UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
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 AUGUST 21, 2006 THERE WERE 9,988,082 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES | | NO |X|
THINKPATH INC.
JUNE 30, 2006 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2006 and
December 31, 2005................................................ 4-5
Interim Consolidated Statements of Operations for the three and six
months ended June 30, 2006 and 2005.............................. 6
Interim Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 2006 and the year ended
December 31, 2005................................................ 7
Interim Consolidated Statements of Cash Flows for the six months
ended June 30, 2006 and 2005..................................... 8
Notes to Interim Consolidated Financial Statements............... 9-32
Item 2. Management's Discussion and Analysis or Plan of Operation.........33-48
Item 3. Controls and Procedures........................................... 49
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 50
Item 3. Defaults Upon Senior Securities .................................. 50
Item 4. Submission of Matters to a Vote of Security Holders .............. 50
Item 5. Other Information ................................................ 50
Item 6. Exhibits and Reports on Form 8-K ................................. 51
-2-
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
-3-
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
6/30/2006 12/31/2005
---------- ----------
$ $
ASSETS
CURRENT ASSETS
Cash 602,824 123,056
Accounts receivable (note 5) 2,087,565 1,841,338
Prepaid expenses 105,222 143,273
---------- ----------
2,795,611 2,107,667
PROPERTY AND EQUIPMENT (note 6) 859,571 577,689
GOODWILL (note 7) 4,402,814 2,507,552
OTHER ASSETS (note 8) 830,588 259,344
---------- ----------
8,888,584 5,452,252
========== ==========
The accompanying notes are an integral part of these interim consolidated
financial statements.
-4-
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
6/30/2006 12/31/2005
------------ ------------
$ $
LIABILITIES
CURRENT LIABILITIES
Laurus revolving note (note 12) 2,351,271 --
Convertible financing - Laurus (note 12) -- 1,169,156
Convertible financing - derivatives (note 12) -- 424,241
Accounts payable (note 13) 1,543,328 1,166,152
Current portion of long-term debt (note 14) 687,903 124,326
------------ ------------
4,582,502 2,883,875
LONG-TERM DEBT (note 14) 1,002,237 69,826
CONVERTIBLE FINANCING - DERIVATIVES (note 12) 787,371 480,948
DEFERRED TAX LIABILITY (note 16) 107,711 --
------------ ------------
6,479,821 3,434,649
============ ============
COMMITMENTS AND CONTINGENCIES (note 22)
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 15) 42,198,530 40,486,219
DEFICIT (38,854,872) (37,518,943)
ACCUMULATED OTHER COMPREHENSIVE LOSS (note 17) (934,895) (949,673)
------------ ------------
2,408,763 2,017,603
------------ ------------
8,888,584 5,452,252
============ ============
The accompanying notes are an integral part of these interim consolidated
financial statements.
-5-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (RESTATED)
(AMOUNTS EXPRESSED IN US DOLLARS)
3 months ended June 30, 6 months ended June 30,
Restated Restated
2005 2005
2006 (note 25) 2006 (note 25)
---------- ---------- ---------- ----------
$ $ $ $
REVENUE 3,793,823 3,603,870 6,704,137 7,206,809
COST OF SERVICES 2,558,950 2,535,022 4,660,079 4,865,792
---------- ---------- ---------- ----------
GROSS PROFIT 1,234,873 1,068,848 2,044,058 2,341,017
---------- ---------- ---------- ----------
EXPENSES
Administrative 885,860 655,119 1,479,085 1,244,153
Selling 464,660 325,085 938,476 693,119
Depreciation and amortization 175,775 85,731 263,707 167,269
Write down of property and equipment -- -- -- 3,851
Debt forgiveness (78,062) (66,150) (78,062) (66,150)
Financing costs and mark-to-market adjustments 577,756 4,523 453,549 4,523
---------- ---------- ---------- ----------
2,025,989 1,004,308 3,056,755 2,046,765
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES AND INCOME TAXES (791,116) 64,540 (1,012,697) 294,252
Interest Charges 161,964 822,877 304,195 1,181,371
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (953,080) (758,337) (1,316,892) (887,119)
Income Taxes (note 16) 11,194 63,502 19,037 70,942
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (964,274) (821,839) (1,335,929) (958,061)
INCOME FROM DISCONTINUED OPERATIONS (note 18) -- 23,693 -- 19,096
---------- ---------- ---------- ----------
NET LOSS (964,274) (798,146) (1,335,929) (938,965)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND DILUTED* 4,369,147 4,000,971 4,369,147 3,665,040
========== ========== ========== ==========
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK BASIC AND DILUTED (0.22) (0.21) (0.31) (0.26)
========== ========== ========== ==========
LOSS FROM DISCONTINUED OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK BASIC AND DILUTED -- 0.01 -- 0.01
========== ========== ========== ==========
NET LOSS PER WEIGHTED AVERAGE COMMON STOCK
BASIC AND DILUTED (0.22) (0.20) (0.31) (0.26)
========== ========== ========== ==========
* 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.
-6-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND THE YEAR ENDED DECEMBER 31, 2005
(AMOUNTS EXPRESSED IN US DOLLARS)
PREFERRED ACCUMULATED
COMMON STOCK STOCK CAPITAL OTHER
NUMBER OF NUMBER OF STOCK COMPREHENSIVE COMPREHENSIVE
SHARES* SHARES AMOUNTS DEFICIT LOSS LOSS
- ----------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2004 2,720,493 39,686,047 (34,683,637) (940,764)
======================================================== =============
Net loss for the period -- -- (2,835,306) (2,835,306)
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments (8,909) (8,909)
-------------
Comprehensive loss (2,844,215)
=============
Common stock repurchased for
cancellation (note 11) (626,384) (123,110) --
Conversion of 12% senior secured
convertible debentures 1,235,100 317,168 --
Interest on 12% senior secured
convertible debentures 131,395 21,448 --
Common stock issued for investment 246,450 246,609 --
Common stock and warrants issued
for services 100,787 98,057 --
Accrued liabilities settled through
the issuance of common stock 930,481 240,000 --
-------------------------------------------------------- -------------
Balance as of December 31, 2005 4,738,322 40,486,219 (37,518,943) (949,673)
======================================================== =============
Net loss for the period -- -- (1,335,929) (1,335,929)
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments 14,778 14,778
-------------
Comprehensive loss (1,321,151)
=============
Common stock issued for investment 3,685,751 763,000 --
Preferred stock issued for
investment 700 699,687 --
Accrued liabilities settled through
the issuance of common stock 1,202,009 249,624 --
-------------------------------------------------------- -------------
Balance as of June 30, 2006 9,626,082 700 42,198,530 (38,854,872) (934,895)
======================================================== =============
* 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.
-7-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (RESTATED)
(AMOUNTS EXPRESSED IN US DOLLARS)
Six Months Ended June 30,
Restated
2006 2005 (note 25)
---- --------------
$ $
Cash flows from operating activities
Net loss (1,335,929) (938,965)
Adjustments to reconcile net loss to net cash used in operating activities:
Income (loss) from discontinued operations -- 19,096
Depreciation and amortization 263,707 167,269
Beneficial conversion on issuance of convertible debt -- 474,302
Interest on 12% senior secured convertible debentures -- 21,448
Write off unamortized debt discount -- 505,340
Amortization of deferred financing costs 287,610 4,523
Mark-to-market of derivatives (135,656) --
Loss on extinguishment of debt 689,858 --
Gain on reversal of embedded derivative (388,263)
Write down of property and equipment -- 3,851
Decrease (increase) in accounts receivable 322,105 (468,688)
Decrease (increase) in prepaid expenses 62,126 (92,468)
Increase in accounts payable 151,404 283,742
Debt forgiveness (78,062) (66,150)
---------- ----------
Net cash provided by (used in) operating activities (161,100) (86,700)
---------- ----------
Cash flows from investing activities
Purchase of property and equipment (8,023) (193,016)
Cash received on disposal of other asset 66,920 --
Cash payment for acquisition net of cash acquired and related costs (1,252,091) --
---------- ----------
Net cash used in investing activities (1,193,194) (193,016)
---------- ----------
Cash flows from financing activities
Repayment of receivable discount facility -- (728,416)
Proceeds from revolving (convertible) financing facility 303,234 3,100,000
Deferred financing costs incurred (121,696) (230,792)
Repayment of convertible debt -- (1,162,700)
Repurchase of shares for cancellation -- (123,110)
Proceeds from long-term debt 1,959,750 --
Repayment of long-term debt (306,574) (69,396)
---------- ----------
Net cash provided by financing activities 1,834,714 785,586
---------- ----------
Cash flow from used by discontinued operations -- (19,096)
Effect of foreign currency exchange rate changes (652) (59,458)
---------- ----------
Net increase (decrease) in cash 479,768 427,316
Cash
Beginning of period 123,056 180,121
---------- ----------
End of period 602,824 607,437
========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 161,964 179,579
========== ==========
Income taxes paid 11,194 70,942
========== ==========
SUPPLEMENTAL NON-CASH ITEMS:
Common stock issued for liabilities 249,624 --
========== ==========
Common stock issued for investment 763,000 --
========== ==========
Preferred stock issued for investment 699,687 --
========== ==========
The accompanying notes are an integral part of these interim consolidated
financial statements.
-8-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS AND GOING CONCERN
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the Company's ability to continue
as a going concern for a reasonable period of time. These conditions and
events include significant recurring operating losses and working capital
deficiencies. At June 30, 2006, the Company had a deficit of $38,854,872
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 financing facility with Laurus Master Fund,
Ltd. ("Laurus"). At June 30, 2006, the balance on the facility was
$2,825,453 (note 12) . 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%.
As at August 21, 2006, management's plans to mitigate and alleviate its
operating losses and working capital deficiencies include:
a) Registration of the shares underlying the Laurus 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 in the current year and following 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 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) 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 The
Multitech Group Inc. provides engineering, design, technical publications
and staffing, services to enhance the resource performance of clients. In
addition, the Company owns 100% (unless otherwise noted) of 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.), TidalBeach Inc.
and TBM Technologies Inc.
-9-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
c) 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.
d) 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 approximate fair values because of
the short maturity of those instruments.
e) 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.
f) 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.
g) 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.
h) 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 15 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.
i) 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.
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.
-10-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
j) 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.
At December 31, 2005, the Company recorded a charge of $1,459,691 for the
impaired goodwill of the Technical Publications and Engineering unit based
on reduced cash flow estimates.
As at December 31, 2004, the Company 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.
k) 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.
l) 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.
m) 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.
-11-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
n) 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.
o) 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.
p) Accounting for Stock-Based Compensation
Effective January 1, 2006, the Company's stock based employee compensation
plans are accounted for in accordance with the recognition and measurement
provisions of Statement of Financial Accounting Standards ("FAS") No. 123
(revised 2004), Share-Based Payment ("FAS 123(R)"). See Note 3 (c) for
further details.
q) 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.
r) 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.
s) Recent Pronouncements
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.
-12-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29", effective for non-monetary
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. Effective January 1, 2006, the Company
adopted this standard using the modified prospective 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 total expense of
stock based employee compensation 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 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.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments" ("SFAS 155"). SFAS 155 allows any hybrid
financial instrument that contains an embedded derivatives that otherwise
would require bifurcation under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" to be carried at fair value in its
entirety, with changes in fair value recognized in earnings. In addition,
SFAS 155 requires that beneficial interests in securitized financial
assets be analyzed to determine whether they are freestanding derivatives
or contain an embedded derivative. SFAS 155 also eliminates a prior
restriction on the types of passive derivatives that a qualifying special
purpose entity is permitted to hold. SFAS 155 is applicable to new or
modified financial instruments in fiscal years beginning after September
15, 2006, though the provisions related to fair value accounting for
hybrid financial instruments can also be applied to existing instruments.
