adjusted for 1:5,000 reverse stock split on
June 29, 2005) at the following prices per common share and expiry dates were
outstanding:
Number of warrants*
June 30, 2005 December 31, 2004 Exercise price Expiry date
per share
---------------- -------------------- ----------------------- --------------
-- -- $16,200.00 2004
-- 195 $16,250.00 to 2005
$18,550.00
56 56 $12,300.00 2005
56 88 $3,150.00 to $5,000.00 2005
20 20 $7,500.00 2006
213 213 $2,750.00 2006
-- 1,200 $400.00 2007
124 924 $200.00 2009
2,400 5,257 $87.50 2009
-- -- $3.75 2009
-- -- $2.00 2009
229 229 $1.25 2009
1,714 4,286 $87.50 2010
2,857 2,857 $43.75 2010
13,333 33,333 $3.75 2010
-- -- $2.00 2010
9,083 9,083 $1.25 2010
-- 33,449 $1.00 2010
-- 50,000 $2.00 2011
-- 51,429 $1.40 2011
47,388 375,388 $1.25 2011
62,500 1,243,382 $1.00 2011
1,050,000 -- $0.55 2011
1,050,000 -- $0.60 2011
---------------- -------------------- ----------------------- --------------
2,239,973 1,811,389
---------------- -------------------- ----------------------- --------------
A summary of changes to number of issued warrants is as follows:
Outstanding at December 31, 2004 1,811,389
Issued 2,100,000
Cancelled (1,671,189)
Exercised --
Expired (227)
-----------
Outstanding at March 31, 2005 2,239,973*
------------
On January 8, 2004, the Company issued 286* 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
$87.50 per share. On April 7, 2004 all of these warrants were repriced from
$87.50 to $2.00 per share.
On March 25, 2004, the Company issued 184,800* 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 $2.09 per share. On June
18, 2004, all of these warrants were repriced from $2.09 to $1.25 per share.
On November 12, 2004, 168,000 of these warrants were repriced from $1.25 to
$1.00 per share.
On March 29, 2004 the Company issued 50,000* 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 $2.00 per share.
On May 20, 2004 and June 18, 2004, the Company issued 336,471* 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 $1.25
per share. On November 12, 2004, 305,882* of these warrants were repriced
from $1.25 to $1.00 per share.
On May 24, 2004 and June 18, 2004, the Company issued 231,429* 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 $1.40 and
$1.25 per share, respectively.
F-18
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
On November 12, 2004, the Company issued 937,500* 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 $1.00 per share.
On June 27, 2005, a total of 1,671,189* warrants held by the debenture
holders were cancelled in consideration of payment in full of the principal
balance owing of $1,162,700.
On June 27, 2005 the Company issued Laurus Master Fund, Ltd. warrants to
purchase up to 2,100,000* shares of its common stock with 1,050,000* at an
exercise price of $0.55 per share and 1,050,000* at an exercise price of
$0.60 per share. The warrants are exercisable at any time and in any amount
for six years from the date of closing.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
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, 2002 Stock Option Plan and 2005 Stock Option Plan, pursuant to which an
aggregate of 1,622,006* 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 to employees 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.
On June 27, 2005, the Company issued Laurus Master Fund, Ltd. an option to
purchase up to 379,572* shares of its common stock, no par value per share,
at an exercise price of $.0001 per share. The options are exercisable at any
time and in any amount for a period of ten years from the date of issuance.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
F-19
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
15. 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:
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
$ $
Losses available to offset future income taxes 4,671,000 4,678,000
Share and debt issue costs 440,000 357,000
Property and equipment 874,000 877,000
------- -------
5,985,000 5,912,000
Less: valuation allowance 5,985,000 5,912,000
--------- ---------
-- --
b) Current Income Taxes
Current income taxes consist of:
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
$ $
Amounts calculated at Federal and Provincial (365,508) (1,503,170)
--------- -----------
statutory rates
Permanent differences 363,191 763,040
Valuation allowance 73,259 758,000
------ -------
436,450 1,521,040
------- ---------
Current income taxes 70,942 17,870
====== ======
Issue expenses totaling approximately $1,090,000 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 June 30, 2005.
