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 SEPTEMBER 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 |_|
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY
(AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT) YES | | NO |X|
AS OF NOVEMBER 14, 2005 THERE WERE 4,737,535 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES | | NO |X|
THINKPATH INC.
SEPTEMBER 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 September 30, 2005 and
December 31, 2004...............................................F-1,F-2
Interim Consolidated Statements of Operations for the three and nine
months ended September 30, 2005 and 2004............................F-3
Interim Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2005 and the year ended
December 31, 2004...................................................F-5
Interim Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004...................................F-6
Notes to Interim Consolidated Financial Statements........F-7 thru F-26
Item 2. Management's Discussion and Analysis or Plan of Operation............ 3
Item 3. Controls and Procedures..............................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........18
Item 3. Defaults Upon Senior Securities .....................................18
Item 4. Submission of Matters to a Vote of Security Holders .................18
Item 5. Other Information ...................................................18
Item 6. Exhibits and Reports on Form 8-K ....................................19
POTENTIAL MODIFICATIONS TO DISCLOSURE AND ACCOUNTING - we are currently
responding to comments provided by the staff of the Securities and Exchange
Commission in connection with its review of our financial statements and reports
filed under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These comments affect our past filings and may affect this filing. The
most recent comments relate to our accounting for certain convertible debt that
has warrants, options and related registration rights and the application of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock." We intend to respond to
these comments and have engaged accounting professionals to assist in resolving
these issues. Depending on the outcome of our discussions with the Securities
and Exchange Commission, we may be required to amend our filings under the
Exchange Act.
-2-
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
F-1
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
30-SEP-05 31-DEC-04
--------- ---------
$ $
ASSETS
CURRENT ASSETS
Cash 166,242 180,121
Accounts receivable 2,755,185 2,243,513
Prepaid expenses 175,342 88,403
--------- ---------
3,096,769 2,512,037
PROPERTY AND EQUIPMENT 504,733 494,003
GOODWILL 3,967,243 3,748,732
OTHER ASSETS 339,792 61,562
--------- ---------
7,908,537 6,816,334
========= =========
The accompanying notes are an integral part of
these interim consolidated financial statements.
F-2
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
30-SEP-05 31-DEC-04
--------- ---------
$ $
LIABILITIES
CURRENT LIABILITIES
Receivable Discount Facility -- 723,995
Laurus Funds 1,386,008 --
Accounts payable 1,192,707 1,257,799
Current portion of long-term debt 117,165 85,099
12% Convertible Debentures -- 566,653
----------- -----------
2,695,880 2,633,546
LONG-TERM DEBT 113,449 182,837
----------- -----------
2,809,329 2,816,383
=========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 21)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 52,139,370 49,531,299
DEFICIT (45,704,887) (44,204,935)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,335,275) (1,326,413)
----------- -----------
5,099,208 3,999,951
----------- -----------
7,908,537 6,816,334
=========== ===========
The accompanying notes are an integral part of
these interim consolidated financial statements.
F-3
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
REVENUE 3,169,632 3,125,899 10,376,441 9,507,784
COST OF SERVICES 2,253,380 1,981,507 7,119,172 6,089,123
----------- ----------- ----------- -----------
GROSS PROFIT 916,252 1,144,392 3,257,269 3,418,661
----------- ----------- ----------- -----------
EXPENSES
Administrative 605,735 583,840 1,849,888 1,736,566
Selling 490,259 385,902 1,183,318 1,045,053
Depreciation and amortization 94,243 118,683 261,512 399,699
Write down of property and equipment -- -- 3,851 --
Debt forgiveness -- -- (66,150) --
----------- ----------- ----------- -----------
1,190,237 1,088,425 3,232,479 3,181,318
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES (273,985) 55,967 24,790 237,343
Interest Charges 235,944 1,064,652 1,448,490 2,842,147
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (509,929) (1,008,685) (1,423,700) (2,604,804)
Income Taxes 24,406 15,906 95,348 20,382
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (534,335) (1,024,591) (1,519,048) (2,625,186)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (15,141) 19,096 (42,164)
NET LOSS (534,335) (1,039,732) (1,499,952) (2,667,350)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK OUTSTANDING
BASIC AND DILUTED* 4,677,798 1,120,206 4,243,318 840,128
=========== =========== =========== ===========
LOSS FROM CONTINUING OPERATIONS
PER WEIGHTED AVERAGE COMMON
STOCK BASIC AND DILUTED (0.11) (0.91) (0.36) (3.12)
=========== =========== =========== ===========
* 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 CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND THE YEAR ENDED DECEMBER 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
COMMON ACCUMULATED
STOCK CAPITAL OTHER
NUMBER OF STOCK COMPREHENSIVE COMPREHENSIVE
SHARES* AMOUNTS DEFICIT LOSS LOSS
---------------------------------------------------------------------------
Balance as of December 31, 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 -- -- (1,499,952) (1,499,952)
Other comprehensive loss, net of tax:
Foreign currency translation (8,862) (8,862)
------------
Comprehensive loss (1,508,814)
============
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 --
Common stock and warrants issued for services 100,000 98,057
Warrants issued for cash -- 766,002 --
Debt settled through the issuance of common 930,481 240,000
stock
Beneficial conversion on issuance of -- 1,225,690 --
convertible debt
------------ ------------ ------------ ------------
Balance as of September 30, 2005 4,737,535 52,139,370 (45,704,887) (1,335,275)
============ ============ ============ ============
* 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-5
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
2005 2004
---- ----
$ $
Net loss (1,499,952) (2,667,350)
---------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 261,512 432,363
Beneficial conversion on issuance of convertible debt 419,583 2,507,880
Interest on 12% senior secured convertible debentures 21,448 29,380
Write off unamortized debt discount 729,422 --
Write down of property and equipment 3,851 --
Increase in accounts receivable (501,299) (369,870)
Increase in prepaid expenses (89,562) (109,203)
Decrease in accounts payable (110,590) (1,014,369)
Debt forgiveness (66,150) --
Accounts payable settled with common stock 240,000 --
Common stock and warrants issued for services 98,057 175,336
---------- ----------
Net cash used in operating activities (493,680) (1,015,833)
---------- ----------
Purchase of property and equipment (211,000) (173,598)
---------- ----------
Net cash used in investing activities (211,000) (173,598)
---------- ----------
Repayment of receivable discount facility (722,331) (512,269)
Proceeds from convertible financing facility 3,129,006 --
Deferred financing costs incurred (230,792) --
Repayment of notes payable -- (6,444)
Repayment of long-term debt (97,624) (60,442)
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 792,449 824,966
---------- ----------
Effect of foreign currency exchange
rate changes (101,648) 24,707
---------- ----------
Net decrease in cash (13,879) (339,758)
Cash
Beginning of period 180,121 483,443
---------- ----------
End of period 166,242 143,685
========== ==========
Interest paid 278,037 304,887
========== ==========
Income taxes paid 95,348 15,906
========== ==========
The accompanying notes are an integral part of
these interim consolidated financial statements.