Early adoption, as of the beginning of an entity's fiscal year, is also
permitted, provided interim financial statements have not yet been issued.
The company is currently evaluating the potential impact, if any, that the
adoption of SFAS 155 will have on its consolidated financial statements.
In March 2006, the FASB issued SFAS 156, "Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140". This statement
amends FASB Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", with respect to the
accounting for separately recognized servicing assets and servicing
liabilities. This statement: (1) requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing
contract in any of the following situations: (a) a transfer of the
servicer's financial assets that meets the requirements for sale
accounting, (b) a transfer of the servicer's financial assets to a
qualifying special-purpose entity in a guaranteed mortgage securitization
in which the transferor retains all of the resulting securities and
classifies them as either available-for-sale securities or trading
securities in accordance with FASB Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", (c) an acquisition or
assumption of an obligation to service a financial asset that does not
relate to financial assets of the servicer or its consolidated affiliates;
(2) requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable; (3)
permits an entity to choose either of the following subsequent measurement
methods for each class of separately recognized servicing assets and
servicing liabilities: (a) Amortization method-Amortize servicing assets
or servicing liabilities in proportion to and over the period of estimated
net servicing income or net servicing loss and assess servicing assets or
servicing liabilities for impairment or increased obligation based on fair
value at each reporting date, or (b) Fair value measurement method-Measure
servicing assets or servicing liabilities at fair value at each reporting
date and report changes in fair value in earnings in the period in which
the changes occur; (3) at its initial adoption, permits a one-time
reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights, without calling into question
the treatment of other available-for-sale securities under Statement 115,
provided that the available-for-sale securities are identified in some
manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to
subsequently measure at fair value; and (5) requires separate presentation
of servicing assets and servicing liabilities subsequently measured at
fair value in the statement of financial position and additional
disclosures for all separately recognized servicing assets and servicing
liabilities. An entity should adopt this statement as of the beginning of
its first fiscal year that begins after September 15, 2006.
-13-
Earlier adoption is permitted as of the beginning of an entity's fiscal
year, provided the entity has not yet issued financial statements,
including interim financial statements, for any period of that fiscal
year. The effective date of this Statement is the date an entity adopts
the requirements of this statement.
t) 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 (25) $15,688
Options granted during the period 1,864,572 $.19
---------
Options outstanding at December 31, 2005 1,864,659
=========
Options forfeited during the period --
Options expired during the period (87) $3,475
Options granted during the period --
--
Options outstanding at June 30, 2006 1,864,572
=========
Options exercisable December 31, 2005 1,864,659 $.19
Options exercisable June 30, 2006 1,864,572 $.19
Options available for future grant December 137,015
31, 2005
Options available for future grant June 30, 137,102
2006
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
b) Range of Exercise Prices at June 30, 2006
Weighted Weighted
Average Average
Outstanding Remaining Options Exercise
Options* Life Exercisable* Price
------- ---- ----------- -----
$0.0001 1,864,572 9.32 1,864,572 $0.19
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
c) Change in Accounting Policy and Pro-forma net income
At June 30, 2006, the Company has five stock-based employee
compensation plans, which are described more fully in Note 15(d).
Effective January 1, 2006, the Company's plans are accounted for in
accordance with the recognition and measurement provisions of
Statement of Financial Accounting Standards ("FAS") No. 123 (revised
2004), Share-Based Payment ("FAS 123(R)"), which replaces FAS No.
123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees, and related interpretations. FAS 123 (R)
requires compensation costs related to share-based payment
transactions, including employee stock options, to be recognized in
the financial statements. In addition, the Company adheres to the
guidance set forth within Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 107, which provides the
Staff's views regarding the interaction between SFAS No. 123(R) and
certain SEC rules and regulations and provides interpretations with
respect to the valuation of share-based payments for public
companies.
-14-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
Prior to January 1, 2006, the Company accounted for similar
transactions in accordance with APB No. 25 which employed the
intrinsic value method of measuring compensation cost. Accordingly,
compensation expense was not recognized for fixed stock options if
the exercise price of the option equaled or exceeded the fair value
of the underlying stock at the grant date.
While FAS No. 123 encouraged recognition of the fair value of all
stock-based awards on the date of grant as expense over the vesting
period, companies were permitted to continue to apply the intrinsic
value-based method of accounting prescribed by APB No. 25 and
disclose certain pro-forma amounts as if the fair value approach of
SFAS No. 123 had been applied. In December 2002, FAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure,
an amendment of SFAS No. 123, was issued, which, in addition to
providing alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee
compensation, required more prominent pro-forma disclosures in both
the annual and interim financial statements. The Company complied
with these disclosure requirements for all applicable periods prior
to January 1, 2006.
In adopting FAS 123(R), the Company applied the modified prospective
approach to transition. Under the modified prospective approach, the
provisions of FAS 123 (R) are to be applied to new awards and to
awards modified, repurchased, or cancelled after the required
effective date. Additionally, compensation cost for the portion of
awards for which the requisite service has not been rendered that
are outstanding as of the required effective date shall be
recognized as the requisite service is rendered on or after the
required effective date. The compensation cost for that portion of
awards shall be based on the grant-date fair value of those awards
as calculated for either recognition or pro-forma disclosures under
FAS 123.
There was no stock compensation expense for employee options
recorded under FAS 123 (R) in the Consolidated Statement of
Operations for the three and six months ended June 30, 2006. There
was no stock compensation expense for employee options recorded
under APB No. 25 in the Consolidated Statements of Operations for
the three and six months ended March 31, 2006.
The Company previously accounted for options granted to its
non-employee consultants using the fair value cost in accordance
with FAS 123 and EITF No. 96-18. The adoption of FAS 123(R ) and SAB
107 as of January 1, 2006, had no material impact on the accounting
for non-employee awards. The Company continues to consider the
additional guidance set forth in EITF Issue No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees"
("EITF 96-18").
There was no stock compensation expense related to non-employee
options for the three and six month periods ended June 30, 2006 or
2005.
Pro Forma Information under SFAS No. 123 for Periods Prior to
Adoption of FAS 123 ( R):
The following table illustrates the effect on net income and
earnings per share as if the fair value recognition provisions of
FAS No. 123 had been applied to all outstanding and unvested awards
in the prior year comparable period.
Three months ended Six months ended
June 30, June 30,
Restated Restated
2005 (note 25) 2005 (note 25)
-------------- --------------
$
Net loss as reported (798,146) (938,965)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for -- --
all awards net of related tax effects
Pro forma net loss (798,146) (938,965)
Loss per share:
Basic and diluted loss per share, (0.20) (0.26)
as reported
Pro forma loss per share (0.20) (0.26)
-15-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
d) Black-Scholes Assumptions
The fair value of each option grant used for purposes of estimating the
pro forma amounts summarized above is estimated on the date of grant using
the Black-Scholes option price model with the weighted average assumptions
shown in the following table:
2005 Grants 2001 Grants
----------- -----------
Risk free interest rates 4.43 - 4.56% 4.76%
Volatility factors 116 - 137% 100%
Weighted average expected life 10 years 4.90 years
Weighted average fair value per share $0.25 $3,700.00
Expected dividends -- --
On June 27, 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.
On November 22, 2005, the Company issued a total of 1,460,000 options at
an exercise price of $.24 per share 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 December 12, 2005, the Company issued 25,000 options at an exercise
price of $.27 per share to Mr. Tom Luther, Vice President Sales, under the
2005 Stock Option Plan. The options vest immediately and expire in 2015.
There have been no other options granted since 2001.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
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 $246,609
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 $246,609. 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 were valued as follows:
Current assets $23,616
Property and equipment 11,240
Other assets 100,909
Liabilities assumed (107,667)
--------
Less: consideration 246,609
--------
Goodwill $218,511
========
At December 31, 2005, the Company wrote off the goodwill from the
acquisition of TBM Technologies Inc., for impairment based on reduced cash
flow estimates.
On June 30, 2006, the Company completed the acquisition of The Multitech
Group Inc. (TMG), an engineering services firm located in New Jersey
effective April 1, 2006. The purchase price of $2,798,750 was based on
five times the audited 2005 EBIT of TMG and was payable as follows: thirty
percent in cash for a total of $839,625; twenty per cent in a two year
subordinated note of $559,750 bearing annual interest at US prime, payable
quarterly and guaranteed by the Company; twenty-five per cent in the
Company's common shares for a total consideration of $699,688 or 3,369,188
common shares; and, twenty-five per cent in the Company's preferred shares
for a total consideration of $669,688 or 700 preferred share which will be
convertible into common shares after June 30, 2007. The acquisition was
accounted for by the purchase method and the operations have been included
in the consolidated operations from April 1, 2006.
-16-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
The net acquired assets were valued as follows:
Current assets $965,977
Property and equipment 378,715
Other assets 626,519
Liabilities assumed (762,933)
----------
Less: consideration including acquisition costs 3,103,540
----------
Goodwill $1,895,262
5. ACCOUNTS RECEIVABLE
6/30/06 12/31/05
--------- ---------
$ $
Accounts receivable 2,345,074 2,043,214
Less: Allowance for doubtful accounts (257,509) (201,876)
--------- ---------
2,087,565 1,841,338
========= =========
Allowance for doubtful accounts
Balance, beginning of period 201,876 179,648
Provision 80,063 42,051
Recoveries (24,430) (19,823)
--------- ---------
Balance, end of period 257,509 201,876
========= =========
6. PROPERTY AND EQUIPMENT
6/30/06 12/31/05
---------------------------------- --------
ACCUMULATED
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 221,051 184,228 36,823 31,734
Computer equipment and software 3,833,651 3,387,492 446,159 524,474
Leasehold improvements 57,422 39,139 18,283 21,481
Automobile 61,817 44,381 17,436 --
Fair Market Increment on
Acquired Assets 358,810 17,940 340,870 --
--------- --------- ------- -------
4,532,751 3,673,180 859,571 577,689
========= ========= ======= =======
Property and equipment
under capital lease 267,263 174,760 92,503 99,408
========= ========= ======= =======
Amortization of property and equipment for the three and six months ended
June 30, 2006 amounted to $85,143 and $153,751 respectively. These amounts
include amortization of property and equipment under capital lease of
$4,909 and $9,842 respectively for the three and six months ended June 30,
2006.
Amortization of property and equipment for the year ended December 31,
2005 amounted to $280,837 including amortization of property and equipment
under capital lease of $44,275.
-17-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(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:
6/30/06 12/31/05
------- --------
ACCUMULATED
ACCUMULATED IMPAIRMENT
COST AMORTIZATION LOSSES NET NET
$ $ $ $ $
-------------------------------------------------------------
Technical
Publications &
Engineering
(CadCam Inc., TBM
Technologies Inc.
and The Multitech
Group Inc.) 7,851,142 535,164 2,913,164 4,402,814 2,507,552
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, 2005, the Company performed its annual impairment test for
goodwill by first comparing the carrying value of the net assets to the
fair value of the Technical Publications and Engineering unit. The fair
value was determined to be less than the carrying value, and therefore a
second step was performed to compute the amount of the impairment. In this
process, a fair value for goodwill was estimated, based in part on the
fair value of the operations, and was compared to its carrying value. The
shortfall of the fair value below carrying value was $1,241,180 which
represents the amount of goodwill impairment.
