UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER 001-14813
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.)
16 FOUR SEASONS PLACE, SUITE 215, TORONTO, ONTARIO, CANADA M9B 6E5
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(416) 622-5200
-------------------
(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 MAY 21, 2007 THERE WERE 6,010,262 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES | | NO |X|
THINKPATH INC.
MARCH 31, 2007 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of March 31, 2007 and
December 31, 2006.............................................. 4-5
Interim Consolidated Statements of Operations for the three months
ended March 31, 2007 and 2006.................................. 6
Interim Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2007 and the year ended
December 31, 2006.............................................. 7
Interim Consolidated Statements of Cash Flows for the three months
ended March 31, 2007 and 2006.................................. 8
Notes to Interim Consolidated Financial Statements............ 9-30
Item 2. Management's Discussion and Analysis or Plan of Operation........ 31-46
Item 3. Controls and Procedures............................................ 46
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 47
Item 3. Defaults Upon Senior Securities ................................... 47
Item 4. Submission of Matters to a Vote of Security Holders ............... 47
Item 5. Other Information ................................................. 47
Item 6. Exhibits and Reports on Form 8-K .................................. 47
Signatures ........................................................ 48
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 (UNAUDITED) AND DECEMBER 31, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
3/31/2007 12/31/2006
--------- ----------
$ $
ASSETS
CURRENT ASSETS
Cash 68,265 114,041
Accounts receivable (note 5) 2,764,510 2,150,413
Prepaid expenses 121,321 132,814
--------- ----------
2,954,096 2,397,268
PROPERTY AND EQUIPMENT (note 6) 546,342 590,283
GOODWILL (note 7) 2,359,318 2,359,318
OTHER ASSETS (note 8) 273,681 302,508
--------- ----------
6,133,437 5,649,377
========= ==========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-4-
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 (UNAUDITED) AND DECEMBER 31, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
3/31/2007 12/31/2006
----------- -----------
$ $
LIABILITIES
CURRENT LIABILITIES
Laurus revolving note (note 9) 3,208,938 2,921,792
Accounts payable (note 10) 1,890,724 1,493,223
Current portion of long-term debt (note 11) 940,662 824,709
----------- -----------
6,040,324 5,239,724
LONG-TERM DEBT (note 11) 651,595 730,976
CONVERTIBLE FINANCING - DERIVATIVES (note 9) 770,137 817,303
----------- -----------
7,462,056 6,788,003
=========== ===========
COMMITMENTS AND CONTINGENCIES (note 17)
STOCKHOLDERS' EQUITY (DEFICIENCY)
CAPITAL STOCK (note 12) 42,266,530 42,266,530
DEFICIT (42,565,783) (42,376,656)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,029,366) (1,028,500)
----------- -----------
(1,328,619) (1,138,626)
----------- -----------
6,133,437 5,649,377
=========== ===========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-5-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
Three months ended March 31,
2007 2006
--------- ---------
$ $
REVENUE 3,851,932 2,910,314
COST OF SERVICES 2,482,925 2,088,930
--------- ---------
GROSS PROFIT 1,369,007 821,384
--------- ---------
EXPENSES
Administrative 664,985 605,426
Selling 467,944 473,816
Depreciation and amortization 103,250 87,932
Write down of property and equipment 3,443 --
Financing costs and mark-to-market adjustments 4,031 (124,208)
--------- ---------
1,243,653 1,042,966
--------- ---------
INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES 125,354 (221,582)
Interest Charges 310,940 142,231
--------- ---------
LOSS BEFORE INCOME TAXES (185,586) (363,813)
Income Taxes (note 13) 3,541 7,843
--------- ---------
NET LOSS (189,127) (371,656)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND DILUTED 9,826,082 4,369,147
========= =========
NET LOSS PER WEIGHTED AVERAGE COMMON STOCK
BASIC AND DILUTED (0.02) (0.09)
========= =========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-6-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND THE YEAR ENDED DECEMBER 31, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