F-6
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS AND GOING CONCERN
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the Company's ability to continue
as a going concern for a reasonable period of time. These conditions and
events include significant recurring operating losses and working capital
deficiencies. At September 30, 2005, the Company had a deficit of
$45,704,887 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 September 30, 2005, the balance on the
facility was $2,958,117. 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 November 14, 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 Master Fund, Ltd., 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-7
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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-8
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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.
As at December 31, 2004, 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.
On an ongoing basis, absent any impairment indicators, the Company will
perform a goodwill impairment test as of the end of the fourth quarter of
every year.
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-9
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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-10
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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-11
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections", applying to all voluntary accounting principle changes
as well as the accounting for and reporting of such changes. SFAS No. 154
requires voluntary changes in accounting principle be retrospectively
applied to financial statements from previous periods unless such
application is impracticable. SFAS No. 154 requires that changes in
depreciation, amortization, or depletion methods for long-lived,
non-financial assets must be accounted for as a change in accounting
estimate due to a change in accounting principle. By enhancing the
consistency of financial information between periods, the requirements of
FASB 154 improves financial reporting. FASB 154 replaces APB Opinion No.
20 and FASB 3. FASB 154 carries forward many provisions of Opinion 20 and
FASB 3 without change including those provisions related to reporting a
change in accounting estimate, a change in reporting entity, correction of
an error and reporting accounting changes in interim financial statements.
FASB 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005.
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 September 30, 2005 379,668
=========
Options exercisable December 31, 2004 112 $6,100
Options exercisable September 30, 2005 379,668 $6,579
Options available for future grant December 31, 2004 1,562
Options available for future grant September 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 September 30, 2005
OPTIONS
WEIGHTED OUTSTANDING WEIGHTED
OUTSTANDING AVERAGE AVERAGE OPTIONS AVERAGE
OPTIONS* REMAINING LIFE Exercise PRICE EXERCISABLE* EXERCISE PRICE
$16,250 9 0.24 $16,250 9 $16,250
$3,350 to $3,500 87 0.57 $3,470 87 $3,488
$0.0001 379,572 9.75 $0.0001 379,572 $0.0001
* 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 SEPTEMBER 30, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
c) Pro-forma net income
At September 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Net loss as reported (534,335) (1,039,732) (1,499,952) (2,667,350)
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 (534,335) (1,039,732) (1,499,952) (2,669,245)
========== ========== ========== ==========
Loss per share:
Basic and diluted loss per share, as (0.11) (0.93) (0.35) (3.17)
========== ========== ========== ==========
reported
Pro forma loss per share (0.11) (0.93) (0.35) (3.18)
========== ========== ========== ==========
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 rates 3.9% 4.76%
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 nine months ended September 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-13
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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
September 30, 2005 December 31, 2004
------------------ -----------------
$ $
Accounts receivable 2,976,343 2,423,161
Less: Allowance for doubtful accounts (221,158) (179,648)
--------- ---------
2,755,185 2,243,513
========= =========
Allowance for doubtful accounts
Balance, beginning of period 179,648 186,847
Provision 43,010 25,738
Recoveries (1,500) (32,937)
--------- ---------
Balance, end of period 221,158 179,648
========= =========
6. PROPERTY AND EQUIPMENT
September 30, 2005 December 31, 2004
--------------------------------------- -----------------
ACCUMULATED
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 170,085 138,335 31,750 35,245
Computer equipment and software 3,597,588 3,147,403 450,185 448,773
Leasehold improvements 57,025 34,227 22,798 9,985
--------- --------- ------- -------
3,824,698 3,319,965 504,733 494,003
========= ========= ======= =======
Assets under capital lease 258,467 154,062 104,405 90,689
========= ========= ======= =======
Amortization of property and equipment for the nine months ended September
30, 2005 amounted to $203,845 including amortization of assets under
capital lease of $36,161.