During the fourth quarter 2005, conditions were present that clearly
indicated an impairment of the goodwill of TBM Technology Inc., including
adverse changes in legal factors (see note 22) and business climate as
well as the projection of continued cash flow losses. As a result of these
conditions, the full amount of goodwill of $218,511 was written off.
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.
Effective April 1, 2006, the Company acquired goodwill in the amount of
1,895,262 in connection to its acquisition of TMG (note 4) which has been
allocated to the Technical Publications and Engineering reporting unit.
8. OTHER ASSETS
6/30/06 12/31/05
------- --------
$ $
Cash surrender value of life insurance 13,291 66,920
Deferred Financing Costs 275,557 192,424
Contracts 428,132 --
Customer Lists 113,608 --
======= =======
Total 830,588 259,344
======= =======
Included in Other Assets are deferred financing costs related to the
Laurus Convertible Financing Facility to be amortized over the three-year
term of the debt, beginning July 1, 2005. Also included in Other Assets
are contracts and customer lists related to the acquisition of The
Multitech Group Inc. (note 4) to be amortized over two and three years
respectively, beginning April 1, 2006. Amortization of other assets for
the three and six months ended June 30, 2006 amounted to $90,632 and
$109,956 respectively.
Amortization of other assets for the year ended December 31, 2005 amounted
to $89,919 including amortization of $51,551 on customer lists acquired on
January 17, 2005 (Note 4) the balance of which $53,799 was written off for
impairment at year-end.
9. RECEIVABLE DISCOUNT FACILITY
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.
-18-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(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 6.75% per
annum.
11. 12% CONVERTIBLE DEBENTURE
At December 31, 2005, the amortization of the beneficial conversion
feature on all issued convertible debentures was determined to be $474,302
which was 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 $505,340 was expensed as interest.
12. LAURUS REVOLVING NOTE (CONVERTIBILE FINANCING) FACILITY
On June 27, 2005, the Company closed a $3,500,000 convertible financing
facility with Laurus Master Fund, Ltd. ("Laurus"). The facility consists
of a secured convertible note ("Minimum Borrowing Note") 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% ("contract rate") but never less than 8%. At closing, the Company
received $2,100,000 in proceeds from the facility based on its eligible
accounts receivable ("formula amount") and an additional $1,000,000
("overadvance") granted in excess of the formula amount. The overadvance
bears interest at the prime rate as published by the Wall Street Journal
plus 2% and held an expiration date of December 27, 2005. In the event
that the overadvance was not repaid in full by this date, the interest
rate was to increase by an additional 1% per month.
Laurus has the option to convert into common stock at anytime all or any
portion of the principal and interest and fees payable at a fixed
conversion price as follows:
- first $1,000,000 in principal convertible at a fixed price of
$0.40 (80% of the average price for 10 days prior to closing
of debt);
- next $1,000,000 in principal convertible at a fixed price of
$0.50 (100% of the average price for 10 days prior to closing
of debt);
- and, any remaining principal convertible at a fixed price of
$0.53 (105% of the average price for 10 days prior to closing
of debt).
Should the Company complete a subsequent financing at a lower price than
the original issue, the conversion prices of the three tranches above will
be adjusted to 80%, 100% and 105% of the new lower price. This feature
would modify the number of shares that the Company will issue on
conversion of the notes.
The Company has the option of prepaying the note at any time by paying to
the holder a sum of money equal to 130% of the principal amount of the
note.
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 vest immediately and expire on June 27, 2011. The
Company also issued options 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 vest immediately and expire on June 27, 2015.
The financing included a Registration Rights Agreement which prescribes
that the Company shall have caused a registration statement to be filed
with the SEC, in respect of the securities covered by the Minimum
Borrowing Note, Warrants and Options within 30 days of closing and to
cause the registrations to become effective within 90 days of closing. In
the event that the Company fails to file such registration statement, the
agreement also provides that the Company shall pay to Laurus, as partial
damages, for each day that an Event has occurred and is continuing, an
amount in cash equal to one-thirtieth (1/30th) of the product of: (A) the
original principal amount of each Minimum Borrowing Note outstanding at
such time multiplied by (B) 0.02. In the event the Company fails to make
any such payments in a timely manner, Section 1 of the Registration Rights
Agreement also provides that such payments shall bear interest at the rate
of 1.5% per month (prorated for partial months) until paid in full.
Assuming a successful registration of the shares and warrants, if the
market price of the Company's common stock exceeds the then applicable
fixed conversion price by at least 25%, the contract rate for the
succeeding calendar month shall automatically be reduced by 100 basis
points (1%) for each incremental 25% increase in the market price of the
common stock above the then applicable fixed conversion price.
-19-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
The Company determined that the conversion option embedded in the note and
the warrants and options attached to the note qualify as embedded
derivatives under the guidance 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" and as such should be accounted for separately
at inception at their fair value and subsequently marked to market. The
total of the embedded derivatives was separated from the debt based on the
initial amount of $3,100,000. The initial value of the derivatives and
"embedded derivatives" is offset against the Laurus financing and will be
amortized over a 3-year period subject to the expected availability. The
conversion right and interest adjustment clause found in the note were
considered one embedded derivative and the warrants and options were each
considered separate derivatives.
As the embedded derivatives are not standard and are not publicly quoted,
a combination of Black-Scholes methodologies and Monte Carlo simulations
were used. Valuations were performed at each quarter end and the
conversion option, warrants and options were each valued separately. As
the Company has no public rating or no public debt, it is very difficult
to estimate the potential change of the credit spread between the issue
date and valuation dates. Moreover, there is no evidence of any material
event that could change significantly the credit spread of the issue. A
constant credit spread equal to 300 basis points as per the issue date was
therefore assumed in the valuation. For the valuation as of December 31,
2005 an assumption of 158% volatility was used and for the valuation at
June 30, 2006, an assumption of 142% volatility was used.
Conversion Option
As the issue is a floating rate note, it is inferred that it will
substantially be always equal to par ($3,100,000 USD). The implied number
of conversion options will be derived by dividing the notional by the
average conversion price. As showed in the table below, the conversion
price was calculated using the weighted average conversion price for each
tranche. This option was valued using a standard Black-Scholes model.
Conversion Weighted
Tranche Notional Price Average
Tranche 1 1,000,000 0.4 0.1290
Tranche 2 1,000,000 0.5 0.1613
Tranche 3 1,100,000 0.53 0.1881
========= =======
Total 3,100,000 0.4784
The interest rate adjustment clause contained in the conversion option
sets that if the stock price exceeds the prevailing conversion price by a
certain level, interest payments on the floating rate note will be
reduced. This clause diminishes the conversion options fair value as the
holder will be penalized when the conversion option will be in the money.
The fair value for this clause is dependant on the expected behaviour of
the prime rate and the Company's stock price. This clause was valued using
a Monte Carlo simulation model using a mean reversion process to simulate
the prime rate and a standard Geometric Brownian motion process for the
Company's stock price.
The 8% floor on interest rate clause contained in the conversion option
was valued using a Monte Carlo simulation model with a mean reversion
process to simulate the prime rate. As the value of the floor option was
determined to be relatively insignificant ($29,000 liability as of
December 31, 2005 and $500 liability as of June 30, 2006 representing an
impact on the fair value of 0.2% and .015% respectively for the
valuations), it was ignored in the valuation of the conversion option. The
impact of this analysis will be performed at each valuation date. If the
model shows that the floor option would have a significant impact on the
market value, the conversion option will have to be valued using a
different model that will implicitly account for the floor option such as
the binomial model.
The 5% limitation upon issuance of shares was ignored in this valuation
based on the assumption that it is a liquidity feature that would not
significantly impact the valuation.
Warrants and Options
Valuation of the warrants and options were performed separately using
standard Black-Scholes methodology. As the Company would be required to
issue new shares for these instruments it used a valuation with a dilution
effect.
Valuation Results
Derivative 6/30/06 12/31/05
---------- ------- --------
Conversion Options $403,552 $452,928
Interest Adjustment Clause ($15,269) ($28,687)
Warrants $409,585 $393,100
New Warrants (note 14) 304,763 --
Options $73,023 $87,848
---------- --------
$1,175,654 $905,189
========== ========
-20-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
During the six months ended June 30, 2006, the Company amortized $287,610
of the initial value of the derivatives and embedded derivatives which are
included in financing costs. The mark to market of the derivatives
including the embedded derivatives at the end of each period was credited
to financing costs in the amount of $135,656.
During the year ended December 31, 2005 the Company amortized $275,135 of
the initial value of the derivatives and embedded derivatives which is
included in financing costs. The mark to market of the derivatives
including the embedded derivatives at the end of each period was credited
to financing costs in the amount of $723,008.
On December 8, 2005, the Company and Laurus entered into an amendment of
the Security Agreement pursuant to which Laurus agreed to waive (i) any
event of default by the Company relating to the Company's non-payment of
any liquidated damages associated with its non-filing of its Registration
Statement and (ii) any liquidated damages associated with its non-filing
of its Registration Statement that had accrued and were due and payable as
of the date of December 8, 2005. In addition, the filing and effective
dates for the Registration Statement were extended to January 31, 2006 and
March 30, 2006, respectively.
Due to its ongoing discussion with the SEC, the Company failed to file and
cause to be effective a registration statement by March 30, 2006. Laurus
agreed to waive the event of default and associated liquidated damages and
to extend the filing deadline until July 1, 2006.
On January 26, 2006, the Company and Laurus executed an Overadvance Side
Letter whereby Laurus increased the overadvance amount on the revolving
note to $1,200,000 ("Second Overadvance"). The second overadvance bears
interest at the prime rate as published by the Wall Street Journal plus
2%. The second overadvance expires on July 27, 2006. In the event that the
overadvance is not repaid in full by this date, the interest rate will be
increased by an additional 1% per month. In consideration of the Second
Overadvance, the Company issued 500,000 additional common stock purchase
warrants with an exercise price of $0.01 per share which expire on January
26, 2012. Using the standard Black-Scholes methodology, these warrants
were valued to be $98,588 which is being offset against the Laurus
financing and will be amortized over the remaining term of the debt.
On June 30, 2006, Laurus modified the terms of the convertible financing
facility and removed the convertibility option, the interest adjustment
clause and the conversion adjustment clause. In addition, the Registration
Rights Agreement was modified so that the liquidated damages that may be
charged for failure to file a registration statement at 2% per day shall
no longer exceed 20% of the total debt owed to Laurus. Further, the
Registration Rights Agreement was modified such that there must be an
effective registration statement for the common stock issued upon the
exercise of options and warrants since the convertibility option has been
removed.
The Company evaluated the modifications to the convertible financing
facility under EITF Issue No. 96-19, "Debtor's Accounting for a
Modification or Exchange of Debt Instruments" and EITF Issue No. 05-07,
"Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues". ETIF Issue No. 96-19 requires the debtor
to determine whether the present value of the cash flows, including
changes in the fair value of an embedded conversion option upon
modification of a convertible debt instrument, under the terms of the new
debt instrument is at least 10% different from the present value of the
remaining cash flows under the terms of the original instrument. Moreover,
this EITF specifies that changes in the fair value of embedded conversion
options should be incorporated in this analysis. This is reiterated in
EITF Issue No. 05-7. Using the methodology proposed in EITF Issue No.