COMMON PREFERRED ACCUMULATED
STOCK STOCK CAPITAL OTHER
NUMBER OF NUMBER OF STOCK COMPREHENSIVE COMPREHENSIVE
SHARES SHARES AMOUNTS DEFICIT LOSS LOSS
--------------------------------------------------------------------------------------
Balance as of December 31, 2005 4,738,322 40,486,219 (37,518,943) (949,673)
=========== =========== =========== =========== ===========
Net loss for the year -- -- (4,857,713) (4,857,713)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (78,827) (78,827)
-----------
Comprehensive loss (4,936,540)
===========
Common stock issued for acquisition 3,685,751 763,000 --
Preferred stock issued for acquisition 700 699,687 --
Common stock issued for services 200,000 68,000
--
Accrued liabilities settled through the
issuance of common stock 1,202,009 249,624 --
----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2006 9,826,082 700 42,266,530 (42,376,656) (1,028,500)
=========== =========== =========== =========== ===========
Net loss for the period -- -- (189,127) (189,127)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (866) (866)
-----------
Comprehensive loss (189,993)
===========
----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2007 9,826,082 700 42,266,530 (42,565,783) (1,029,366)
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-7-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
$ $
Cash flows from operating activities
Net loss (189,127) (371,656)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 103,250 87,932
Amortization of deferred financing costs 115,655 142,105
Mark-to-market of derivatives (280,407) (266,313)
Loss on extinguishment of debt 168,783 --
Write down of property and equipment 3,443 --
Decrease (increase) in accounts receivable (612,489) 31,172
Decrease in prepaid expenses 11,542 22,913
Increase in accounts payable 398,234 148,283
-------- ---------
Net cash (used in) provided by operating activities (281,116) (205,564)
-------- ---------
Cash flows from investing activities
Purchase of property and equipment (16,473) (5,470)
Net cash used in investing activities (16,473) (5,470)
-------- ---------
Cash flows from financing activities
Proceeds from revolving financing facility 318,888 --
Proceeds from convertible financing facility -- 165,891
Deferred financing costs incurred (17,500) --
Repayment of long-term debt (46,415) (20,072)
-------- ---------
Net cash provided by financing activities 254,973 145,819
-------- ---------
Effect of foreign currency exchange rate changes (3,160) 38,134
-------- ---------
Net decrease in cash (45,776) (27,081)
Cash
Beginning of year 114,041 123,056
-------- ---------
End of year 68,265 95,975
======== =========
SUPPLEMENTAL CASH ITEMS:
Interest paid 310,940 142,231
======== =========
Income taxes paid 3,541 7,843
======== =========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-8-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS AND GOING CONCERN
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the Company's ability to continue as
a going concern for a reasonable period of time. These conditions and
events include significant recurring operating losses and working capital
deficiencies. At March 31, 2007, the Company had a deficit of $42,565,783
and has suffered recurring losses from operations.
With insufficient working capital from operations, the Company's primary
source of cash is a $4,000,000 financing facility with Laurus Master Fund,
Ltd. ("Laurus"). At March 31, 2007, the balance on the facility was
$3,706,218 (note 9). 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 May 18, 2007, management's plans to mitigate and alleviate its
operating losses and working capital deficiencies include:
a) Raise additional working capital via convertible debt
b) Ongoing cost cutting measures as required to restore each office
to profitability
c) Continued focus on securing customers with high growth potential,
such as those in the aerospace and defense industries;
d) Complement organic growth with the acquisition of profitable
engineering companies; and
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 MARCH 31, 2007
(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 12 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.
The outstanding options and warrants as detailed in note 12 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.
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.