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-14
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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:
September 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
September 30, 2005 December 31, 2004
------------------ -----------------
$ $
Cash surrender value of life insurance 65,580 61,562
Customer Lists 62,603 --
Deferred Financing Costs 211,609 --
======= ======
Total 339,792 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 $57,667
for the nine months ended September 30, 2005 and nil for the year ended
December 31, 2004.
9. RECEIVABLE DISCOUNT FACILITY
i) September 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-15
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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:
# of Original # of New
Date of Debenture Conversion Warrants Exercise Warrants Exercise
Issuance Amount Price Issued* Price Repriced* Price
-------------------------------------------------------------------------------------------
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-16
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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 September
30, 2005, the Company has amortized $65,758 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 September 30, 2005, the Company has amortized
$81,874 in beneficial conversion feature as interest expense.
At September 30, 2005, the balance on the facility was as follows:
Principal balance $2,958,117
Unamortized Beneficial Conversion Feature (871,865)
Unamortized Debt Discount (700,244)
----------
Total $1,386,008
==========
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
13. LONG-TERM DEBT
i) September 30, 2005
At September 30, 2005, the Company had a loan balance of $189,874 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%.
a) Included therein:
September 30, 2005 December 31, 2004
------------------ -----------------
$ $
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 189,874 227,951
Financial Services Limited
Various capital leases with various payment
terms and interest rates 40,740 39,985
------ ------
230,614 267,936
Less: current portion 117,165 85,099
------- ------
113,449 182,837
======= =======
F-17
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
b) Future principal payments obligations as at September 30, 2005, were as
follows:
2005 27,593
2006 129,344
2007 73,677
2008 --
2009 --
--------
$230,614
========
c) Interest expense related to long-term debt was $42,180 for the nine
months ended September 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.
On July 1, 2005 the Company issued 294,118* shares of its common stock, no
par value per share, 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, no par value per share, 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 per share, 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 warrants shall
have "piggyback" registration rights.
Using the Black Scholes pricing model, the fair value of the warrants was
determined to be $57,057 and is included in selling expenses.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
F-18
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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*
September 30, 2005 December 31, 2004 Exercise price per share Expiry date
------------------------------------------------------------------------------------
-- -- $16,200.00 2004
-- 195 $16,250.00 to $18,550.00 2005
-- 56 $12,300.00 2005
-- 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
500,000 -- $0.41 2007
100,000 -- $1.20 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
------------------------------------------------------------------------------------
2,839,861 1,811,389
------------------------------------------------------------------------------------
A summary of changes to number of issued warrants is as follows:
Outstanding at December 31, 2004 1,811,389
Issued 2,700,000
Cancelled (1,671,189)
Exercised --
Expired (339)
----------
Outstanding at September 30, 2005 2,839,861*
----------
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-19
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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.
As disclosed in Note 14(b), on July 7, 2005, the Company issued 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 to
Financial Media Relations LLC. The warrants shall be exercisable for a
period of two years, shall vest immediately and be deemed earned upon
issuance, and all warrants shall have "piggyback" registration rights.
Using the Black Scholes pricing model, the fair value of the warrants was
determined to be $57,057 and is included in selling expenses.
* 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-20
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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:
September 30, 2005 December 31, 2004
------------------ -----------------
$ $
Losses available to offset future income taxes 4,983,000 4,678,000
Share and debt issue costs 192,000 357,000
Property and equipment 936,000 877,000
----------- -----------
6,111,000 5,912,000
Less: valuation allowance 6,111,000 5,912,000
----------- -----------
-- --
=========== ===========
b) Current Income Taxes
Current income taxes consist of:
September 30, 2005 December 31, 2004
------------------ -----------------
$ $
Amounts calculated at Federal and Provincial
statutory rates (562,000) (1,503,170)
----------- -----------
Permanent differences 458,000 763,040
Valuation allowance 199,000 758,000
----------- -----------
657,000 1,521,040
Current income taxes 95,000 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 $12,400,000 nor a
capital loss totaling $750,000 in the future as a deferred tax asset as at
September 30, 2005. As at the completion of the September 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)
Nine Months Ended Year Ended
September 30, 2005 December 31, 2004
------------------ -----------------
$ $
Net loss (1,499,952) (4,205,224)
Other comprehensive loss
Foreign currency translation adjustments (8,862) (10,724)
----------- -----------
Comprehensive income (loss) (1,508,814) (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-21
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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 nine
months ended September 30, 2005 and 2004. The net loss for the three and
nine months ended September 30, 2005 was nil and $4,600 compared to $1,200
and $3,900 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 nine months ended
September, 2005 and 2004. There were no losses from the training division
for the three and nine months ended September 30, 2005 compared to a net
loss of $14,000 and $39,000, 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 nine months ended
September 30, 2005 and 2004. Net income from the IT recruitment division
for the three and nine months ended September 30, 2005 was nil and $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 nine
months ended September 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $
Revenues -- -- -- --
-------- -------- -------- --------
Income (loss) from operations
before income taxes -- (14,091) (86) (40,814)
Provision for Income Taxes -- 1,050 (19,182) 1,350
-------- -------- -------- --------
Income (loss) from discontinued
operations -- (15,141) 19,096 (42,164)
======== ======== ======== ========
F-22
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
18. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company issued common shares and warrants for the following:
Nine Months Ended Year Ended
September 30, 2005 December 31, 2004
------------------ -----------------
$ $
Services rendered 98,057 175,336
Accounts payable 240,000 --
------- -------
338,057 175,336
======= =======
19. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Canada 500,706 216,620 1,474,710 561,796
United States of America 2,668,926 2,909,279 8,901,731 8,945,988
--------- --------- --------- ---------
3,169,632 3,125,899 10,376,441 9,507,784
========= ========= ========== =========
b) Net Income (Loss) by Geographic Area
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Canada (563,087) (1,401,376) (2,281,208) (3,794,145)
United States of America 28,752 361,644 781,256 1,126,795
--------- ----------- ----------- -----------
(534,335) (1,039,732) (1,499,952) (2,667,350)
========= =========== =========== ===========
c) Identifiable Assets by Geographic Area
September 30, 2005 December 31, 2004
------------------ -----------------
$ $
Canada 1,287,106 499,483
United States of America 6,621,431 6,316,851
--------- ---------
7,908,537 6,816,334
========= =========
d) Revenue and Gross Profit by Operating Segment
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Revenue
Tech Pubs and Engineering 3,143,232 3,080,571 10,292,801 9,328,681
Gross Profit
Tech Pubs and Engineering 2,234,662 1,134,944 7,057,661 3,381,567
No other segment represents 10% of the Company's revenues, operating
losses or total assets.