96-19, the fair value as of June 30, 2006 of the embedded conversion
option was $388,264 (value of the embedded conversion option less value of
the interest adjustment clause) and the present value of the "old" and
"new" financing was $1,726,425 and $1,451,862 respectively. The Company
concluded that the difference in cash flows was 16% and therefore that the
"old" financing was extinguished.
EITF Issue No. 96-19 requires that the new debt be recorded at fair value
and that amount should be used to determine the debt extinguishment gain
or loss to be recognized and effective rate of the new debt. Using an
effective rate of 20%, the fair value of the new facility was determined
to be $2,351,271 which results in a loss of $689,858 on extinguishment of
debt based on the book value of the old facility of $1,661,413. This loss
is included in financing costs at June 30, 2006 in the consolidated
statement of operations.
As the conversion right of the convertible financing facility was
eliminated, the entire embedded derivative pertaining to the conversion
option was reversed, resulting in a gain of $388,264. This gain is
included in financing costs at June 30, 2006 in the consolidated statement
of operations.
The Company also evaluated the modifications to the Registration Rights
Agreement, specifically the 2% liquidated damages clause under EITF Issue
No. 00-19 to determine whether the warrants and options issued with the
debt should be reclassed into equity from liabilities. According to EITF
Issue No. 00-19, paragraph 16 "If a settlement alternative includes a
penalty that would be avoided by a company under other settlement
alternatives, the uneconomic settlement alternative should be disregarded
in classifying the contract. In the case of delivery of unregistered
shares, a discount from the value of the corresponding registered shares
that is a reasonable estimate of the difference in fair values between
registered and unregistered shares (that is, the discount reflects the
fair value of the restricted shares determined using commercially
reasonable means) is not considered a penalty."
The Company concluded that the 20% cap added to the liquidated damages
clause, does not represent an economically reasonable difference between
registered and unregistered shares as the cap is based on the notional
amount of financing outstanding which no longer has a convertibility
feature and therefore has not relation to the shares that could be issued
upon the exercise of options and warrants. Moreover, the maximum potential
penalty that could arise under this clause based on the total debt
outstanding to Laurus at June 30, 2006 was approximately $845,000 which is
significant as compared to the total value of the shares that could be
issued under the outstanding warrants and options at June 30, 2006 of
approximately $960,000.
-21-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
Under the Security Agreement, the Company is also subject to a 2% penalty
(with no cap) if its stock would stop trading for failure of failure to
make timely filings with the SEC. In consideration of this penalty, which
could be interpreted as a form of net cash settlement, and the assessment
of the liquidated damages clause, the Company concluded that the criteria
for reclassification to equity in EITF 00-19 was not met and therefore the
warrants and options would remain embedded derivatives.
At the end of each period, the balance on the Laurus facility was as
follows:
6/30/06 12/31/05
------- --------
$ $
Principal balance revolving note 2,825,453 --
Principal balance convertible facility -- 2,522,219
Deferred Financing Costs (474,182) (1,353,063)
---------- ----------
Total 2,351,271 1,169,156
---------- ==========
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
13. ACCOUNTS PAYABLE
Included in accounts payable at the end of each period are the following:
6/30/06 12/31/05
------- --------
$ $
Trade payables 499,022 276,486
Accrued payroll and payroll liabilities 427,483 266,343
Accrued bonuses 90,500 130,866
Accrued professional fees 160,670 245,368
Other 365,653 247,189
--------- ---------
1,543,328 1,166,152
========= =========
14. LONG-TERM DEBT
i) June 30, 2006
On June 30, 2006, the Company reached a settlement with W. Terry Lyons
with respect to the secured loan outstanding to him in the amount of
$178,062 including accrued interest. In consideration of a monetary
payment by the Company of $100,000 and execution of a Full and Final
Release, Lyons released the Company of all rights and debt held by him and
forgave the balance of the loan of $78,062 which is included in debt
forgiveness in the consolidated statement of operations.
On June 30, 2006, the Company repaid the balance owing on an SBA loan held
by TMG in the amount of $84,083. This loan was personally guaranteed by
the principal shareholders of TMG and collateralized by their personal
residence and TMG's accounts receivables.
On June 30, 2006, the Company repaid an Officer's Loan to the vendors of
TMG in the amount of $349,624 with a cash payment of $100,000 and
1,202,009* shares of the Company's common stock, no par value per share,
for consideration of $249,624.
On June 30, 2006, Laurus Master Fund Ltd. issued the Company a secured
term loan in the amount of $1,400,000 of which the proceeds were used to
fund the acquisition of TMG. The loan is payable monthly starting October
1, 2006 in the amount of $42,424 per month. The loan bears interest at an
annual rate equal to the Wall Street Journal prime rate plus 2%. The loan
matures June 30, 2009. In connection with the financing, the Company
issued Laurus a warrant to purchase up to 1,810,674 shares of the
Company's common stock at $.0001 per share. Laurus is prohibited from
selling any of the warrants until June 30, 2007 and thereafter is
prohibited from selling an amount of shares in excess of 15% of the daily
volume of trading of the Company's common stock on any day.
The warrants issued with the term loan are subject to the modified
Registration Rights Agreement (Note 12) including the 2% liquidated
damages clause and therefore are classified as embedded derivatives under
EITF 00-19. The warrants have been valued as of June 30, 2006 using
standard Black-Scholes methodology with a dilution effect. (Risk free
interest rate of 5.38%; volatility of 142%; weighted average expected life
of 10 years; weighted average fair value per share of $0.17). In
accordance with APB 14, the value of these warrants should be extracted
from the total cash received and the difference ascribed to the secured
debt as follows:
Cash received 1,400,000
Warrants 304,763
---------
Secured Loan 1,095,237
---------
-22-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
Beginning July 1, 2006, the Company will amortize the initial value of the
embedded derivative over the three year term of the loan.
On June 30, 2006, the Company issued five unsecured promissory notes to
the shareholders of TMG totaling $559,750 with quarterly payments of
$69,969 starting September 30, 2006. The notes bear interest at an annual
rate equal to the Wall Street Journal prime rate and mature on June 30,
2008.
On June 30, 2006, the Company assumed a motor vehicle loan as a result of
the acquisition of TMG in the amount of $11,160 with monthly payments of
$372 for 36 months starting January 14, 2006. The loan is secured by the
motor vehicle and bears interest at 7.5% per annum. The loan matures on
January 14, 2009.
At June 30, 2006, the Company held various capital leases in the amount of
$23,993 secured by property and equipment with various payment terms and
interest rates ranging from 10-22%. These leases mature between July 2006
and July 2007.
ii) December 31, 2005
At December 31, 2005, the Company had a loan balance of $163,987 with
Terry Lyons with monthly payments of $10,000. The loan bears interest at
US prime plus 14%. The loan was secured by the Company's assets and
subordinated to Laurus Master Fund, Ltd. The loan matured July 2007.
At December 31, 2005, the Company held various capital leases in the
amount of $30,165 secured by property and equipment with various payment
terms and interest rates ranging from 10-22%. These leases mature between
March 2006 and July 2007.
6/30/06 12/31/05
------- --------
$ $
a) Included therein:
Laurus Term Loan $1,095,237 --
Promissory Notes - TMG 559,750 --
Loan - Motor Vehicle 11,160 --
Terry Lyons -- 163,987
Capital Leases 23,993 30,165
---------- -------
1,690,140 194,152
Less: current portion 687,903 124,326
---------- -------
1,002,237 69,826
========== =======
b) Future principal payments obligations as at June 30, 2006, were as
follows:
2006 280,314
2007 806,555
2008 649,026
2009 259,008
2010 --
----------
$1,994,903
==========
c) Interest expense related to long-term debt for the three and six months
ended June 30, 2006 was $15,064 and $34,649 respectively. Interest expense
related to long-term debt was $53,132 for the year ended December 31,
2005.
-23-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
15. 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
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 $246,609.
During the year ended December 31, 2005, the Company issued 1,366,495*
shares of its common stock to the 12% Senior Secured Convertible Debenture
holders upon the conversion of $338,616 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 at December 31, 2005.
On June 30, 2006, the Company issued 3,369,188* shares of its common
stock, no par value per share, to the Vendors of TMG for a total
consideration of $669,689. The Company also issued 1,202,009* shares of
its common stock, no par value per share, to the Vendors of TMG as
repayment of an Officer's Loan in the amount $249,624.
On June 30, 2006, the Company issued 316,563* shares of its common stock,
no par value per share, to Leventis Investments for a total consideration
of $63,313 as partial payment of a buyer's fee for the TMG acquisition.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
-24-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(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*
6/30/06 12/31/05 Exercise price per share Expiry date
- --------------------------------------------------------------------------------
-- -- $16,200.00 2004
-- -- $16,250.00 to $18,550.00 2005
-- -- $12,300.00 2005
-- -- $3,150.00 to $5,000.00 2005
-- 20 $7,500.00 2006
-- 213 $2,750.00 2006
-- -- $400.00 2007
500,000 500,000 $0.41 2007
100,000 100,000 $1.20 2007
124 124 $200.00 2009
2,400 2,400 $87.50 2009
-- -- $3.75 2009
-- -- $2.00 2009
229 229 $1.25 2009
1,714 1,714 $87.50 2010
2,857 2,857 $43.75 2010
13,333 13,333 $3.75 2010
-- -- $2.00 2010
9,083 9,083 $1.25 2010
-- -- $1.00 2010
-- -- $2.00 2011
-- -- $1.40 2011
47,388 47,388 $1.25 2011
62,500 62,500 $1.00 2011
1,050,000 1,050,000 $0.55 2011
1,050,000 1,050,000 $0.60 2011
500,000 -- $0.01 2012
1,810,674 -- $.0001 2016
- --------------------------------------------------------------------------------
5,150,302 2,839,861
- --------------------------------------------------------------------------------
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 December 31, 2005 2,839,861*
---------
Issued 2,310,674
Cancelled --
Exercised --
Expired (233)
---------
Outstanding at June 30, 2006 5,150,302*
=========
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 15(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.
-25-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
As disclosed in Note 12, on January 26, 2006, the Company issued 500,000*
additional common stock purchase warrants to Laurus Master Fund, Ltd. with
an exercise price of $0.01 per share and expire on January 26, 2012.
As disclosed in Note 14, on June 30, 2006, the Company issued 1,810,674*
common stock purchase warrants to Laurus Master Fund, Ltd. with an
exercise price of $.0001 per share and which expire on June 30, 2016.
Laurus is prohibited from selling any of the warrants until June 30, 2007
and thereafter is prohibited from selling an amount of shares in excess of
15% of the daily volume of trading of the Company's common stock on any
day.
* 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. Under the
plans, a total of 2,001,674 options were authorized to be granted to
officers, directors, consultants, key employees, advisors and similar
parties who provide their skills and expertise to the Company. At June 30,
2006, 1,864,572 options remain outstanding and 137,102 options are
available for future grant. At December 31, 2005, 1,864,659 options remain
outstanding and 137,015 options are available for future grant.
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.
On November 22, 2005, the Company issued a total of 1,460,000 options at
an exercise price of $.24 per share 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 December 12, 2005, the Company issued 25,000 options at an exercise
price of $.27 per share to Mr. Tom Luther, Vice President Sales, under the
2005 Stock Option Plan. The options vest immediately and expire in 2015.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
e) Preferred Stock
On June 30, 2006, the Company issued 700 shares of Series D preferred
stock to the Vendors of TMG for a total consideration of $669,689. The
Series D preferred stock is convertible into common stock at the option of
the holder, one year from issuance by dividing $669,689 by the market
price of the Company's common stock prior to conversion.