As at the completion of the June 30, 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.
16. COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
$ $
Net loss (965,617) (4,205,224)
Other comprehensive loss
Foreign currency translation adjustments (9,544) (10,724)
------- --------
Comprehensive income (loss) (975,161) (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.
F-20
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
17. DISCONTINUED OPERATIONS
Effective March 8, 2002, the Company sold its technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. As part of the
transaction, Cognicase assumed all of the staff in the Company's technology
division, including the employees of TidalBeach Inc. The Company will not
have future revenues from either its Njoyn or Secondwave products and
therefore the technology operations have been reported as discontinued. There
was no technology revenue for the three and six months ended June 30, 2005
and 2004. The net loss for the three and six months ended June 30, 2005 was
$40 and $4,600 compared to $1,300 and $2,700 in 2004.
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 three and six months ended June 30,
2005 and 2004. There were no losses from the training division for the three
and six months ended June 30, 2005 compared to a net loss of $13,000 and
$24,000, respectively, in 2004.
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. On June 8, 2005, the Company
collected approximately $40,000 on the promissory note and forgave the
balance. As a result of this transaction, the Company will not have future
revenues from its IT recruitment division and therefore the operations have
been reported as discontinued.
There was no IT recruitment revenue for the three and six months ended June
30, 2005 and 2004. Net income from the IT recruitment division for the three
and six months ended June 30, 2005 was $24,000 reflecting a tax credit
collected in the second quarter. There was no net income attributable to the
IT recruitment division for the three and six months ended June 30, 2004.
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 June 30, Six Months Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $
Revenues -- -- -- --
-- -- -- --
Income (loss) from operations
before income taxes (86) (14,319) (86) (26,723)
Provision for Income Taxes (23,779) -- (19,182) 300
Income (loss) from discontinued
operations 23,693 (14,319) 19,096 (27,023)
====== ======== ====== ========
F-21
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
18. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company issued common shares and warrants for the following:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
$ $
Services rendered -- 175,336
Accounts payable -- --
-- --
-- 175,336
== =======
19. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Canada 677,360 122,339 974,004 345,177
United States of America 2,926,510 3,202,845 6,232,805 6,036,708
--------- --------- --------- -- ---------
3,603,870 3,325,184 7,206,809 6,381,885
========= ========= ========= =========
b) Net Income (Loss) by Geographic Area
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Canada (1,040,024) (1,404,561) (1,718,121) (2,392,768)
United States of America 219,495 569,173 752,504 765,150
------- ------- ------- -------
(820,529) (835,388) (965,617) (1,627,618)
========= ========= ========= ===========
c) Identifiable Assets by Geographic Area
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
$ $
Canada 1,428,171 499,483
United States of America 6,963,533 6,316,851
--------- ---------
8,391,704 6,816,334
========= =========
d) Revenue and Gross Profit by Operating Segment
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Revenue
Tech Pubs and Engineering 3,575,010 3,275,178 7,149,569 6,248,100
Gross Profit
Tech Pubs and Engineering 1,060,855 1,261,296 2,326,570 2,246,624
No other segment represents 10% of the Company's revenues, operating losses
or total assets.
F-22
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
e) Revenues from Major Customers and Concentration of Credit Risk
The consolidated entity had the following revenues from major customers:
For the three and six months ended June 30, 2005, one customer had sales of
$905,070 and $2,290,288, respectively, representing approximately 25% and
32%, respectively, of total revenue.