F-23
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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 nine months ended September 30, 2005, one customer had
sales of $806,950 and $3,097,238, respectively, representing approximately
25% and 30%, respectively, of total revenue.
For the three and nine months ended September 30, 2004, one customer had
sales of $1,008,468 and $2,965,921, respectively, representing
approximately 32% 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
NUMERATOR
Net loss from continuing operations (534,335) (1,024,591) (1,519,048) (2,625,186)
Income (loss) from discontinued
operations -- (15,141) 19,096 (42,164)
---------- ---------- ---------- ----------
Net loss (534,335) (1,039,732) (1,499,952) (2,667,350)
========== ========== ========== ==========
DENOMINATOR
Weighted Average common stock
outstanding* 4,677,798 1,120,206 4,243,318 840,128
========== ========== ========== ==========
Basic and diluted loss per common
share from continuing operations (0.11) (0.91) (0.36) (3.12)
========== ========== ========== ==========
Basic and diluted loss per common
share after discontinued operations (0.11) (0.93) (0.35) (3.17)
========== ========== ========== ==========
Average common stock outstanding* 4,677,798 1,120,206 4,243,318 840,128
Average common stock issuable -- -- -- --
---------- ---------- ---------- ----------
Average common stock outstanding
assuming dilution* 4,677,798 1,120,206 4,243,318 840,128
========== ========== ========== ==========
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 September 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-24
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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 September 30, 2005, for the next five years are as follows:
2005 $97,275
2006 300,321
2007 301,332
2008 174,968
2009 45,120
Thereafter 3,760
--------
$922,774
========
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 August 25, 2005, the Company reached a settlement with Johnston &
Associates, LLC ("J&A"), a South Carolina corporation, of the action
commenced at Ontario, Canada as Court File No. C-294-04 against the
Company by J&A, in which J&A demanded payment of $60,000 pursuant to a
consulting agreement entered into April 2002. In consideration of a
monetary payment by the Company of $20,000 and execution of a Mutual Full
and Final Release, J&A dismissed the aforementioned action.
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
Subsequent to September 30, 2005, the Company issued a total of 1,460,000
options to its Management and Directors under the 2005 Stock Option Plan
which was approved by the Company's shareholders at its Annual General
Meeting on April 22, 2005, and subsequently approved by its Board of
Directors. The options vest immediately and expire in 2015.
On November 3, 2005, the Company terminated the service agreement of the
vendors of TBM Technologies Inc., acquired on January 17, 2005, for what
it believes is a material breach of the agreement by the vendors.
F-25
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2005 AND 2004
(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 30% 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 September 30, 2004 financial statements have been
reclassified to conform with the basis of presentation used at September
30, 2005.
F-26
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 believe we are poised to benefit from
the increased demand generated by aerospace and defense-related customers who we
expect 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 intend to 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.
-3-
STATEMENTS OF OPERATIONS--PERCENTAGES
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
-------------- ---------------
2005 2004 2005 2004
---- ---- ---- ----
REVENUE 100% 100% 100% 100%
---- ---- ---- ----
COST OF SERVICES 71% 63% 69% 64%
---- ---- ---- ----
GROSS PROFIT 29% 37% 31% 36%
---- ---- ---- ----
EXPENSES
Administrative 19% 19% 18% 18%
Selling 16% 12% 12% 11%
Depreciation and amortization 3% 4% 2% 4%
Write down of property and equipment 0% 0% 0% 0%
Debt forgiveness 0% 0% (1)% 0%
---- ---- ---- ----
Income (loss) from continuing
operations before interest charges (9)% 2% --% 3%
Interest charges 7% 34% 14% 30%
---- ---- ---- ----
Loss from continuing operations
before income taxes (16)% (32)% (14)% (27)%
Income taxes 1% 1% 1% --%
---- ---- ---- ----
Loss from continuing operations (17)% (33)% (15)% (27)%
Income (loss) from discontinued
operations --% (1)% --% (1)%
Net Loss (17)% (34)% (15)% (28)%
---- ---- ---- ----
-4-
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
REVENUE
For the three months ended September 30, 2005, we derived 84% of our
revenue in the United States compared to 93% for the three months ended
September 30, 2004. The decrease in total revenue derived from the United States
is a result of the increase in engineering sales in Canada to $500,000 for the
three months ended September 30, 2005 from $220,000 for the three months ended
September 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 which is consistent with the same period last year. No other operating
segment represented more than 10% of our consolidated revenues.