-10-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
The Company recognizes revenue on time-and-materials contracts to the
extent of billable rates times hours delivered, plus expenses incurred. For
fixed price contracts within the scope of Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts (SOP 81-1), revenue is recognized on the percentage of completion
method using costs incurred in relation to total estimated costs or upon
delivery of specific products or services, as appropriate. For fixed
price-completion contracts that are not within the scope of SOP 81-1,
revenue is generally recognized as earned according to contract terms as
the service is provided. The Company provides its customers with a number
of different services that are generally documented through separate
negotiated task orders that detail the services to be provided and the
compensation for these services. Services rendered under each task order
represent an independent earnings process and are not dependent on any
other service or product sold. The Company recognizes revenue on cost-plus
contracts to the extent of allowable costs incurred plus a proportionate
amount of the fee earned, which may be fixed or performance-based. The
Company considers fixed fees under cost-plus contracts to be earned in
proportion to the allowable costs incurred in performance of the contract,
which generally corresponds to the timing of contractual billings. The
Company records provisions for estimated losses on uncompleted contracts in
the period in which those losses are identified.
The Company considers performance-based fees under any contract type to be
earned only when it can demonstrate satisfaction of a specific performance
goal or it receive contractual notification from a customer that the fee
has been earned. In all cases, the Company recognizes revenue only when
pervasive evidence of an arrangement exists services have been rendered,
the contract price is fixed or determinable, and collection is reasonably
assured.
Contract revenue recognition inherently involves estimation. From time to
time, facts develop that requires the Company to revise the total estimated
costs or revenues expected. In most cases, these changes relate to changes
in the contractual scope of the work, and do not significantly impact the
expected profit rate on a contract. The Company records the cumulative
effects of any revisions to the estimated total costs and revenues in the
period in which the facts become known.
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, 2006, the Company recorded a charge of $2,043,496 for the
impaired goodwill of the Technical Publications and Engineering unit based
on reduced cash flow estimates.
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.
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.
-11-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
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. Estimates are used when recording accruals
of expenses and revenue, allowance for doubtful accounts, and valuations of
long-lived assets, goodwill and convertible financing derivatives. These
estimates are reviewed periodically and as adjustments become necessary,
they are reported in earnings in the period in which they become known.
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.
-12-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
r) Recent Pronouncements
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; (4) 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.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires
that we recognize in our financial statements the benefit of a tax position
if that position is more likely than not of being sustained on audit, based
on the technical merits of the position. The provisions of FIN 48 become
effective as of the beginning of our 2008 fiscal year, with the cumulative
effect of the change in accounting principle recorded as an adjustment to
opening retained earnings. The company is currently evaluating the impact
that FIN 48 will have on its financial statements.
-13-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" (FAS 157), which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements. The provisions of FAS 157 become effective as of the
beginning of the 2009 fiscal year. The company is currently evaluating the
impact that FAS 157 will have on its financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108), which addresses how to quantify the effect of
financial statement errors. The provisions of SAB 108 become effective as
of the end of the 2007 fiscal year. The company does not expect the
adoption of SAB 108 to have a significant impact on its financial
statements.
In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans"
("SFAS 158") which requires an employer to recognize the overfunded or
underfunded status of a defined benefit plan as an asset or liability in
its consolidated balance sheet. Under SFAS 158, actuarial gains and losses
and prior service costs or credits that have not yet been recognized
through earnings as net periodic benefit cost will be recognized in other
comprehensive income, net of tax, until they are amortized as a component
of net periodic benefit cost. SFAS 158 is effective as of the end of the
fiscal year ending after December 15, 2006 and shall not be applied
retrospectively. The company is currently evaluating the impact that the
adoption of SFAS 158 will have on its consolidated financial statements.
In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for
Registration Payment Arrangements." This FASB Staff Position ("FSP")
addresses an issuer's accounting for registration payment arrangements.