For the three and six months ended June 30, 2004, one customer had sales of
$1,247,344 and $1,957,453, respectively, representing approximately 38% and
31%, respectively, of total revenue.
f) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
20. 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 June 30, Six Months Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
NUMERATOR
Net loss from continuing operations (844,222) (821,069) (984,713) (1,600,595)
Income (loss) from discontinued 23,693 (14,319) 19,096 (27,023)
------ -------- ------ --------
operations
Net loss (820,529) (835,388) (965,617) (1,627,618)
========= ========= ========= ===========
DENOMINATOR
Weighted Average common stock
outstanding* 4,000,971 712,614 3,665,040 698,550
========= ======= ========= =======
Basic and diluted loss per common
share from continuing operations (0.21) (1.15) (0.27) (2.29)
====== ====== ====== ======
Basic and diluted loss per common
share after discontinued operations (0.21) (1.17) (0.26) (2.33)
====== ====== ====== ======
Average common stock outstanding* 4,000,971 712,614 3,665,040 698,550
Average common stock issuable -- -- -- --
-- -- -- --
Average common stock outstanding
assuming dilution* 4,000,971 712,614 3,665,040 698,550
========= ======= ========= =======
The outstanding options and warrants as detailed in note 14 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 at June 30, 2005, the Company has issued a total of 3,065,420* shares of
its common stock to the convertible debenture holders upon the conversion of
$3,862,300 of debentures and accrued interest.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
F-23
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
21. COMMITMENTS AND CONTINGENCIES
a) Lease Commitments
Minimum payments under operating leases for premises occupied by the Company
and its subsidiaries offices, located throughout Ontario, Canada and the
United States, exclusive of most operating costs and realty taxes, as at June
30, 2005, for the next five years are as follows:
2005 $158,056
2006 171,326
2007 171,326
2008 87,189
2009 45,120
Thereafter 3,760
-----
$636,777
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. Trial is set to commence
September 5, 2005, although the Company is still pursuing settlement
discussions with the plaintiff.
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.
22. SUBSEQUENT EVENTS
On July 1, 2005 the Company issued 294,118* shares of its common stock to
Declan French in consideration of $100,000 extra compensation as approved by
the shareholders at the Annual General Meeting on April 22, 2005. The shares
were issued based on the closing price of $0.34 on July 1, 2005. The extra
compensation was awarded in consideration of Mr. French's personal guarantees
and indemnification of certain of the Company's debts as well as his
acceptance of shares in lieu of cash for prior bonuses and debt payments.
Also, on July 1, 2005, the Company issued 636,363* shares of its common stock
to Declan French in consideration of $140,000 in accrued bonuses from the
years 2003 and 2004 as per his employment agreement. The shares were issued
based on the lowest intraday price of $0.22 on July 1, 2005.
On July 7, 2005, the Company entered into an agreement with Financial Media
Relations, LLC, a California company, for the purpose of developing and
implementing a marketing and investor relations program and the provision of
business development and strategic advisory services. The term of the
agreement is twelve months at a cost of $20,500 on execution and $12,500 per
month thereafter. In addition, the Company issued 100,000* shares of common
stock, no par value, and warrants to purchase 500,000* shares of common stock
exercisable at $0.41 per share and 100,000* shares of common stock
exercisable at $1.20 per share. The warrants shall be exercisable for a
period of two years, shall vest immediately and be deemed earned upon
issuance, and all options shall have "piggyback" registration rights.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
F-24
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
23. 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 32% 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.
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.
24. COMPARATIVE FIGURES
Certain figures in the June 30, 2004 financial statements have been
reclassified to conform with the basis of presentation used at June 30, 2005.
F-25
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.
-2-
STATEMENTS OF OPERATIONS--PERCENTAGES
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ---------------
2005 2004 2005 2004
----- ----- ----- -----
REVENUE 100 % 100 % 100 % 100 %
----- ----- ----- -----
COST OF SERVICES 70 % 62 % 68 % 64 %
----- ----- ----- -----
GROSS PROFIT 30 % 38 % 32 % 36 %
----- ----- ----- -----
EXPENSES
Administrative 18 % 17 % 17 % 19 %
Selling 10 % 10 % 10 % 10 %
Depreciation and amortization 2 % 4 % 2 % 4 %
Write down of property and equipment 0 % 0 % 0 % 0 %
Debt forgiveness (2)% 0 % (1)% 0 %
----- ----- ----- -----
Income (loss) from continuing
operations before interest charges 2 % 7 % 4 % 3 %
Interest charges 24 % 31 % 17 % 28 %
----- ----- ----- -----
Loss from continuing operations
before income taxes (22)% (24)% (13)% (25)%
Income taxes 2 % -- % 1 % -- %
----- ----- ----- -----
Loss from continuing operations (24)% (24)% (14)% (25)%
Income (loss) from discontinued
operations 1 % 0 % 0 % 0 %
Net Loss (23)% (24)% (14)% (25)%
----- ----- ----- -----
-3-
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2004
REVENUE
For the three months ended June 30, 2005, we derived 81% of our revenue
in the United States compared to 96% for the three months ended June 30, 2004.