Consolidated revenues for the three months ended September 30, 2005
increased by $45,000 or 1%, to $3,170,000 as compared to $3,125,000 for the
three months ended September 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 September 30, 2005
increased by $270,000, or 14%, to $2,250,000, as compared to $1,980,000 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 September 30, increased from 63% in 2004 to 71% 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
September 30, 2005 decreased by $220,000, or 19%, to $920,000 compared to
$1,140,000 for the same period in 2004. As a percentage of revenue, gross profit
for the three months ended September 30, 2005 was 29% compared to 37% 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 September 30, 2005 increased by
$100,000, or 9%, to $1,190,000 compared to $1,090,000 for the three months ended
September 30, 2004.
ADMINISTRATIVE EXPENSES
Administrative expenses increased by $20,000 or 3% to $605,000 for the
three months ended September 30, 2005 compared to $585,000 for the three months
ended September 30, 2004. This increase is largely attributable to increased
administrative salaries and benefits and additional maintenance fees on hardware
and software. As a percentage of revenue, administrative expenses for the three
months ended September 30, 2005 was 19% which is consistent with the same period
in 2004.
SELLING EXPENSES
Selling expenses increased by $100,000, or 26%, to $490,000 for the three
months ended September 30, 2005 compared to $390,000 for the same period in
2004. This increase is attributable to the costs associated with a comprehensive
sales and marketing campaign initiated in September and launched in October 2005
as well as the cost of warrants issued to Financial Media Relations. As a
percentage of revenue, selling expenses for the three months ended September 30,
2005 increased to 16% compared to 12% for the same period last year.
-5-
DEPRECIATION AND AMORTIZATION
For the three months ended September 30, 2005, depreciation and
amortization expenses decreased by $30,000, or 25%, to $90,000 from $120,000 for
the three months ended September 30, 2004. As a percentage of revenue,
depreciation and amortization expenses have decreased from 4% for the three
months ended September 30, 2004 to 3% for the same period in 2005. This decrease
is the result of the declining balance of our property and equipment.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES
For the three months ended September 30, 2005, income (loss) from
continuing operations before interest charges decreased by $340,000 or 566% to a
loss of $280,000,000 compared to income of $60,000 for the three months ended
September 30, 2004.
INTEREST CHARGES
For the three months ended September 30, 2005, interest charges decreased
by $820,000, or 70%, to $240,000 from $1,060,000 for the three months ended
September 30, 2004. This decrease is largely attributable to the reduced
interest expense on the beneficial feature recognized on convertible debt.
Included in the interest charges for the three months ended September 30, 2005
is $64,000 in amortized debt discount and $79,000 in beneficial conversion
expense related to the Laurus Convertible Financing Facility. Included in the
interest charges for the three months ended September 30, 2004 is $970,000
beneficial conversion expense related to the 12% Senior Secured Convertible
Debentures.
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
For the three months ended September 30, 2005, loss from continuing
operations before income taxes decreased by $500,000 or 50% to $510,000 compared
to $1,010,000 for the same period in 2004. This decrease is largely attributable
to the reduction in beneficial conversion expense included in interest charges.
INCOME TAXES
Income tax expense for the three months ended September 30, 2005 increased
by $8,500 or 53% to $24,500 compared to $16,000 for the three months ended
September 30, 2004.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the three months ended September 30,
2005 decreased by $490,000 or 48% to a loss of $530,000 compared to a loss of
$1,020,000 for the three months ended September 30, 2004. This decrease is
largely attributable to the reduction in beneficial conversion expense included
in interest charges.
INCOME (LOSS)FROM DISCONTINUED OPERATIONS
Operations of the technology, training and IT recruitment divisions have
been reported as discontinued for the three months ended September 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 September 30, 2005 and 2004. There was no income (loss) for the three
months ended September 30, 2005 compared to a loss of $1,200 for the three
months ended September 30, 2004.
Effective May 1, 2002, we signed an agreement with triOS Training Centres
Limited, an Ontario company, for the purchase of certain assets of our Toronto
training division, Thinkpath Training for a nominal amount of cash and the
assumption of all prepaid training liabilities. As part of the transaction,
triOS assumed the Toronto training staff.
-6-
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 September 30,
2005 and 2004. There was no income (loss) from the training division for the
three months ended September 30, 2005 compared to a net loss of $14,000 for the
three months ended September 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 September
30, 2005 and 2004. There was no net income (loss) from the IT recruitment
division for the three months ended September 30, 2005 or 2004.
NET LOSS
For the three months ended September 30, 2005, net loss decreased by $510,000 or
49% to a net loss of $530,000 compared to a net loss of $1,040,000 for the same
period in 2004. This decrease is largely attributable to the reduction in
beneficial conversion expense included in interest charges.
THE NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
REVENUE
For the nine months ended September 30, 2005, we derived 86% of our
revenue in the United States compared to 94% 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 $1,475,000 for the nine months ended
September 30, 2005 from $560,000 for the three months ended September 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 nine months ended September 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 nine months ended September 30, 2005
increased by $870,000 or 9%, to $10,380,000 as compared to $9,510,000 for the
nine months ended September 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
30% of our consolidated revenues for the nine months ended September 30, 2005.
The same customer had sales of approximately 31% of our consolidated revenues
for the same period last year.
COST OF SERVICES
The cost of services for the nine months ended September 30, 2005
increased by $1,030,000, or 17%, to $7,120,000, as compared to $6,090,000 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 nine months
ended September 30, increased from 64% in 2004 to 69% in 2005.