This FSP specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be
separately recognized and measured in accordance with FASB Statement No. 5,
Accounting for Contingencies. The guidance in this FSP amends FASB
Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities , and No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity , and FASB Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others , to include scope
exceptions for registration payment arrangements. This FSP further
clarifies that a financial instrument subject to a registration payment
arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles ("GAAP") without regard to the
contingent obligation to transfer consideration pursuant to the
registration payment arrangement. This FSP is effective immediately for
registration payment arrangements and the financial instruments subject to
those arrangements that are entered into or modified subsequent to the date
of issuance of this FSP.
For registration payment arrangements and financial instruments subject to
those arrangements that were entered into prior to the issuance of this
FSP, this guidance shall be effective for financial statements issued for
fiscal years beginning after December 15, 2006, and interim periods within
those fiscal years. Early adoption of this FSP for interim or annual
periods for which financial statements or interim reports have not been
issued is permitted. Early adoption of this FSP for interim or annual
periods for which financial statements or interim reports have not been
issued is permitted.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115" (FAS 159). FAS 159 permits companies to choose to
measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for similar types of assets and liabilities. The provisions of FAS 159
become effective as of the beginning of the 2008 fiscal year. The company
is currently evaluating the impact that FAS 159 will have on its financial
statements.
s) Advertising Costs
Advertising costs are expensed as incurred.
-14-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
3. STOCK OPTION PLANS
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
a) Options outstanding at December 31, 2005 1,864,659 $.19
=========
Options forfeited during the year (25,000) $0.27
Options expired during the year (87) $3,470
Options granted during the year --
--
Options outstanding at December 31, 2006 1,839,572 $.19
=========
Options forfeited during the period --
Options expired during the period --
Options granted during the period --
--
Options outstanding at March 31, 2007 1,839,572 $.19
=========
Options exercisable December 31, 2006 1,839,572 $.19
Options exercisable March 31, 2007 1,839,572 $.19
Options available for future grant December 31, 2006 162,102
Options available for future grant March 31, 2007 162,102
b) Range of Exercise Prices at March 31, 2007
OUTSTANDING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
OPTIONS REMAINING LIFE EXERCISABLE EXERCISE PRICE
------- -------------- ----------- ----------------
$0.01 1,839,572 8.57 1,839,572 $0.19
c) Change in Accounting Policy and Pro-forma net income
At December 31, 2006, the Company has five stock-based employee
compensation plans, which are described more fully in note 12(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.
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.
-15-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
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
months ended March 31, 2007 and 2006. There was no stock compensation
expense for employee options recorded under APB No. 25 in the Consolidated
Statements of Operations for the three months ended March 31, 2007 and
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 months ended March 31, 2007 and 2006.
On February 28, 2007, the exercise price of 379,572 options issued to
Laurus Master Fund, Ltd on June 27, 2005 was amended from $.0001 to $0.01
per share. The options are exercisable at any time and in any amount and
expire on June 27, 2015.
There have been no options granted since 2005.
4. ACQUISITIONS
On June 30, 2006, the Company acquired 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 shares 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.
The net acquired assets were valued as follows:
Current assets $965,977
Property and equipment 378,715
Cash surrender value of life insurance 13,291
Customer lists 123,934
Contracts 489,294
Liabilities assumed (762,933)
---------
1,208,278
Less: consideration including acquisition costs 3,103,540
---------
Goodwill $1,895,262
==========
At December 31, 2006, the Company wrote off the goodwill of $1,895,262
allocated to the acquisition of TMG, for impairment based on reduced cash
flow estimates.