The decrease in total revenue derived from the United States is a result of the
increase in engineering sales in Canada to $680,000 for the three months ended
June 30, 2005 from $120,000 for the three months ended June 30, 2004.
Our primary source of revenue was engineering services including
engineering design and build, technical publications and documentation and
on-site engineering support. Engineering services represented 99% of total
revenue for the three months ended June 30, 2005 compared to 98% 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 June 30, 2005 increased
by $275,000 or 8%, to $3,600,000 as compared to $3,325,000 for the three months
ended June 30, 2004. The increase is primarily attributable to the increase in
engineering sales in Canada.
COST OF SERVICES
The cost of services for the three months ended June 30, 2005 increased
by $485,000, or 24%, to $2,535,000, as compared to $2,050,000 for the same
period in 2004. This increase is partially attributable to the increase in
revenue. As a percentage of revenue, the cost of services for the three months
ended June 30, increased from 62% in 2004 to 70% 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. Gross profit for the three months ended
June 30, 2005 decreased by $205,000, or 16%, to $1,070,000 compared to
$1,275,000 for the same period in 2004. As a percentage of revenue, gross profit
for the three months ended June 30, 2005 was 30% compared to 38% in 2004. The
decrease in gross profit can be attributed to the addition of lower margin
engineering projects during the second quarter as a means of establishing a new
client base, delayed start dates of higher margin defense projects and the
increase in lower margin contract placement sales compared to higher margin
project sales.
EXPENSES
Total expenses for the three months ended June 30, 2005 decreased by
$60,000, or 6%, to $1,000,000 compared to $1,060,000 for the three months ended
June 30, 2004.
ADMINISTRATIVE EXPENSES
Administrative expenses increased by $75,000 or 13% to $655,000 for the
three months ended June 30, 2005 compared to $580,000 for the three months ended
June 30, 2004. As a percentage of revenue, administrative expenses increased
from 17% for the three months ended June 30, 2004 to 18% for the same period in
2005. This increase is largely attributable to increased administrative salaries
and benefits and additional maintenance fees on hardware and software.
SELLING EXPENSES
Selling expenses decreased by $25,000, or 7%, to $325,000 for the three
months ended June 30, 2005 compared to $350,000 for the same period in 2004.
This decrease is attributable to the reduction of commissions paid to sales
personnel which is driven by gross profit. As a percentage of revenue, selling
expenses for the three months ended June 30, 2005 are 10% which is consistent
with the same period last year.
-4-
DEPRECIATION AND AMORTIZATION
For the three months ended June 30, 2005, depreciation and amortization
expenses decreased by $55,000, or 39%, to $85,000 from $140,000 for the three
months ended June 30, 2004. As a percentage of revenue, depreciation and
amortization expenses have decreased from 4% for the three months ended June 30,
2004 to 2% for the same period in 2005. This decrease is the result of the
declining balance of the our property and equipment.
DEBT FORGIVENESS
Debt forgiveness for the three months ended June 30, 2005 includes
$66,150 of accrued interest on the 12% Senior Secured Convertible Debentures
which was forgiven when the principal balance was repaid on June 27, 2005.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES
For the three months ended June 30, 2005, income from continuing
operations before interest charges decreased by $140,000 or 67% to $70,000
compared to $210,000 for the three months ended June 30, 2004.