-7-
GROSS PROFIT
Gross profit for the nine months ended September 30, 2005 decreased by
$160,000, or 5%, to $3,260,000 compared to $3,420,000 for the same period 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. As a percentage of revenue, gross profit for the nine months
ended September 30, 2005 was 31% compared to 36% in 2004.
EXPENSES
Total expenses for the nine months ended September 30, 2005 increased by
$50,000, to $3,230,000 compared to $3,180,000 for the nine months ended
September 30, 2004.
ADMINISTRATIVE EXPENSES
Administrative expenses increased by $110,000 or 6% to $1,850,000 for the
nine months ended September 30, 2005 compared to $1,740,000 for the nine months
ended September 30, 2004. As a percentage of revenue, administrative expenses
for the nine months ended September 30, 2004 are 18% which is consistent with
the same period last year.
SELLING EXPENSES
Selling expenses increased by $130,000, or 12%, to $1,180,000 for the nine
months ended September 30, 2005 compared to $1,045,000 for the same period in
2004. This increase is attributable to the increase in sales personnel salaries
as well as marketing and promotional activities including the cost of warrants
issued to Financial Media Relations LLC. As a percentage of revenue, selling
expenses for the nine months ended September 30, 2005 are 11% which is
consistent with the same period last year.
DEPRECIATION AND AMORTIZATION
For the nine months ended September 30, 2005, depreciation and
amortization expenses decreased by $140,000, or 35%, to $260,000 from $400,000
for the nine months ended September 30, 2004. As a percentage of revenue,
depreciation and amortization expenses have decreased from 4% for the nine
months ended September 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 nine months ended September 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 nine months ended September 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 FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES
For the nine months ended September 30, 2005, income from continuing
operations before interest charges decreased by $220,000 or 92% to $20,000
compared to $240,000 for the nine months ended September 30, 2004.
INTEREST CHARGES
For the nine months ended September 30, 2005, interest charges decreased
by $1,390,000, or 49%, to $1,450,000 from $2,840,000 for the nine months ended
September 30, 2004. This decrease is largely attributable to the reduced
interest expense on the beneficial feature recognized on convertible debt.
Included in the interest charges for the nine months ended September 30, 2005 is
the write off of the unamortized debt discount remaining on the 12% Senior
Secured Convertible Debentures which were repaid in June 2005 in the amount of
$729,422. Also included is $65,758 in amortized debt discount and $81,874 in
beneficial conversion expense related to the Laurus Convertible Financing
Facility. Included in the interest charges for the nine months ended September
30, 2004 is $2,510,000 beneficial conversion expense related to the 12% Senior
Secured Convertible Debentures.
-8-
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
For the nine months ended September 30, 2005, loss from continuing
operations before income taxes decreased by $1,180,000 or 45% to $1,420,000
compared to $2,600,000 for the same period in 2004. This decrease is largely
attributable to the reduction in beneficial conversion expense included in
interest charges.
INCOME TAXES
Income tax expense for the nine months ended September 30, 2005 increased
by $75,000 or 375% to $95,000 compared to $20,000 for the nine months ended
September 30, 2004.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the nine months ended September 30,
2005 decreased by $1,110,000 or 42% to a loss of $1,520,000 compared to a loss
of $2,630,000 for the nine months ended September 30, 2004. This decrease is
largely attributable to the reduction in beneficial conversion expense included
in interest charges.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Operations of the technology, training and IT recruitment divisions have
been reported as discontinued for the nine months ended September 30, 2005 and
2004.
There was no technology revenue for the nine months ended September 30,
2005 and 2004. The net loss for the nine months ended September 30, 2005 was
$4,600 compared to $3,900 for the nine months ended September 30, 2004.
There was no training revenue for the nine months ended September 30, 2005
and 2004. There was no loss from the training division for the nine months ended
September 30, 2005 compared to a loss of $39,000 for the nine months ended
September 30, 2004.
There was no IT recruitment revenue or income for the nine months ended
September 30, 2005 and 2004. Net income for the IT recruitment division for the
nine months ended September 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 nine months ended September 30, 2004.
NET LOSS
For the nine months ended September 30, 2005, the net loss decreased by
$1,170,000 or 44% to $1,500,000 compared to a net loss of $2,670,000 for the
same period in 2004. This decrease is largely attributable to the reduction in
beneficial conversion expense included in interest charges.
LIQUIDITY AND CAPITAL RESOURCES
With insufficient working capital from operations, our primary source of
cash is a 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%. 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. At September 30, 2005,
the balance on the facility was $2,958,117. At September 30, 2005, the
unamortized beneficial conversion feature was $871,865 which is being amortized
over the three year term of the facility. At September 30, 2005, the unamortized
debt discount on the Laurus facility was $700,244 which is also being amortized
over the three year term of the facility. At September 30, 2005, we have
amortized $81,874 in beneficial conversion feature and $65,758 in debt discount
as interest expense.
-9-
At September 30, 2005, we had cash of $170,000 and working capital of
$400,000. At September 30, 2005, we had a cash flow deficiency from operations
of $500,000 largely due to the increase in accounts receivable. At September 30,
2004, we had cash of $140,000 and a working capital deficiency of $940,000. At
September 30, 2004, we had a cash flow deficiency from operations of $1,020,000
primarily attributable to a decrease in accounts payable.
At September 30, 2005, we had a cash flow deficiency from investing
activities of $210,000 related to the purchase of property and equipment. At
September 30, 2004, we had a cash flow deficiency from investing activities of
$170,000 also related to the purchase of property and equipment.