-16-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
5. ACCOUNTS RECEIVABLE
3/31/07 12/31/06
------- --------
$ $
Accounts receivable 2,965,542 2,366,916
Less: Allowance for doubtful accounts (201,032) (216,503)
--------- ---------
2,764,510 2,150,413
========= =========
Allowance for doubtful accounts
Balance, beginning of period 216,503 201,876
Provision 5,921 92,662
Recoveries (21,392) (78,035)
-------- --------
Balance, end of period 201,032 216,503
======= =======
6. PROPERTY AND EQUIPMENT
3/31/07 12/31/06
---------------------------------------- ----------
ACCUMULATED
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 215,002 161,563 53,439 56,997
Computer equipment and software 4,015,605 3,533,198 482,407 518,130
Leasehold improvements 45,091 34,595 10,495 15,156
Automobile 43,425 43,425 -- --
------ ------ ------- -------
4,319,123 3,772,781 546,342 590,283
========= ========= ======= =======
Property and equipment
under capital lease included in the above 126,092 97,008 29,084 37,105
======= ====== ====== ======
Amortization of property and equipment for the three months ended March 31,
2007 amounted to $56,894, including amortization of property and equipment
under capital lease of $8,022.
Amortization of property and equipment for the year ended December 31, 2006
amounted to $312,189, including amortization of property and equipment
under capital lease of $25,759.
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:
3/31/07 12/31/06
------- --------
ACCUMULATED
ACCUMULATED IMPAIRMENT
COST AMORTIZATION LOSSES NET NET
---------- ------------- -------------- ---------- ------------
$ $ $ $ $
Technical Publications &
Engineering (Thinkpath US Inc.,
TBM Technologies Inc. and The
Multitech Group Inc.) 7,851,142 535,164 4,956,660 2,359,318 2,359,318
--------- ------- --------- --------- ---------
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.
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.
-17-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
At December 31, 2006, 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 $2,043,496 which
represents the amount of goodwill impairment.
8. OTHER ASSETS
3/31/07 12/31/06
------- --------
$ $
Cash surrender value of life insurance -- --
Deferred Financing Costs 191,061 209,559
Customer Lists 82,620 92,949
------ ------
Total 273,681 302,508
======= =======
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
customer lists related to the acquisition of The Multitech Group Inc. (note
4) to be amortized over three years, beginning April 1, 2006.
Amortization of other assets for the three months ended March 31, 2007
amounted to $46,356. Amortization of other assets for the year ended
December 31, 2006 amounted to $322,630.
Previously included in Other Assets were contracts related to the
acquisition of the The Multitech Group Inc. (note 4) which were being
amortized over two years. At December 31, 2006, the contracts asset balance
in the amount of $305,811 was determined to be impaired and written off.
During the year ended December 31, 2006, the Company received cash of
$77,594 on the surrender value of life insurance policies held on two
employees.
9. 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 consisted
of a secured convertible note ("Minimum Borrowing Note") based on 90% of
eligible accounts receivable which matured on June 27, 2008 and bore
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
bore 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 had 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 would
be adjusted to 80%, 100% and 105% of the new lower price. This feature
would modify the number of shares that the Company would issue on
conversion of the notes.
The Company had 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.
-18-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
In connection with the financing, the Company issued warrants to purchase
up to 2,100,000 shares of its common stock with 1,050,000 at an exercise
price of $0.55 per share and 1,050,000 at an exercise price of $0.60 per
share. The warrants vested 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 vested immediately and expire on June 27, 2015. On February 28,
2007 the option price was amended from $0.0001 per share to $0.01 per
share.
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 failed to file such registration statement, the agreement
also provided that the Company shall pay liquidated damages and interest to
Laurus.
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 is being
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 were 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. For the valuation
as of December 31, 2006 an assumption of 100% volatility was used and for
the valuation at March 31, 2007, an assumption of 94.65% volatility was
used.
CONVERSION OPTION
As the issue was a floating rate note, it was inferred that it would
substantially always be equal to par ($3,100,000 USD). The implied number
of conversion options would be derived by dividing the notional by the
average conversion price. As shown 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.
WEIGHTED
TRANCHE NOTIONAL CONVERSION 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 set
that if the stock price exceeded the prevailing conversion price by a
certain level, interest payments on the floating rate note would be
reduced. This clause diminished the conversion options fair value as the
holder would be penalized when the conversion option was 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 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.
-19-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
AMENDMENTS
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.
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 bore
interest at the prime rate as published by the Wall Street Journal plus 2%.