INTEREST CHARGES
For the three months ended June 30, 2005, interest charges decreased by
$180,000, or 17%, to $850,000 from $1,030,000 for the three months ended June
30, 2004. This decrease is largely attributable to the reduced interest expense
on the beneficial feature recognized on the convertible debentures. Included in
the interest charges for the three months ended June 30, 2005 is the write off
the unamortized debt discount remaining on the 12% Senior Secured Convertible
Debentures in the amount of $729,422. Also included is $2,099 in amortized debt
discount and $2,613 in beneficial conversion expense related to the Laurus
Convertible Financing Facility. Included in the interest charges for the three
months ended June 30, 2004 is $916,229 beneficial conversion expense related to
the 12% Senior Secured Convertible Debentures.
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
For the three months ended June 30, 2005, loss from continuing
operations before income taxes decreased by $40,000 or 5% to $780,000 compared
to $820,000 for the same period in 2004.
INCOME TAXES
Income tax expense for the three months ended June 30, 2005 increased
by $60,000 or 2000% to $63,000 compared to $3,000 for the three months ended
June 30, 2004.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the three months ended June 30,
2005 increased by $20,000 or 2% to a loss of $840,000 compared to a loss of
$820,000 for the three months ended June 30, 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 June 30, 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 June 30, 2005 and 2004. The net loss for the three months ended June 30,
2005 was $40 compared to $1,300 for the three months ended June 30, 2004.
-5-
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 June 30, 2005
and 2004. There were no losses from the training division for the three months
ended June 30, 2005 compared to a net loss of $13,000 for the three months ended
June 30, 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 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 for the three months ended June 30,
2005 and 2004. Net income from the IT recruitment division for the three months
ended June 30, 2005 was $24,000 reflecting a tax credit collected. There was no
net income attributable to the IT recruitment division for the three months
ended June 30, 2004.
NET LOSS
For the three months ended June 30, 2005, net loss decreased by $15,000
or 2% to a net loss of $820,000 compared to a net loss of $835,000 for the same
period in 2004.
THE SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2004
REVENUE
For the six months ended June 30, 2005, we derived 86% of our revenue
in the United States compared to 95% for the same period in 2004. The decrease
in total revenue derived from the United States is a result of the increase in
engineering sales in Canada to $970,000 for the six months ended June 30, 2005
from $340,000 for the three months ended June 30, 2004.
Our primary source of revenue was engineering services including
engineering design and build, technical publications and documentation and
on-site engineering support. Engineering services represented 99% of total
revenue for the six months ended June 30, 2005 compared to 98% for the same
period last year. No other operating segment represented more than 10% of our
consolidated revenues.
Consolidated revenues for the six months ended June 30, 2005 increased by
$830,000 or 13%, to $7,210,000 as compared to $6,380,000 for the six months
ended June 30, 2004. The increase is primarily attributable to the increase in
engineering sales in Canada as well as revenue related to the continuing
contracts with existing customers in the defense industry, awarded in 2004. As a
result of these contracts, one customer had sales of approximately 32% of our
consolidated revenues for the six months ended June 30, 2005. The same customer
had sales of approximately 31% of our consolidated revenues for the same period
last year.
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COST OF SERVICES
The cost of services for the six months ended June 30, 2005 increased
by $760,000, or 18%, to $4,870,000, as compared to $4,110,000 for the same
period in 2004. This increase is partially attributable to the increase in
revenue. As a percentage of revenue, the cost of services for the six months
ended June 30, increased from 64% in 2004 to 68% in 2005.
GROSS PROFIT
Gross profit for the six months ended June 30, 2005 increased by
$70,000, or 3%, to $2,340,000 compared to $2,270,000 for the same period in
2004. This increase is partially attributable to the increase in revenue. As a
percentage of revenue however, gross profit for the six months ended June 30,
2005 was 32% compared to 36% in 2004. This decrease can be attributed to the
addition of lower margin engineering projects during the second quarter as a
means of establishing a new client base, delayed start dates of higher margin
defense projects and the increase in lower margin contract placement sales
compared to higher margin project sales.
EXPENSES
Total expenses for the six months ended June 30, 2005 decreased by
$50,000, or 2%, to $2,040,000 compared to $2,090,000 for the six months ended
June 30, 2004.