At September 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 September 30, 2004, we had cash flow
from financing activities of $820,000 attributable primarily to proceeds from
the sale of convertible debentures and the exercise of common stock purchase
warrants.
At September 30, 2005 we had a loan balance of $190,000 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 September 30, 2005, we had approximately $40,000 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.
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
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 September 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.
-10-
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
September 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.
-11-
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-based
Payment". This statement requires employers to expense costs related to
share-based payment transactions with employees. With limited exceptions, SFAS
No. 123 (Revised) requires that the fair value of share-based payments to
employees be expensed over the period service is received. SFAS No. 123
(Revised) becomes effective for annual reporting periods that begin after
December 15, 2005. We intend to adopt this standard using the modified
retrospective method of transition. This method requires that issued financial
statements be restated based on the amounts previously calculated and reported
in the pro forma footnote disclosures required by SFAS No. 123. SFAS No. 123
(Revised) allows the use of both closed form models (e.g., Black-Scholes Model)
and open form models (e.g., lattice models) to measure the fair value of the
share-based payment as long as that model is capable of incorporating all of the
substantive characteristics unique to share-based awards. In accordance with the
transition provisions of SFAS No. 123 (Revised), the expense attributable to an
award will be measured in accordance with the company's measurement model at
that award's date of grant. We believe the pro forma disclosures in Note 3 (c)
provide an appropriate short-term indicator of the level of expense that will be
recognized in accordance with SFAS No. 123 (Revised). However, the total expense
recorded in future periods will depend on several variables, including the
number of shared-based awards that vest and the fair value of those vested
awards.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations". FIN 47 clarifies that the term
conditional asset retirement obligation as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations", refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. Retrospective application of interim financial
information is permitted but is not required. We do not believe that the
adoption of FIN 47 will have an impact, if any, on its results of operations or
financial position.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections", applying to all voluntary accounting principle changes as
well as the accounting for and reporting of such changes. SFAS No. 154 requires
voluntary changes in accounting principle be retrospectively applied to
financial statements from previous periods unless such application is
impracticable. SFAS No. 154 requires that changes in depreciation, amortization,
or depletion methods for long-lived, non-financial assets must be accounted for
as a change in accounting estimate due to a change in accounting principle. By
enhancing the consistency of financial information between periods, the
requirements of FASB 154 improves financial reporting. FASB 154 replaces APB
Opinion No. 20 and FASB 3. FASB 154 carries forward many provisions of Opinion
20 and FASB 3 without change including those provisions related to reporting a
change in accounting estimate, a change in reporting entity, correction of an
error and reporting accounting changes in interim financial statements. FASB 154
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
RECENT EVENTS
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. On
September 28, 2005, we received notice that this review was extended to our Form
10-QSB for the quarterly period ended June 30, 2005. As a result of our ongoing
discussions with the Securities and Exchange Commission, we may be required to
amend this quarterly report to reflect any changes required.
Subsequent to September 30, 2005, we issued a total of 1,460,000 options to our
Management and Directors under the 2005 Stock Option Plan which was approved by
our shareholders at our Annual General Meeting on April 22, 2005, and
subsequently approved by our Board of Directors. The options vest immediately
and expire in 2015.
On November 3, 2005, we terminated the service agreement of the vendors of TBM
Technologies Inc., for what we believe is a material breach of the agreement by
the vendors.
-12-
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
On December 12, 2001, the Securities and Exchange Commission issued FR-60,
Cautionary Advice Regarding Disclosure about Critical Accounting Policies, which
encourages additional disclosure with respect to a company's critical accounting
policies, the judgments and uncertainties that affect a company's application of
those policies, and the likelihood that materially different amounts would be
reported under different conditions and using different assumptions.
Management is required to make certain estimates and assumptions during
the preparation of the consolidated financial statements in accordance with
GAAP. These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates. Certain accounting policies and estimates have a more significant
impact on our financial statements than others, due to the magnitude of the
underlying financial statement elements.
CONSOLIDATION
Our determination of the appropriate accounting method with respect to our
investments in subsidiaries is based on the amount of control we have, combined
with our ownership level, in the underlying entity. Our consolidated financial
statements include the accounts of our parent company and our wholly-owned
subsidiaries. All of our investments are accounted for on the cost method. If we
had the ability to exercise significant influence over operating and financial
policies of a company, but did not control such company, we would account for
these investments on the equity method.
Accounting for an investment as either consolidated or by the equity
method would have no impact on our net income (loss) or stockholders' equity in
any accounting period, but would impact individual income statement and balance
sheet items, as consolidation would effectively "gross up" our income statement
and balance sheet. However, if control aspects of an investment accounted for by
the cost method were different, it could result in us being required to account
for an investment by consolidation or the equity method. Under the cost method,
the investor only records its share of the investee's earnings to the extent
that it receives dividends from the investee; when the dividends received exceed
the investee's earnings subsequent to the date of the investor's investment, the
investor records a reduction in the basis of its investment. Under the cost
method, the investor does not record its share of losses of the investee.
Conversely, under either consolidation or equity method accounting, the investor
effectively records its share of the investee's net income or loss, to the
extent of its investment or its guarantees of the investee's debt.
At December 31, 2004, we wrote down our investments in non-related
companies to nil.
REVENUE RECOGNITION
We recognize revenue 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
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.
-13-
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 OF 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.