-26-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
16. DEFERRED INCOME TAXES AND INCOME TAXES
a) Deferred Income Taxes
The components of the future tax liability benefit by source of temporary
differences that gave rise to the benefit are as follows:
6/30/06 12/31/05
------- --------
$ $
Losses available to offset future
income taxes 5,804,223 5,221,000
Deferred costs and customer lists 33,000 33,000
Share and debt issue costs 68,000 126,000
Property and equipment 1,015,000 949,000
--------- ---------
6,920,223 6,329,000
Less: valuation allowance 7,027,934 6,329,000
--------- ---------
(107,711) --
========= =========
b) Current Income Taxes
Current income taxes consist of:
6/30/06 12/31/05
------- --------
$ $
Amounts calculated at statutory rates (534,371) (581,881)
--------- ---------
Permanent differences (145,562) 304,304
Valuation allowance 698,970 417,000
--------- ---------
553,408 721,304
--------- ---------
Current income taxes 19,037 139,423
========= =========
Issue expenses totaling approximately $446,000 may be claimed at the rate
of 20% per year with $210,000 until 2006, and $236,000 until 2010. 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 $14,500,000, nor a capital loss totaling $750,000
in the future as a deferred tax asset as at June 30, 2006. As at the
completion of the June 30, 2006 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.
17. COMPREHENSIVE LOSS
6/30/06 12/31/05
------- --------
$ $
Net loss (1,335,929) (2,835,306)
Other comprehensive loss
Cumulative adjustment to market value -- --
Foreign currency translation
adjustments 14,778 (8,909)
---------- ----------
Comprehensive loss (1,321,151) (2,844,215)
========== ==========
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.
-27-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
18. DISCONTINUED OPERATIONS
Effective March 8, 2002, the Company sold its technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. As part of
the transaction, Cognicase assumed all of the staff in the Company's
technology division, including the employees of TidalBeach Inc. The
Company will not have future revenues from either its Njoyn or Secondwave
products and therefore the technology operations have been reported as
discontinued. There was no technology revenue for the three months and six
months ended June 30, 2006 and 2005. There was no income or losses from
the technology division for the three and six months ended June 30, 2006.
The net loss for the technology operations for the three and six months
ended June 30, 2005 was nil and $5,000 respectively.
Effective May 1, 2002, the Company signed an agreement with triOS Training
Centres Limited, an Ontario company, for the purchase of certain assets of
the Toronto training division, Thinkpath Training for a nominal amount of
cash and the assumption of all prepaid training liabilities. As part of
the transaction, triOS assumed the Toronto training staff.
On November 1, 2002, the Company entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the purchase of certain
assets of the New York training division, Thinkpath Training for a nominal
amount of cash and the assumption of all prepaid training liabilities. As
part of the transaction, Thinkpath Training LLC assumed the New York
training staff, some assets and is subletting the classroom facilities.
As a result of these two transactions, the Company will not have future
revenues from its training division and therefore the operations have been
reported as discontinued.
There was no training revenue for the three and six months ended June 30,
2006 and 2005. There was no income or losses for the training division for
the three and six months ended June 30, 2006 and 2005.
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 revenue attributable to the IT recruitment division for the
three and six months ended June 30, 2006 and 2005. There was no income or
losses for the IT recruitment division for the three and six months ended
June 30, 2006. The net income for the IT division for the three and six
months ended June 30, 2005, was $24,000 and $24,000 respectively.
The following table presents the revenues, income (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 Six months ended
June 30, June 30,
Restated Restated
2005 2005
2006 (note 25) 2006 (note 25)
---- --------- ---- ---------
$ $
Revenues -- -- -- --
Loss from operations before
income taxes -- (86) -- (86)
Provision for Income Taxes -- (23,779) -- (19,182)
Income from discontinued
operations -- 23,693 -- 19,096
-28-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
19. SCHEDULE OF NON-CASH ITEMS PER STATEMENT OF CASH FLOW
The Company issued common shares and warrants for the following:
Six Months ended June 30, 2006
Restated
2006 2005 (note 25)
---- --------------
$ $
Common stock issued for liabilities 249,624 --
Common stock issued for investment 763,000 --
Preferred stock issued for investment 699,687 --
--------- --
1,712,311 --
========= ==
20. SEGMENTED INFORMATION
a) Revenue and Gross Profit by Geographic Area
Three months ended Six months ended
June 30, June 30,
Restated Restated
2005 2005
2006 (note 25) 2006 (note 25)
---- --------- ---- ---------
$ $ $ $
Revenue
Canada 406,321 677,360 839,230 974,004
United States of America 3,387,502 2,926,510 5,864,907 6,232,805
--------- --------- --------- ---------
3,793,823 3,603,870 6,704,137 7,206,809
========= ========= ========= =========
Gross Profit
Canada 128,189 87,228 280,923 187,471
United States of America 1,106,684 981,620 1,763,135 2,153,546
--------- ------- --------- ---------
1,234,873 1,068,848 2,044,058 2,341,017
========= ========= ========= =========
b) Net Income (Loss) by Geographic Area
Three months ended Six months ended
June 30, June 30,
Restated Restated
2005 2005
2006 (note 25) 2006 (note 25)
---- --------- ---- ---------
$ $ $ $
Canada (939,721) (1,017,641) (1,092,730) (1,691,469)
United States of America (24,553) 219,495 (243,199) 752,504
-------- ---------- ---------- ----------
(964,274) (798,146) (1,335,929) (938,965)
========= ========== ========== ==========
c) Identifiable Assets by Geographic Area
6/30/06 12/31/05
------- --------
$ $
Canada 804,246 811,119
United States of America 8,084,338 4,641,133
--------- ---------
8,888,584 5,452,252
========= =========
d) Revenues from Major Customers and Concentration of Credit Risk
The consolidated entity had the following revenues from major customers:
For the three and six months ended June 30, 2006, one customer had sales
of $306,080 and $718,694, respectively, representing approximately 8% and
11%, respectively, of total revenue.
For the three and six months ended June 30, 2005, one customer had sales
of $905,070 and $2,290,288, respectively, representing approximately 25%
and 32%, respectively, of total revenue.
e) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
-29-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
21. 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 Six months ended
June 30, June 30,
Restated Restated
2005 2005
2006 (note 25) 2006 (note 25)
---- --------- ---- ---------
$ $ $ $
Numerator
Loss from continuing
operations (964,274) (821,839) (1,335,929) (958,061)
Income from discontinued
operations -- 23,693 -- 19,096
---------- ---------- ---------- ----------
Net loss (964,274) (798,146) (1,335,929) (938,965)
========== ========== ========== ==========
Denominator
Weighted Average common
stock outstanding* 4,369,147 4,000,971 4,369,147 3,665,040
========== ========== ========== ==========
Basic and diluted loss per
common share from
continuing operations (0.22) (0.21) (0.31) (0.26)
========== ========== ========== ==========
Basic and diluted loss per
common share after
discontinued operations (0.22) (0.20) (0.31) (0.26)
========== ========== ========== ==========
Average common stock
outstanding* 4,369,147 4,000,971 4,369,147 3,665,040
Average common stock
issuable -- -- -- --
---------- ---------- ---------- ----------
Average common stock
outstanding assuming
dilution* 4,369,147 4,000,971 4,369,147 3,665,040
========== ========== ========== ==========
The outstanding options and warrants as detailed in note 15 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.
* Adjusted for reverse split of Company's stock (1:5,000) on June 29, 2005
22. COMMITMENTS AND CONTINGENCIES
a) Lease Commitments
Minimum payments under operating leases for premises occupied by the
Company and its subsidiaries offices, located throughout Ontario, Canada
and the United States, exclusive of most operating costs and realty taxes,
as at June 30, 2006, for the next five years are as follows:
2006 $230,912
2007 462,835
2008 260,861
2009 140,477
2010 140,477
Thereafter --
--
----------
$1,235,561
==========
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. Subsequent to the year end, the Company was notified by
the purchaser that they had failed to meet their rent obligations and
currently had rent arrears of approximately $80,000. The lessor filed a
claim against Thinkpath Training LLC and the Company demanding that the
rent arrears be paid and the premises vacated immediately. On June 1,
2006, a default judgement was awarded to the lessor and entered against
the Companys. On July 7, 2006, a motion to vacate the default judgement
was denied. On July 27, 2006, the court agreed to the Company's motion to
renew and reargue our prior motion seeking to vacate the default judgement
on August 23, 2006. Although the Company intends to continue to defend
this claim vigorously, it may be held liable for the rent arrears plus the
balance of the lease which expires August 31, 2006 for a total of
$300,000.
-30-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
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 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. The
vendors are seeking termination pay from the Company in the amount of
approximately $40,000. The Company intends to defend this claim vigorously
and counterclaim for losses suffered as well as jeopardy to its reputation
by the actions of the vendors.
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.
23. SUBSEQUENT EVENTS
Subsequent to June 30, 2006, 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 six months beginning July 1, 2006 at a cost of
$5,000 per month. In addition, the Company issued 162,000* shares of its
common stock, no par value, with "piggyback" registration rights.
24. FINANCIAL INSTRUMENTS
a) Credit Risk Management
The Company is exposed to credit risk on the accounts receivable from its
customers. In order to reduce its credit risk, the Company has adopted
credit policies, which include the analysis of the financial position of
its customers and the regular review of their credit limits. In some
cases, the Company requires bank letters of credit or subscribes to credit
insurance.
b) Concentration of Credit Risk
The Company'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.
The fair value of the Company's debt instruments with embedded derivatives
are measured separately at the end of each period using a combination of
Black-Scholes methodologies and Monte Carlo simulations. As the Company
has no public rating or no public debt, it is very difficult to estimate
the potential change of the credit spread between the issue date and
valuation dates. Moreover, there is no evidence of any material event that
could change significantly the credit spread of the issue. A constant
credit spread equal to 300 basis points as per the issue date was
therefore assumed in the valuation and current volatility rates were used.
Changes in the fair value of derivates are charged to current earnings.
-31-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
25. RESTATEMENTS
The accompanying financial statements for the three months and six months
ended June 30, 2005 have been restated to correct accounting errors for
the beneficial conversion feature on convertible debentures.
During the period December 2002 until November 2004, the Company issued
12% Senior Secured Convertible Debentures in the aggregate principal
amount of $5,025,000, which debentures were subsequently converted or
repaid by June 27, 2005. The value assigned to the beneficial conversion
feature on the debentures was credited to paid in capital and charged to
earnings as interest expense on the date of issuance. The Company has
determined, in accordance with Issue 6 of Emerging Task Force No. 00-27
"Application of Issue No. 98-5 to Certain Convertible Instruments" ("EITF
00-27"), that the value of the beneficial conversion feature should be
accreted to interest expense from the date of issuance to the stated
redemption date.
The Company recorded the value of the beneficial conversion feature in
excess of the amount of proceeds allocated to the convertible instruments.
The Company has determined, in accordance with Paragraph 6 of Emerging
Task Force No. 98-5 "Accounting for Convertible Securities with Beneficial
conversion Features or Contingently Adjustable Conversion Ratios"
("EITF98-5"), that the calculated amount of the beneficial conversion
feature should be limited to the amount of proceeds allocated to the
convertible instrument.
The Company has amended its financial statements for the three and six
months ended June 30, 2005 to limit the value of the beneficial conversion
feature to the amount of proceeds allocated to the convertible debenture
and to amortize the beneficial conversion feature from the date of
issuance to the stated redemption date.