ADMINISTRATIVE EXPENSES
Administrative expenses increased by $90,000 or 7% to $1,240,000 for
the six months ended June 30, 2005 compared to $1,150,000 for the six months
ended June 30, 2004. As a percentage of revenue, administrative expenses
decreased from 19% for the six months ended June 30, 2004 to 17% for the same
period in 2005.
SELLING EXPENSES
Selling expenses increased by $30,000, or 5%, to $690,000 for the six
months ended June 30, 2005 compared to $660,000 for the same period in 2004.
This increase is attributable to the increase in commissions paid to sales
personnel which is driven by gross profit. As a percentage of revenue, selling
expenses for the six months ended June 30, 2005 are 10% which is consistent with
the same period last year.
DEPRECIATION AND AMORTIZATION
For the six months ended June 30, 2005, depreciation and amortization
expenses decreased by $110,000, or 39%, to $170,000 from $280,000 for the six
months ended June 30, 2004. As a percentage of revenue, depreciation and
amortization expenses have decreased from 4% for the six months ended June 30,
2004 to 2% for the same period in 2005. This decrease is the result of the
declining balance of our property and equipment.
WRITE DOWN OF PROPERTY AND EQUIPMENT
During the six months ended June 30, 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.
DEBT FORGIVENESS
Debt forgiveness for the six months ended June 30, 2005 includes
$66,150 of accrued interest on the 12% Senior Secured Convertible Debentures
which was forgiven when the principal balance was repaid on June 27, 2005.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES
For the six months ended June 30, 2005, income from continuing
operations before interest charges increased by $120,000 or 67% to $300,000
compared to $180,000 for the six months ended June 30, 2004.
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INTEREST CHARGES
For the six months ended June 30, 2005, interest charges decreased by
$570,000, or 32%, to $1,210,000 from $1,780,000 for the six months ended June
30, 2004. This decrease is largely attributable to the reduced interest expense
on the beneficial feature recognized on the convertible debentures. Included in
the interest charges for the six months ended June 30, 2005 is the write off the
unamortized debt discount remaining on the 12% Senior Secured Convertible
Debentures in the amount of $729,422. Also included is $2,099 in amortized debt
discount and $2,613 in beneficial conversion expense related to the Laurus
Convertible Financing Facility. Included in the interest charges for the six
months ended June 30, 2004 is $1,540,440 beneficial conversion expense related
to the 12% Senior Secured Convertible Debentures.
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
For the six months ended June 30, 2005, loss from continuing operations
before income taxes decreased by $690,000 or 43% to $910,000 compared to
$1,600,000 for the same period in 2004.
INCOME TAXES
Income tax expense for the six months ended June 30, 2005 increased by
$65,000 or 1300% to $70,000 compared to $5,000 for the six months ended June 30,
2004.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the six months ended June 30, 2005
decreased by $615,000 or 38% to a loss of $985,000 compared to a loss of
$1,600,000 for the six months ended June 30, 2004.
INCOME (LOSS)FROM DISCONTINUED OPERATIONS
Operations of the technology, training and IT recruitment divisions
have been reported as discontinued for the six months ended June 30, 2005 and
2004.
There was no technology revenue for the six months ended June 30, 2005
and 2004. The net loss for the six months ended June 30, 2005 was $4,600
compared to $2,700 for the six months ended June 30, 2004.
There was no training revenue for the six months ended June 30, 2005 and
2004. There was no loss from the training division for the six months ended June
30, 2005 compared to a loss of $24,000 for the six months ended June 30, 2004.
There was no IT recruitment revenue or income for the six months ended
June 30, 2005 and 2004. Net income for the IT recruitment division for the six
months ended June 30, 2005 was $24,000 reflecting a tax credit collected in the
second quarter. There was no income attributable to the IT recruitment division
for the six months ended June 30, 2004.
NET LOSS
For the six months ended June 30, 2005, the net loss decreased by
$660,000 or 40% to $970,000 compared to a net loss of $1,630,000 for the same
period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
On June 27, 2005, we closed a $3,500,000 convertible financing facility
with Laurus Master Fund, Ltd. The facility consists of a revolving line of
credit based on 90% of eligible accounts receivable which matures on June 27,
2008 and bears interest at an annual rate equal to The Wall Street Journal prime
rate plus 3%. At closing, we received $3,100,000 in proceeds from the facility
based on our eligible accounts receivable at that date. The principal
outstanding on the secured convertible note is convertible into common stock at
a fixed conversion price ranging from 80% to 110% of the average closing price
for the previous ten days, subject to certain conditions.