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Due to the fact that items in the financial statements are being
translated at different rates according to their nature, a translation
adjustment is created. This translation adjustment has been included in
accumulated other comprehensive income.
There can be no assurance that we would have been able to exchange
currency on the rates used in these calculations. We do not engage in exchange
rate-hedging transactions. A material change in exchange rates between United
States and Canadian dollars could have a material effect on our reported
results.
* 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.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and recorded within time periods specified in
the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurances of
achieving the desired control objectives, and management necessarily required
was required to apply its judgment in evaluating its cost benefit relationship
of possible controls and procedures. The Company's certifying officers have
concluded that the Company's disclosure controls and procedures were not
effective in reaching that level of reasonable assurance.
As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of our Company's management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were not effective. In light of the material weakness described
below, which were first discovered by the Chief Executive Officer and the Chief
Financial Officer subsequent to the end of the quarter ended June 30, 2005, the
Company implemented additional procedures to ensure its consolidated financial
statements are prepared in accordance with generally accepted accounting
principles. Accordingly, management believes the financial statements presented
in this Form 10QSB fairly present, in all material respects, the Company's
financial position, results of operations and cash flow for the periods
presented; provided, however, it should be noted we are currently responding to
comments provided by the staff of the Securities and Exchange Commission in
connection with its review of our financial statements and reports filed under
the Exchange Act.
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, assessed the effectiveness of the Company's internal
control over financial reporting as of September 30, 2005.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of September 30, 2005, management has identified the following
material weaknesses:
1. As of September 30, 2005, the Company did not have an effective control
environment based on criteria established in "Internal Control - Integrated
Framework" issued by COSO. The Company failed to design appropriate company wide
policies and procedures over the accounting, revenue, treasury and risk
management functions and did not uniformly and consistently communicate the
importance of internal controls throughout the organization. In addition, the
Company's policies and procedures with respect to review and supervision of its
accounting operations were not operating effectively in so far as the Company
failed to implement the appropriate accounting treatment in connection with two
convertible debenture financings engaged in by the Company. This control
deficiency, together with the control deficiencies described in point 2 below,
indicate that the Company did not maintain an effective control environment.
This control deficiency could result in a material misstatement of annual or
interim financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency constitutes a
material weakness.
2. As of September 30, 2005, the Company did not maintain a sufficient
complement of personnel with an appropriate level of accounting knowledge,
experience and training in the application of generally accepted accounting
principles commensurate with the Company's financial reporting requirements
including personnel with that had the expertise to evaluate the accounting
treatment of convertible debentures issued by the Company. In addition, the
Company also failed to implement processes to ensure periodic monitoring of its
existing internal control activities over financial reporting. Specifically, the
Company had a shortage of finance and accounting staff with sufficient depth and
skill in the application of U.S. generally accepted accounting principles and
individuals in the finance function who did not have the appropriate skills,
training and experience to meet the objective that should be expected of these
roles.
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Because of these material weaknesses, management has concluded that the Company
did not maintain effective internal control over financial reporting as of
September 30, 2005, based on the criteria in Internal Control - Integrated
Framework.
Plan for Remediation of Material Weaknesses
At the direction of our board of directors, management has spent and continues
to spend a significant amount of time, effort and resources to improve our
control environment. Such efforts have included the engagement of the Complex
Accounting and Transaction Expertise and the SEC Services Group of Deloitte &
Touche, the appointment of David Barnes as a director of the Company who has
extensive accounting experience and will serve as the head of our audit
committee, the subscription to accounting journals and the attendance of
accounting seminars by our personnel. This effort has been undertaken to improve
our operational and financial reporting efficiency.
Although we have undertaken steps to prevent further material weaknesses or
significant deficiencies in our internal controls, we cannot assure that we will
not in the future identify further material weaknesses or significant
deficiencies in our internal control over financial reporting that have not
previously been identified, or that all the material weaknesses identified in
this report will be remediated by December 31, 2005.
Changes in Internal Control over Financial Reporting
Except the procedures implemented to improve our internal controls as described
above including the engagement of consultants, the appointment of a director
that will serve as the chair of our audit committee, the subscription to
accounting journals and the attendance of seminars by accounting personnel,
there were no changes in the Company's internal control over financial reporting
during the quarter ended September 30, 2005, other than as described above, that
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
(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
From time to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company's business. Except
for the following, the Company is currently not aware of nor has any knowledge
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results:
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On August 25, 2005, we reached a settlement with Johnston & Associates,
LLC, a South Carolina corporation, of the action commenced at Ontario, Canada,
Court File No. C-294-04, against us demanding payment of $60,000 pursuant to a
consulting agreement entered into April 2002. In consideration of a monetary
payment of $20,000 and execution of a Mutual Full and Final Release, Johnston &
Associates dismissed the action against us.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
During the third quarter 2005, we sold unregistered securities as
described below. There were no underwriters involved in the transactions and
there were no underwriting discounts or commissions paid in connection
therewith, except as disclosed below. The purchasers of the securities in such
transactions represented their intention to acquire the securities for
investment purposes only and not with a view to or for sales in connection with
any distribution thereof and appropriate legends were affixed to the
certificates for the securities issued in such transactions. The purchasers of
the securities in the transactions below were each experienced investors who
were provided information about us and were able to bear the risk of loss of
their entire investment.
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.
We believe the above issuances were exempt from registration pursuant to
the exemption provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 October 7, 2005, the Company filed a report on Form 8-K to disclose
non-reliance and restatement of previously issued financial statements and the
appointment of a new director.
* 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: November 21, 2005 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
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