The effect of this restatement was to decrease the Company's net loss by
$22,383 and $26,652 respectively for the three and six month periods ended
June 30, 2005. This restatement concerns a non-cash item.
The following table quantifies the EPS impact of this restatement:
Operating
Earnings
(Loss)
Amount per Share
- --------------------------------------------------------------------------------
Net loss for the three months ended June 30, 2005 as
reported in June 30, 2005 Form 10Q-SB $(820,529) (0.04)
to correct accounting error for recording beneficial
conversion feature on convertible debentures 22,383 (0.00)
Revised net loss $(798,146) (0.04)
The following table quantifies the EPS impact of this restatement:
Operating
Earnings
(Loss)
Amount per Share
- --------------------------------------------------------------------------------
Net loss for the six months ended June 30, 2005 as
reported in June 30, 2005 Form 10Q-SB $(965,617) (0.04)
to correct accounting error for recording beneficial
conversion feature on convertible debentures 26,652 (0.00)
Revised net loss $(938,965) (0.04)
26. COMPARATIVE FIGURES
Certain figures in the June 30, 2005 financial statements have been
reclassified to conform with the basis of presentation used at June 30,
2006.
-32-
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
We are focused on building relationships with customers in high growth
industries such as defense and aerospace. 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.
On June 30, 2006, we completed the acquisition of The Multitech Group Inc.
(TMG), an engineering services firm located in New Jersey. The purchase price of
$2,798,750 was based on five times the audited 2005 EBIT of TMG and was payable
as follows: thirty percent in cash for a total of $839,625; twenty per cent in a
two year subordinated note of $559,750 bearing annual interest at US prime,
payable quarterly; twenty-five per cent in common stock for a total
consideration of $699,688 or 3,369,188 common shares; and, twenty-five per cent
in preferred stock for a total consideration of $669,688 or 700 preferred share
which will be convertible into common shares after June 30, 2007. The
acquisition was accounted for by the purchase method and the operations have
been included in the consolidated operations from April 1, 2006.
TMG has been providing reliable engineering design services in Material
Handling, Pollution Control, Port Security, Government/Military, and
Manufacturing since 1976. It also develops and implements Technical
Documentation and Training programs.
-33-
TMG's annual revenues are approximately $3.3 million with an EBIT of
approximately $500,000 The acquisition adds some long-term, high profile clients
including Fedex, U.S Postal Service, Siemens, Boeing, Smiths Detection, Sandvik,
Port Authority of New York and New Jersey. The five TMG officers accepted
employment agreements with Thinkpath in various capacities, including John W.
Kennedy as Vice President of Business Development, James J. McLafferty as
General Manager (New Jersey Office), Scott A. Nilssen as National Director of
Marketing and Cecelia Kennedy as Contracts Staffing Manager (New Jersey Office).
-34-
STATEMENTS OF OPERATIONS--PERCENTAGES
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
% % % %
REVENUE 100 100 100 100
COST OF SERVICES 67 70 70 68
---- ---- ---- ----
GROSS PROFIT 33 30 30 32
EXPENSES
ADMINISTRATIVE 23 18 22 17
SELLING 12 9 14 10
DEPRECIATION AND AMORTIZATION 5 2 4 2
WRITE DOWN OF PROPERTY AND EQUIPMENT -- -- -- --
DEBT FORGIVENESS (2) (2) (1) (1)
FINANCING COSTS 15 -- 7 --
---- ---- ---- ----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE (21) 2 (15) 4
INTEREST CHARGES AND INCOME TAXES
INTEREST CHARGES 4 23 5 16
---- ---- ---- ----
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (25) (21) (20) (12)
INCOME TAXES -- 2 -- 1
---- ---- ---- ----
LOSS FROM CONTINUING OPERATIONS (25) (23) (20) (13)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- 1 -- --
---- ==== ---- ====
NET LOSS (25) (22) (20) (13)
==== ==== ==== ====
-35-
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2005
REVENUE
Our revenue is comprised of engineering services including the complete
planning, staffing, development, design, implementation and testing of a
project. It can also involve enterprise-level planning and project anticipation.
Our specialized engineering services include: design, build and drafting,
technical publications and documentation. We outsource our technical
publications and engineering services on both a time and materials and project
basis. Customers we provide engineering services to include General Dynamics,
General Electric, General Motors, Lockheed Martin, Cummins Engines, ABB, Eaton
Aerospace, Remy, America Inc., Toyota, Atlas Copco and Comdev Space Group.
For the three months ended June 30, 2006, we derived 89% of our revenue in the
United States compared to 81% for the three months ended June 30, 2005. This
increase is largely attributable to the acquisition of TMG which contributed
$750,000 in revenue since April 1, 2006. Consolidated revenues for the three
months ended June 30, 2006 increased by $190,000 or 5% to $3,790,000 as compared
to $3,600,000 for the three months ended June 30, 2005. Without the $750,000
contribution from TMG, the revenue from organic operations is down $560,000.
This decrease is largely attributable to the decline in sales of approximately
$600,000 from one major customer located in the United States who represented
only 8% of our consolidated revenue for the three months ended June 30, 2006
compared to 25% for the three months ended June 30, 2005.
COSTS OF SERVICES
The direct costs of engineering services include wages, benefits, software
training and project expenses. Costs of services for the three months ended June
30, 2006 increased by $20,000 or 1% to $2,560,000 as compared to $2,540,000 for
the three months ended June 30, 2005. This increase is related to the increase
in revenue. As a percentage of revenue, however, the cost of services for the
three months ended June 30, 2006 decreased from 70% in 2005 to 67% in 2006.
GROSS PROFIT
Gross profit is calculated by subtracting all direct costs from net revenue.
Gross profit for the three months ended June 30, 2006 increased by $160,000 or
15% to $1,230,000 compared to $1,070,000 for the three months ended June 30,
2005. As a percentage of revenue, gross profit for the three months ended June
30, 2006 was 33% compared to 30% in 2005. The increase is directly attributable
to the increase in gross profit in Canada from 13% in 2005 to 32% in 2006 as
result of the addition of several higher margin engineering service projects as
well as contract placements.
EXPENSES
Total expenses for the three months ended June 30, 2006 increased by 103% or
$1,021,000 to $2,030,000 compared to $1,000,000 for the three months ended June
30, 2005
ADMINISTRATIVE EXPENSES
Administrative expenses increased by $230,000 or 33% to $890,000 for the three
months ended June 30, 2006 compared to $660,000 for the three months ended June
30, 2005. This increase is largely attributable to the acquisition of TMG
including the salaries of the five officers and two support staff. As a
percentage of revenue, administrative expenses for the three months ended June
30, 2006 was 23% compared to 18% in 2005.
SELLING EXPENSES
Selling expenses increased by $130,000, or 39%, to $460,000 for the three months
ended June 30, 2006 compared to $330,000 for the three months ended June 30,
2005. This increase is attributable to the additional salaries of new sales
staff hired during the later part of 2005 and early 2006 plus additional sales
expenses from the acquisition of TMG. As a percentage of revenue, selling
expenses for the three months ended June 30, 2006 was 12% compared to 9% in
2005.
-36-
DEPRECIATION AND AMORTIZATION
For the three months ended June 30, 2006, depreciation and amortization expenses
increased by $90,000, or 100%, to $180,000 compared to $90,000 for the three
months ended June 30, 2005. The 2006 increase is attributable to amortization of
approximately $90,000 of additional capital assets and other assets including
contracts and customer lists acquired with the TMG acquisition. As a percentage
of revenue, depreciation and amortization expenses increased to 5% for the three
months ended June 30, 2006 compared to 2% in 2005.
DEBT FORGIVENESS
On June 30, 2006 we reached a settlement with W. Terry Lyons with respect to the
secured loan outstanding to him in the amount of $178,000 including accrued
interest. In consideration of a monetary payment of $100,000 and execution of a
Full and Final Release, Lyons released all rights and debt held by him and
forgave the balance of the loan of $78,000 which is included in debt
forgiveness. Debt forgiveness for the three months ended June 30, 2005 includes
$66,000 of accrued interest on the 12% Senior Secured Convertible Debentures
which was forgiven when the principal balance was repaid on June 27, 2005.
FINANCING COSTS AND MARK-TO-MARKET ADJUSTMENTS
During the three months ended June 30, 2006, we amortized $145,000 of the
initial value of the derivatives and embedded derivatives attached to the Laurus
Master Fund, Ltd. convertible debt financing closed on June 27, 2005. At June
30, 2006, the fair value of the derivates and embedded derivatives were
marked-to-market with a total of $130,000 charged to financing costs.
On June 30, 2006, Laurus modified the terms of the convertible financing
facility and removed the convertibility option, the interest adjustment clause
and the conversion adjustment clause. In addition, the Registration Rights
Agreement was modified so that the liquidated damages that may be charged for
failure to file a registration statement at 2% per day shall no longer exceed
20% of the total debt owed to Laurus. Further, the Registration Rights Agreement
was modified such that there must be an effective registration statement for the
common stock issued upon the exercise of options and warrants since the
convertibility option has been removed.
We accounted for the modifications under EITF Issue No. 96-19, "Debtor's
Accounting for a Modification or Exchange of Debt Instruments" and EITF Issue
No. 05-07, "Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues". We concluded that the modifications had a
material impact on future cash flows and therefore resulted in extinguishment of
the old debt facility and creation of a new debt facility. Using an effective
rate of 20% the new debt facility was recorded at fair value of $2,350,000
resulting in a loss of $690,000 on extinguishment of debt based on the book
value of the old facility of $1,660,000.
Also, as the conversion right of the convertible financing facility was
eliminated, the entire embedded derivative pertaining to the conversion option
was reversed, resulting in a gain of $390,000.
During the three months ended June 30, 2006, we amortized $5,000 of the initial
value of the derivatives and embedded derivatives attached to the Laurus Master
Fund, Ltd. convertible debt financing closed on June 27, 2005.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES AND INCOME
TAXES For the three months ended June 30, 2006, loss from continuing operations
before interest charges and income taxes increased by 1216% to a loss of
$790,000 compared to income of $60,000 for the three months ended June 30, 2005.
-37-
INTEREST CHARGES
For the three months ended June 30, 2006, interest charges decreased by
$660,000, or 80%, to $160,000 from $820,000 for the three months ended June 30,
2005. This decrease is largely attributable to the reduced interest expense on
the beneficial conversion feature recognized on convertible debt which was
repaid in June 2005. Included in the interest charges for the three months ended
June 30, 2006 is $135,000 paid on the revolving facility and overadvance with
Laurus Master Fund, Ltd., $25,000 on long-term debt and bank charges. Included
in the interest charges for the three months ended June 30, 2005 is $720,000
related to the 12% senior secured convertible debentures, $60,000 paid on the
receivable discount facility with Morrison Financial Services Limited and
$40,000 paid on long-term debt and bank charges.
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
For the three months ended June 30, 2006, loss from continuing operations before
income taxes increased by $190,000 or 25% to a loss of $950,000 compared to a
loss of $760,000 in 2005.
INCOME TAXES
Income tax expense for the three months ended June 30, 2006 was $10,000 compared
to $60,000 in 2005.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the three months ended June 30, 2006
increased by $140,000 or 17% to a loss of $960,000 compared to a loss of
$820,000 for the three months ended June 30, 2005.
LOSS FROM DISCONTINUED OPERATIONS
Operations of the technology, training and IT recruitment divisions have been
reported as discontinued for the three months ended June 30, 2006 and 2005.