The second overadvance was to expire on July 27, 2006. In the event that
the overadvance was not repaid in full by this date, the interest rate was
to 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 is being amortized over the remaining term of the debt. On
March 30, 2007, the expiration date of these warrants was amended to
January 26, 2026.
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 was
included in financing costs at December 31, 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 was
included in financing costs at December 31, 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 no 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 $980,000 which is
significant as compared to the total value of the shares that could be
issued under the outstanding warrants and options June 30, 2006 of
approximately $960,000.
-20-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(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 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.
On November 15, 2006, the Company executed an Omnibus Amendment No. 1 with
Laurus Master Fund, Inc., whereby Laurus agreed to postpone the December
and January principal payments on the Term Note (note 12) to be paid
instead on the Maturity Date of June 30, 2009. In addition, they agreed to
increase the overadvance by $43,000 and extend the overadvance until
December 31, 2007 with a repayment schedule beginning July 1, 2007. In
consideration of these modifications, the Company issued 940,750 common
stock purchase warrants to Laurus with an exercise price of $0.23 per share
which expire on November 15, 2013. Laurus also agreed to waive any
penalties for failure to file and effect a registration statement
registering the shares underlying their common stock purchase warrants
until March 1, 2007.
The fair value of the warrants issued on November 15, 2006 was determined
to be $190,848 and were allocated as follows: 368,904 warrants as
compensation for the deferral of the two principal payments on the term
loan ($74,839 in fair value) and 571,846 warrants for the increase in and
extension of the over advance ($116,009 in fair value).
The Company considered the additional modifications to the revolving credit
facility and term loan and whether they should be accounted for under EITF
96-19 or EITF 98-14. EITF 96-19 requires that modifications be evaluated by
comparing the present value of the cash flows under the old debt with the
present value of the cash flows under the new debt - both discounted at the
effective interest rate of the old debt. The fair value of the additional
warrants issued on the term loan ($74,839) is considered as a cash flow at
inception of the new debt and as the difference was only 5% this
modification was not considered an extinguishment of the old debt. As a
result, there were no changes in the accounting required and the fair value
of the additional warrants will be amortized over the remaining life of the
term loan using the effective interest method.
The revolving line of credit was modified such that the total borrowing
capacity has been increased. Under EITF 98-14, the debtor should compare
the product of the remaining term and the maximum available credit of the
old arrangement with the borrowing capacity of the new arrangement. If the
borrowing capacity of the new arrangement is greater than or equal to the
borrowing capacity of the old arrangement, then any unamortized deferred
costs, any fees paid to the creditor, and any third-party costs incurred
should be associated with the new arrangement. Since the total borrowing
capacity has increased as a result of the modifications, the fair value of
the warrants associated with the overadvance would be deferred and
amortized over the remaining term of the facility.
In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for
Registration Payment Arrangements." This FASB Staff Position ("FSP")
addresses an issuer's accounting for registration payment arrangements.
This FSP can significantly modify the accounting treatment for instruments
that are subject to registration rights agreements such as the Company's
warrants. The FSP essentially states that registration rights agreements
that contain contingent obligations to make payments should be evaluated as
a contingency under FAS 5. Furthermore, the FSP states that: "a financial
instrument subject to a registration payment arrangement should be
accounted for in accordance with other applicable generally accepted
accounting principles (GAAP) without regard to the contingent obligation to
transfer consideration pursuant to the registration payment arrangement."
Prior to the application of this FSP, the Company determined the
appropriate accounting for the warrants by considering both its ability to
settle the warrants by issuing unregistered shares and to pay the
liquidated damages. Considering both elements together, the Company
concluded that because the registration rights agreement contained a 2% per
month liquidated damages clause if the underlying shares were not
registered with the SEC, that the provision of EITF 00-19 paragraph 14
could not be met since it would be uneconomical to issue unregistered
shares and to pay the penalty. Therefore, the warrants were considered
liability instruments under EITF 00-19 and accounted for at fair value.