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In connection with the financing, we issued warrants to purchase up to
2,100,000* shares of our common stock with 1,050,000* at an exercise price of
$0.55 per share and 1,050,000 at an exercise price of $0.60 per share. The
warrants are exercisable at any time and in any amount for six years from the
date of closing. We also issued an option to purchase up to 379,572* shares of
our common stock, no par value per share, at an exercise price of $.0001 per
share. The option is exercisable at any time and in any amount for a period of
ten years from the date of issuance.
The proceeds of $3,100,000 were allocated between the options, warrants
and the debenture without warrants on a pro rata basis. Paid in capital has been
credited by the value of the options and the warrants in the amount of $766,002.
This unamortized debt discount will be amortized over the three year term of the
facility. At June 30, 2005, we have amortized $2,099 in debt discount as
interest expense.
The beneficial conversion feature was determined to be $953,739 which
was also credited to paid in capital and will be amortized over the three year
term of the facility. At June 30, 2005, we have amortized $2,613 in beneficial
conversion feature as interest expense.
With insufficient working capital from operations, the convertible
financing facility will be our primary source of cash. At June 30, 2005, the
balance on the facility was $2,929,111.
From the proceeds of the Laurus facilty, we paid down our receivable
discount facility with Morrison Financial Services Limited in the amount of
$1,073,468. We also paid off the principal balance of the 12% Senior Secured
Convertible Debentures in the amount of $1,162,700. The accrued interest of
$66,150 was forgiven and a total of 626,384* common shares held by the debenture
holders were repurchased for cancellation for $123,110. In addition a total of
1,671,189 warrants held by the debenture holders were cancelled. The unamortized
debt discount remaining on the convertible debentures of $729,422 was expensed
as interest.
At June 30, 2005, we had cash of $610,000 and working capital of
$540,000. At June 30, 2005, we had a cash flow deficiency from operations of
$110,000. At June 30, 2004, we had cash of $770,000 and a working capital
deficiency of $960,000. At June 30, 2004, we had a cash flow deficiency from
operations of $840,000.
At June 30, 2005, we had a cash flow deficiency from investing activities
of $190,000 related to the purchase of property and equipment. At June 30, 2004,
we had a cash flow deficiency from investing activities of $80,000 also related
to the purchase of property and equipment.
At June 30, 2005 we had cash flow from financing activities of $790,000
largely attributable to proceeds from the convertible financing facility with
Laurus Master Fund, Ltd. At June 30, 2004, we had cash flow from financing
activities of $1,160,000 attributable primarily to proceeds of $1,175,000 from
the sale of convertible debentures and $230,000 from the exercise of common
stock purchase warrants.
At June 30, 2005 we had a loan balance of $209,837 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 Laurus Master Fund, Ltd.
At June 30, 2005, we had approximately $45,000 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.
-9-
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. On April 19, 2005, we
paid down the line of credit with the Royal Bank of Canada in the amount of
$52,480.
Effective June 29, 2005, we implemented a one-for-five thousand reverse
split of our common stock. At the time of the reverse stock split, each five
thousand shares of our issued and outstanding common stock were combined into
one share of our common stock. The reverse stock split did not change the number
of authorized shares of our common stock. The one-for-five thousand reverse
split was approved by our shareholders at our Annual General Meeting held on
April 22, 2005, and subsequently approved by our Board of Directors. All common
share and per share amounts throughout this quarterly report have been adjusted
to give effect to this reverse stock split.
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.
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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
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(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.
RECENT EVENTS
On July 1, 2005 we issued 294,118* shares of our common stock to Declan
French in consideration of $100,000 extra compensation as approved by the
shareholders at the Annual General Meeting on April 22, 2005. The shares were
issued based on the closing price of $0.34 on July 1, 2005. The extra
compensation was awarded in consideration of Mr. French's personal guarantees
and indemnification of certain of the Company's debts as well as his acceptance
of shares in lieu of cash for prior bonuses and debt payments.