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. As we will not have future revenues from either its
Njoyn or Secondwave products, the technology operations have been reported as
discontinued. There was no technology revenue for the three months ended June
30, 2006 and 2005. The net loss for the technology operations for the three
months ended June 30, was nil in 2006 and $5,000 in 2005.
Effective May 1, 2002, we 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, we 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, we will not have future revenues from our
training division and therefore the operations have been reported as
discontinued. There was no revenue or losses attributable to the training
division for the three months ended June 30, 2006 and 2005.
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Effective June 27, 2003, we signed an agreement with Brainhunter.com Ltd., an
Ontario company, for the purchase of certain assets of the Toronto IT
recruitment division for a nominal amount of cash and the assumption of all
employee liabilities. The gain on disposal was $190,627 of which we received
$146,627 on closing with the balance of $44,000 due in a promissory note payable
by June 27, 2004. On June 8, 2005, we collected approximately $40,000 on the
promissory note and forgave the balance. As a result of this transaction, we
will not have future revenues from its IT recruitment division and therefore the
operations have been reported as discontinued.
There was no revenue to the IT recruitment division for the three months ended
June 30, 2006 and 2005. There was no losses or income attributable to the IT
recruitment division for the three months ended June 30, 2006 and there was a
gain of $24,000 for the three months ended June 30, 2005.
NET LOSS
For the three months ended June 30, 2006, net loss increased by $160,000 or 20%
to a net loss of $960,000 compared to a net loss of $800,000 for the three
months ended June 30, 2005.
THE SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2005
REVENUE
For the six months ended June 30, 2006, we derived 87% of our revenue in the
United States compared to 86% for the six months ended June 30, 2005.
Consolidated revenues for the six months ended June 30, 2006 decreased by
$500,000 or 7% to $6,700,000 as compared to $7,200,000 for the six months ended
June 30, 2005. This decrease is largely attributable to the aforementioned
decline in sales of approximately $1,570,000 from one major customer who only
represented 11% of our total revenue for the six months ended June 30, 2006
compared to 32% for the six months ended June 30, 2005.
COSTS OF SERVICES
Costs of services for the six months ended June 30, 2006 decreased by $210,000
or 4% to $4,660,000 as compared to $4,870,000 for the six months ended June 30,
2005. However, as a percentage of revenue, the cost of services for the six
months ended June 30, 2006 increased from 68% in 2005 to 70% in 2006.
GROSS PROFIT
Gross profit for the six months ended June 30, 2006 decreased by $300,000 or 13%
to $2,040,000 compared to $2,340,000 for the six months ended June 30, 2005. As
a percentage of revenue, gross profit for the six months ended June 30, 2006 was
30% compared to 32% in 2005. The decrease in gross profit can be attributed to
the aforementioned decrease in revenue.
EXPENSES
Total expenses for the six months ended June 30, 2006 increased by 49% or
$1,010,000 to $3,060,000 compared to $2,050,000 for the six months ended June
30, 2005
ADMINISTRATIVE EXPENSES
Administrative expenses increased by $240,000 or 19% to $1,480,000 for the six
months ended June 30, 2006 compared to $1,240,000 for the six months ended June
30, 2005. This increase is largely attributable to the acquisition of TMG
including the salaries of the five officers and two support staff effective
April 1, 2006. As a percentage of revenue, administrative expenses for the six
months ended June 30, 2006 was 22% compared to 17% in 2005.
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SELLING EXPENSES
Selling expenses increased by $250,000, or 36%, to $940,000 for the six months
ended June 30, 2006 compared to $690,000 for the six months ended June 30, 2005.
This increase is attributable to the additional salaries of new sales staff
hired during the later part of 2005 and early 2006 plus additional sales expense
from the acquisition of TMG. As a percentage of revenue, selling expenses for
the six months ended June 30, 2006 was 14% compared to 10% in 2005.
DEPRECIATION AND AMORTIZATION
For the six months ended June 30, 2006, depreciation and amortization expenses
increased by $90,000, or 53%, to $260,000 compared to $170,000 for the six
months ended June 30, 2005. The 2006 increase is attributable to amortization of
approximately $90,000 of additional capital assets and other assets including
contracts and customer lists acquired with the TMG acquisition. As a percentage
of revenue, depreciation and amortization expenses increased to 4% for the six
months ended June 30, 2006 compared to 2% in 2005.
WRITE DOWN OF PROPERTY AND EQUIPMENT
During the six months ended June 30, 2005, we wrote down property and equipment
in the amount of $5,000. The fair value of the impaired asset was generally
estimated by discounting the expected future cash flows of the individual
assets. Impairment was indicated by adverse change in market prices, current
period cash flow losses combined with a history of losses, or a significant
change in the manner in which the asset is to be used.
DEBT FORGIVENESS
Debt forgiveness for the six months ended June 30, 2006 includes $78,000 from
the settlement of the W. Terry Lyons Loan on June 30, 2006. Debt forgiveness for
the six months ended June 30, 2005 includes $66,000 of accrued interest on the
12% Senior Secured Convertible Debentures which was forgiven when the principal
balance was repaid on June 27, 2005.
FINANCING COSTS AND MARK-TO-MARKET ADJUSTMENTS
During the six months ended June 30, 2006, we amortized $290,000 of the initial
value of the derivatives and embedded derivatives attached to the Laurus Master
Fund, Ltd. convertible debt financing closed on June 27, 2005. At June 30, 2006,
the fair value of the derivates and embedded derivatives were marked-to-market
with a total of $135,000 credited to financing costs. As a result of the
modifications to the Laurus revolving facility on June 30, 2006, we recognized a
loss on extinguishment of debt of $690,000 and a gain on the reversal of the
embedded derivative of $390,000.
During the six months ended June 30, 2006, we amortized $5,000 of the initial
value of the derivatives and embedded derivatives attached to the Laurus Master
Fund, Ltd. convertible debt financing closed on June 27, 2005.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES AND INCOME
TAXES For the six months ended June 30, 2006, loss from continuing operations
before interest charges and income taxes increased by $1,300,000 or 448% to a
loss of $1,010,000 compared to income of $290,000 for the six months ended June
30, 2005.
INTEREST CHARGES
For the six months ended June 30, 2006, interest charges decreased by $880,000,
or 75%, to $300,000 from $1,180,000 for the six months ended June 30, 2005. This
decrease is largely attributable to the reduced interest expense on the
beneficial conversion feature recognized on convertible debt which was repaid in
June 2005. Included in the interest charges for the six months ended June 30,
2006 is $245,000 paid on the revolving facility and overadvance with Laurus
Master Fund, Ltd., and $55,000 on long-term debt and bank charges. Included in
the interest charges for the six months ended June 30, 2005 is $1,000,000
related to the 12% senior secured convertible debentures, $110,000 paid on the
receivable discount facility with Morrison Financial Services Limited, $70,000
paid on long-term debt and bank charges.
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LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
For the six months ended June 30, 2006, loss from continuing operations before
income taxes increased by $430,000 or 48% to a loss of $1,320,000 compared to a
loss of $890,000 in 2005.
INCOME TAXES
Income tax expense for the six months ended June 30, 2006 was $20,000 compared
to $70,000 in 2005.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the six months ended June 30, 2006 increased
by $380,000 or 40% to a loss of $1,340,000 compared to a loss of $960,000 for
the six months ended June 30, 2005.
LOSS FROM DISCONTINUED OPERATIONS
Operations of the technology, training and IT recruitment divisions have been
reported as discontinued for the six months ended June 30, 2006 and 2005.
There was no technology revenue for the six months ended June 30, 2006 and 2005.
The net loss for the technology operations for the six months ended June 30, was
nil in 2006 and $5,000 in 2005.
There was no revenue or loss attributable to the training division for the six
months ended June 30, 2006 and 2005.
There was no revenue to the IT recruitment division for the six months ended
June 30, 2006 and 2005. There was no loss or income attributable to the IT
recruitment division for the six months ended June 30, 2006 and there was a gain
of $24,000 for the six months ended June 30, 2005.
NET LOSS
For the six months ended June 30, 2006, net loss increased by $400,000 or 43% to
a net loss of $1,340,000 compared to a net loss of $940,000 for the six months
ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
With insufficient working capital from operations, our primary source of cash is
a financing facility with Laurus Master Fund, Ltd. At June 30, 2006, the
principal balance on the loan facility was $2,825,000.
At June 30, 2006, we had cash of $600,000 and a working capital deficiency of
$1,790,000. At June 30, 2006, we had a cash flow deficiency from operations of
$160,000. At June 30, 2005, we had cash of $610,000 and a working capital
deficiency of $320,000. At June 30, 2005, we had a cash flow deficiency from
operations of $90,000.
At June 30, 2006, we had a cash flow deficiency from investing activities of
$1,190,000 related to cash paid for the acquisition of TMG net of cash acquired
and related costs. At June 30, 2005, we had a cash flow deficiency from
investing activities of $190,000 related to the purchase of property and
equipment.
At June 30, 2006 we had cash flow from financing activities of $1,830,000
largely attributable to proceeds from the revolving facility with Laurus of
$300,000, a term note with Laurus of $1,400,000 and the issuance of promissory
notes to the TMG vendors of $560,000 less deferred costs of $120,000 and
long-term debt repayment of $310,000. At June 30, 2005, we had cash flow from
financing activities of $790,000 attributable primarily to proceeds from the
convertible financing facility with Laurus of $3,100,000 less deferred financing
costs of $230,000 and long-term debt repayment of $2,080,000.
On June 30, 2006, we reached a settlement with W. Terry Lyons with respect to
the secured loan outstanding to him in the amount of $178,062 including accrued
interest. In consideration of a monetary payment of $100,000 and execution of a
Full and Final Release, Lyons released Thinkpath of all rights and debt held by
him and forgave the balance of the loan of $78,062 which is included in debt
forgiveness in the consolidated statement of operations.
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On June 30, 2006, we repaid the balance owing on an SBA loan held by TMG in the
amount of $84,083. This loan was personally guaranteed by the principal
shareholders of TMG and collateralized by their personal residence and TMG's
accounts receivables.
On June 30, 2006, we repaid an Officer's Loan to the vendors of TMG in the
amount of $349,624 with a cash payment of $100,000 and 1,202,009* shares of our
common stock, no par value per share, for consideration of $249,624.
On June 30, 2006, we received a secured term loan in the amount of $1,400,000
from Laurus Master Fund, Ltd. of which the proceeds were used to fund the
acquisition of TMG. The loan is payable monthly starting October 1, 2006 in the
amount of $42,424 per month. The loan bears interest at an annual rate equal to
the Wall Street Journal prime rate plus 2%. The loan matures June 30, 2009. In
connection with the financing, we issued Laurus a warrant to purchase up to
1,810,674 shares of our common stock at $.0001 per share. Laurus is prohibited
from selling any of the warrants until June 30, 2007 and thereafter is
prohibited from selling an amount of shares in excess of 15% of the daily volume
of trading of our common stock on any day.
On June 30, 2006, we issued five unsecured promissory notes to the shareholders
of TMG totaling $559,750 with quarterly payments of $69,969 starting September
30, 2006. The notes bear interest at an annual rate equal to the Wall Street
Journal prime rate and mature on June 30, 2008.
On June 30, 2006, we assumed a motor vehicle loan as a result of the acquisition
of TMG in the amount of $11,160 with monthly payments of $372 for 36 months
starting January 14, 2006. The loan is secured by the motor vehicle and bears
interest at 7.5% per annum. The loan matures on January 14, 2009.