Under the FSP, the Company had to evaluate whether the warrants could be
settled in unregistered shares and that the 2% penalty payable in the event
that the Company's shares are delisted is included in the scope of the FSP,
then an impediment to classifying the warrants as equity instruments under
FAS 133/EITF 00-19 would be removed. The next step in the analysis was to
consider whether the warrants met the definition of a derivative under FAS
133. In order for the warrants not to be considered an embedded derivative
then they must a) be indexed to the Company's own stock and b) classified
in stockholders' equity. The Company determined that since its functional
currency is Canadian and the warrants are exercisable in US dollars, the
warrants should be considered indexed to both the company's share price and
the exchange rate. As the warrants do not qualify for the exemption in
paragraph 11 (a) of FAS 133, they should continue to be recorded as
liabilities at fair value, with the variations recorded in earnings.
-21-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
On February 28, 2007, the Company executed an Omnibus Amendment No. 2 with
Laurus Master Fund, Inc., whereby Laurus amended the terms of the term loan
(Note 11), increased the over advance to $1,690,000 and increased the
stated amount of the revolver note to $3,650,000. The agreement also
amended the exercise price of the options issued in June 2005 and the
warrants issued in June 2006 from $0.0001 to $0.01. On March 21, 2007, the
Company executed an Omnibus Amendment No. 3 with Laurus Master Fund, Inc.,
whereby the revolver note was increased to $4,000,000. Any principal
indebtedness outstanding on the revolver in excess of $3,650,000 will bear
interest at an annual rate equal to The Wall Street Journal prime rate plus
23% ("contract rate") but never less than 8%. In consideration of these
modifications to the revolving facility, the Company issued 1,213,435
common stock purchase warrants to Laurus with an exercise price of $0.01
per share which expire on February 28, 2027.
In accordance with EITF 98-14, the Company compared the product of the
remaining term and the maximum available credit of the old arrangement with
the borrowing capacity of the new arrangement. As the borrowing capacity of
the new arrangement is greater than the borrowing capacity of the old
arrangement, the fair value of the warrants associated with the revolver
and over advance would be deferred and amortized over the remaining term of
the facility.
During the three months ended March 31, 2007, the Company amortized
$115,655 of the initial value of the derivatives and embedded derivatives
which are included in financing costs. During the year ended December 31,
2006, the Company amortized $465,471 of the initial value of the
derivatives and embedded derivatives which are included in financing costs.
VALUATION RESULTS
DERIVATIVE 3/31/07 12/31/06
---------- ------- ---------
Warrants $730,889 $747,848
Options $39,248 $69,455
------- -------
$770,137 $817,303
======== ========
The mark to market of the derivatives including the embedded derivatives at
March 31, 2007 was credited to financing costs in the amount of $280,407.
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
$293,822.
At the end of each period, the balance on the Laurus facility was as
follows:
3/31/07 12/31/06
------- --------
$ $
Principal balance revolving note 3,706,218 3,387,330
Deferred Financing Costs (497,280) (465,538)
--------- ---------
Total 3,208,938 2,921,792
========= =========
10. ACCOUNTS PAYABLE
Included in accounts payable at the end of each period are the following:
3/31/07 12/31/06
------- --------
$ $
Trade payables 362,946 410,912
Accrued payroll and payroll liabilities 626,421 369,455
Accrued bonuses 104,927 75,987
Accrued professional fees 331,486 361,269
Other 464,944 275,600
------- -------
1,890,724 1,493,223
========= =========
-22-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
11. LONG-TERM DEBT
i) March 31, 2007
On February 28, 2007, the Company executed an Omnibus Amendment No. 2 with
Laurus Master Fund, Inc. (note 9), whereby Laurus agreed to postpone the
March 2007 through to August 2007 principal payments with the postponed
principal to be amortized equally over the remaining term of the loan
beginning September 1, 2007. In addition, the exercise price of the
warrants issued with the loan in June 2006 was amended from $0.0001to $0.01
per share. In consideration of these modifications, the Company issued
warrants to purchase up to 1,213,435 shares of the Company's common stock
at $0.01 per share. The warrants expire on February 28, 2027.