Also, on July 1, 2005, we issued 636,363* shares of our common stock to
Declan French in consideration of $140,000 in accrued bonuses from the years
2003 and 2004 as per his employment agreement. The shares were issued based on
the lowest intraday price of $0.22 on July 1, 2005.
On July 7, 2005, we entered into an agreement with Financial Media
Relations, LLC, a California company, for the purpose of developing and
implementing a marketing and investor relations program and the provision of
business development and strategic advisory services. The term of the agreement
is twelve months at a cost of $20,500 on execution and $12,500 per month
thereafter. In addition, we issued 100,000* shares of common stock, no par
value, and warrants to purchase 500,000* shares of common stock exercisable at
$0.41 per share and 100,000* shares of common stock exercisable at $1.20 per
share. The warrants shall be exercisable for a period of two years, shall vest
immediately and will be deemed earned upon issuance. All options shall have
"piggyback" registration rights.
On June 1, 2005, we received notice that the US Securities and Exchange
Commission is reviewing our Form 10-KSB for the fiscal year ended December 31,
2004 and our Form 10-QSB for the quarterly period ended March 31, 2005.
Therefore, we may be required to amend this quarterly report to reflect any
changes required by the Securities and Exchange Commission.
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.
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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 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, fixed-price and cost-plus contracts.
We recognize 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. For fixed price-completion contracts that
are not within the scope of SOP 81-1, revenue is generally recognized as earned
according to contract terms as the service is provided. We provide our customers
with a number of different services that are generally documented through
separate negotiated task orders that detail the services to be provided and the
compensation for these services. Services rendered under each task order
represent an independent earnings process and are not dependent on any other
service or product sold. We recognize revenue on cost-plus contracts to the
extent of allowable costs incurred plus a proportionate amount of the fee
earned, which may be fixed or performance-based. We consider fixed fees under
cost-plus contracts to be earned in proportion to the allowable costs incurred
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in performance of the contract, which generally corresponds to the timing of
contractual billings. We record provisions for estimated losses on uncompleted
contracts in the period in which those losses are identified. We consider
performance-based fees under any contract type to be earned only when it can
demonstrate satisfaction of a specific performance goal or it receive
contractual notification from a customer that the fee has been earned. In all
cases, we recognize 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 us 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. We record the cumulative effects of any revisions to
the estimated total costs and revenues in the period in which the facts become
known.
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.
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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.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005.
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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 the end of the period covered by the
report (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. The trial is set to commence on September 5, 2005, although
the Company is still discussing settlement options with the plaintiff.
We are not party to any other material litigation, pending or
otherwise.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 29, 2005, we entered into a security agreement with Laurus
Master Fund, Ltd. Pursuant to the agreement, Laurus established a $3.5 million
convertible financing facility based on eligible accounts receivable. Financing
under the security agreement bears interest at an annual rate equal to the Wall
Street Journal prime rate plus 3%. The principal outstanding on the convertible
note is convertible into common stock at a fixed conversion price ranging from
80% to 110% of the average closing price of the common stock for the previous 10
days, subject to certain conditions.
In connection with the transaction, we issued Laurus warrants to
purchase up to 1,050,000* shares of common stock at an exercise price of $0.55
per share and 1,050,000 at an exercise price of $0.60 per share. The warrants
are exercisable at any time and in any amount for six years from the date of
closing. We also issued an option to purchase up to 379,572* shares of its
common stock, no par value per share, at an exercise price of $0.0001 per share.
The option is exercisable at any time and in any amount for a period of ten
years from the date of issuance.
The offering was made pursuant to the exemption under Section 4(2) of
the Securities Act of 1933, as amended.
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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.
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(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.
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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.
On July 1, 2005, the Company filed a report on Form 8-K to disclose
its transaction with Laurus Master Fund, Ltd.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005.
** 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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THINKPATH INC.
Dated: August 22, 2005 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
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