At June 30, 2006, we held various capital leases in the amount of $23,993
secured by property and equipment with various payment terms and interest rates
ranging from 10-22%. These leases mature between July 2006 and July 2007.
Although we believe that our current working capital and cash flows from
continuing 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 the
effectiveness of a registration statement registering the shares underlying the
Laurus warrants 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.
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RECENT ACCOUNTING PRONOUNCEMENTS
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 we do not hold inventory.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67",
which references the financial accounting and reporting guidance for real estate
time-sharing transactions in AICPA Statement of Position (SOP) 04-2, "Accounting
for Real Estate Time-Sharing Transactions". SFAS No. 152 is effective for years
beginning after June 15, 2005, with restatements of previously issued financial
statements prohibited. We do not believe that the adoption of SFAS No. 152 will
have a material impact, if any, on our results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29", effective for nonmonetary asset
exchanges occurring in the fiscal year beginning January 1, 2006. This statement
requires that exchanges of productive assets be accounted for at fair value
unless fair value cannot be reasonably determined or the transaction lacks
commercial substance. We do not believe that the adoption of SFAS No. 153 will
have an impact, if any, on our results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-based Payment".
This statement requires employers to expense costs related to share-based
payment transactions with employees. With limited exceptions, SFAS No. 123
(Revised) requires that the fair value of share-based payments to employees be
expensed over the period service is received. SFAS No. 123 (Revised) becomes
effective for annual reporting periods that begin after December 15, 2005.
Effective January 1, 2006, we adopted this standard using the modified
prospective 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 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 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.
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In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" ("SFAS 155"). SFAS 155 allows any hybrid financial
instrument that contains an embedded derivatives that otherwise would require
bifurcation under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" to be carried at fair value in its entirety, with changes in
fair value recognized in earnings. In addition, SFAS 155 requires that
beneficial interests in securitized financial assets be analyzed to determine
whether they are freestanding derivatives or contain an embedded derivative.
SFAS 155 also eliminates a prior restriction on the types of passive derivatives
that a qualifying special purpose entity is permitted to hold. SFAS 155 is
applicable to new or modified financial instruments in fiscal years beginning
after September 15, 2006, though the provisions related to fair value accounting
for hybrid financial instruments can also be applied to existing instruments.
Early adoption, as of the beginning of an entity's fiscal year, is also
permitted, provided interim financial statements have not yet been issued. We
are currently evaluating the potential impact, if any, that the adoption of SFAS
155 will have on our results of operations or financial position.
In March 2006, the FASB issued SFAS 156, "Accounting for Servicing of Financial
Assets-an amendment of FASB Statement No. 140". This statement amends FASB
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", with respect to the accounting for
separately recognized servicing assets and servicing liabilities. This
statement: (1) requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by
entering into a servicing contract in any of the following situations: (a) a
transfer of the servicer's financial assets that meets the requirements for sale
accounting, (b) a transfer of the servicer's financial assets to a qualifying
special-purpose entity in a guaranteed mortgage securitization in which the
transferor retains all of the resulting securities and classifies them as either
available-for-sale securities or trading securities in accordance with FASB
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", (c) an acquisition or assumption of an obligation to service a
financial asset that does not relate to financial assets of the servicer or its
consolidated affiliates; (2) requires all separately recognized servicing assets
and servicing liabilities to be initially measured at fair value, if
practicable; (3) permits an entity to choose either of the following subsequent
measurement methods for each class of separately recognized servicing assets and
servicing liabilities: (a) Amortization method-Amortize servicing assets or
servicing liabilities in proportion to and over the period of estimated net
servicing income or net servicing loss and assess servicing assets or servicing
liabilities for impairment or increased obligation based on fair value at each
reporting date, or (b) Fair value measurement method-Measure servicing assets or
servicing liabilities at fair value at each reporting date and report changes in
fair value in earnings in the period in which the changes occur; (3) at its
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights,
without calling into question the treatment of other available-for-sale
securities under Statement 115, provided that the available-for-sale securities
are identified in some manner as offsetting the entity's exposure to changes in
fair value of servicing assets or servicing liabilities that a servicer elects
to subsequently measure at fair value; and (5) requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value
in the statement of financial position and additional disclosures for all
separately recognized servicing assets and servicing liabilities. An entity
should adopt this statement as of the beginning of its first fiscal year that
begins after September 15, 2006. Earlier adoption is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including interim financial statements, for any period of
that fiscal year. The effective date of this Statement is the date an entity
adopts the requirements of this statement.
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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.
-45-
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.
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.
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At December 31, 2005, we performed our annual impairment test for goodwill by
first comparing the carrying value of the net assets to the fair value of the
Technical Publications and Engineering unit. The fair value was determined to be
less than the carrying value, and therefore a second step was performed to
compute the amount of the impairment. In this process, a fair value for goodwill
was estimated, based in part on the fair value of the operations, and was
compared to its carrying value. The shortfall of the fair value below carrying
value was $1,241,180 which represents the amount of goodwill impairment.
During the fourth quarter 2005, conditions were present that clearly indicated
an impairment of goodwill of TBM Technologies Inc., including adverse changes in
legal factors and business climate as well as the projection of continued cash
flow losses. As a result of these conditions, the full amount of the goodwill of
$218,511 was written off.
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.
Effective April 1, 2006, the Company acquired goodwill in the amount of
1,895,262 in connection to its acquisition of The Multitech Group Inc. which has
been allocated to the Technical Publications and Engineering reporting unit.
FOREIGN CURRENCY TRANSLATION
The books and records of our Canadian operations are recorded in Canadian
dollars. The financial statements are converted to US dollars as we have elected
to report in US dollars consistent with Regulation S-X, Rule 3-20. The
translation method used is the current rate method which is the method mandated
by SFAS No. 52 where the functional currency is the foreign currency. Under the
current method all assets and liabilities are translated at the current rate,
stockholders' equity accounts are translated at historical rates and revenues
and expenses are translated at average rates for the year.
Due to the fact that items in the financial statements are being translated at
different rates according to their nature, a translation adjustment is created.
This translation adjustment has been included in accumulated other comprehensive
income.
There can be no assurance that we would have been able to exchange currency on
the rates used in these calculations. We do not engage in exchange rate-hedging
transactions. A material change in exchange rates between United States and
Canadian dollars could have a material effect on our reported results.
RISK FACTORS
Investors should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing the Company. Additional risks not presently known to us or that
we currently believe are immaterial may also impair our business operations. If
any of the following risks actually occurs, our business, financial condition or
operating results could be seriously impaired. This section should be read in
conjunction with the Financial Statements and Notes thereto, and Management's
Discussion and Analysis or Plan of Operation contained in this report.
If we are unable to compete effectively with existing or new competitors, the
loss of our competitive position could result in price reductions, fewer
customer orders, reduced revenues, reduced margins, reduced levels of
profitability, and loss of market share. If we are unable to manage our
inventory, we will not be able to satisfy customer demand. Our reliance on one
or a few suppliers for inventory components could delay shipments and increase
our costs. Our future operating results depend on our ability to purchase a
sufficient amount of components to meet the demands of our customers. Since we
may order components from suppliers in advance of receipt of customer orders for
our products that include these components, we could face a material inventory
risk. Our products may have quality issues that could adversely affect our sales
and reputation. We are dependent on significant customers, as noted in
Management's Discussion and Analysis.
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We depend on key employees and face competition in hiring and retaining
qualified employees. Recent and proposed regulations related to equity
compensation could adversely affect our ability to attract and retain key
personnel.
We expect our quarterly revenues, cash flows and operating results to fluctuate
due to the large size and timing of some orders that can materially affect our
financial statements from quarter to quarter, either obscuring or presenting
trends that do or do not exist. This makes prediction of revenues, earnings and
working capital for each financial period especially difficult and uncertain and
increases the risk of unanticipated variations in quarterly results and
financial condition.
Our stock price can be volatile. Our stock price can be affected by many factors
such as quarterly increases or decreases in our earnings, speculation in the
investment community about our financial condition or results of operations,
technological developments, or the loss of key management or technical
personnel.
RECENT EVENTS
Subsequent to June 30, 2006, 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 six months beginning July 1, 2006 at a cost of $5,000 per month. In addition,
we issued 162,000 shares of our common stock, no par value, with "piggyback"
registration rights.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this report, the Company carried out an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation
was done under the supervision and with the participation of the Company's
Principal Executive Officer and Principal Financial Officer. Based upon that
evaluation, the Principal Executive Officer and Principal Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
gathering, analyzing and disclosing information needed to satisfy the Company's
disclosure obligations under the Exchange Act.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of 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:
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. The vendors are seeking
termination pay from the Company in the amount of approximately $40,000. The
Company intends to defend this claim vigorously and counterclaim for losses
suffered as well as jeopardy to its reputation by the actions of the vendors.
In November 2002, we sold certain assets of our training division to Thinkpath
Training LLC. Pursuant to this agreement, Thinkpath Training LLC assumed certain
liabilities including the property lease for this division which expires August
31, 2006. In April 2006, we were notified by Thinkpath Training LLC that they
had failed to meet their rent obligations and currently had rent arrears of
approximately $80,000.
The lessor filed a claim against us and Thinkpath Training LLC demanding that
the rent arrears be paid and the premises vacated immediately. On June 1, 2006,
a default judgment was awarded to the lessor and entered against us. On July 7,
2006, our motion to vacate the default judgment was denied. On July 27, 2006,
the court agreed to our motion to renew and reargue our prior motion seeking to
vacate the default judgment on August 23, 2006. Although we intend to continue
to defend this claim vigorously, we may be held liable for the rent arrears plus
the balance of the lease which expires August 31, 2006 for a total of $300,000.
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ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2006, we sold unregistered securities as
described below. There were no underwriters involved in the transactions and
there were no underwriting discounts or commissions paid in connection
therewith, except as disclosed below. The purchasers of the securities in such
transactions represented their intention to acquire the securities for
investment purposes only and not with a view to or for sales in connection with
any distribution thereof and appropriate legends were affixed to the
certificates for the securities issued in such transactions. The purchasers of
the securities in the transactions below were each sophisticated investors who
were provided information about us and were able to bear the risk of loss of
their entire investment.
On June 30, 2006, we issued 3,369,188 shares of our common stock, no par value
per share, to the vendors of The Multitech Group Inc., for a total consideration
of $669,689 as part of the acquisition price. We also issued 1,202,009 shares of
our common stock, no par value per share, to the principal vendors as repayment
of an Officer's Loan in the amount of $249,624.
On June 30, 2006, we issued 316,563 shares of our common stock, no par value per
share, to Leventis Investments for a total consideration of $63,313 as partial
payment of a buyer's fee for the TMG acquisition.
In connection with a financing, on June 30, 2006, we issued 1,810,674 common
stock purchase warrants to Laurus Master Fund, Ltd. with an exercise price of
$.0001 per share and which expire on June 30, 2016. Laurus is prohibited from
selling any of the warrants until June 30, 2007 and thereafter is prohibited
from selling an amount of shares in excess of 15% of the daily volume of trading
of our common stock on any day.
We believe all of the above issuances were exempt from registration pursuant to
the exemption provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 July 10, 2006, the Company filed a report on Form 8-K to disclose its
financing transaction with Laurus Master Fund, Ltd.
On July 11, 2006, the Company filed a report on Form 8-K to disclose its
acquisition of The Multitech Group Inc.
** The Exhibit attached to this Form 10-QSB shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THINKPATH INC.
Dated: August 21, 2006 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
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