The warrants were valued at February 28, 2007 using standard Black-Scholes
methodology with a dilution effect and determined to have a value of
$116,641. (Risk free interest rate of 4.75%; volatility of 96.5%; weighted
average expected life of 20 years; weighted average fair value per share of
$0.155). 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 and amortized over the remaining term of the loan.
In accordance with EITF 96-19, these modifications to the debt have been
evaluated by comparing the present value of the cash flows under the old
debt with the present value of the cash flows under the new debt, both
discounted at the effective interest rate of the old debt.
For purposes of this calculation, the remaining cash flows as at February
28, 2007 on the original term loan issued on June 30, 2006 were compared to
modified cash flows on the term loan modified as of February 28, 2007. In
this case, the allocated fair value of the additional warrants issued in
November 15, 2006 and on February 28, 2007 ($74,839 and $116,641,
respectively) were considered as a cash flow at inception of the new term
loan.
As the difference of 27% was greater than 10%, the modifications resulted
in an extinguishment of the old debt. As a result, the modification is to
be accounted for in the same manner as a debt extinguishment and all fees
paid to or received from Laurus are to be associated with the
extinguishment of the old debt instrument and included in determining the
debt extinguishment gain or loss.
In accordance with EITF 96-19, the new debt must be accounted for at fair
value. In order to fair value the new term loan, the effective rate of the
convertible debenture issued by the Company on May 10, 2007 was calculated
and the conversion option was extracted in order to obtain an effective
rate of approximately 24%. The resulting loss of $168,784 including the
write off of the value attributed to the warrants as of February 28, 2007
is included in financing costs in the consolidated statement of operations
for the three months ended March 31, 2007.
At March 31, 2007, the Company had five unsecured promissory notes
outstanding to the shareholders of TMG totaling $559,750 with quarterly
payments of $69,969 which were to start 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. The Company has not made any scheduled principal
payments on the notes due to cash flow constraints. Included in interest
expense in the consolidated statement of operations for the three months
ended March 31, 2007 is $15,561 in accrued but unpaid interest and default
penalties on the promissory notes.
At March 31, 2007, the Company held various capital leases in the amount of
$3,234 secured by property and equipment with various payment terms and
interest rates ranging from 10-22%. These leases mature between April 2007
and July 2007.
ii) December 31, 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 at December 31, 2006.
On June 30, 2006, the Company repaid the balance owing on an SBA loan held
by TMG in the amount of $84,083 pursuant to the purchase agreement. 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.
-23-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
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 9) including the 2% liquidated damages
clause and therefore are classified as embedded derivatives under EITF
00-19. The warrants were valued as $304,763 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. Beginning
July 1, 2006, the Company began amortizing the initial value of the
embedded derivative over the three year term of the loan.
On November 15, 2006, the Company executed an Omnibus Amendment No. 1 with
Laurus Master Fund, Inc. (note 9), whereby Laurus agreed to postpone the
December and January principal payments on the term note to be paid instead
on the Maturity Date of June 30, 2009. The fair value of the warrants
issued in consideration of this amendment was determined to be $74,839 and
will be amortized over the remaining life of the term loan using the
effective interest method.
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. At
December 31, 2006, the Company had failed to make any scheduled principal
payments on the notes due to cash flow constraints. Included in interest
expense in the consolidated statement of operations at December 31, 2006,
is $31,121 in accrued but unpaid interest and default penalties on the
promissory notes.
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 was secured by the
motor vehicle and bore interest at 7.5% per annum. The loan was to mature
on January 14, 2009. In July 2006, this liability was assumed by a TMG
employee.
At December 31, 2006, the Company held various capital leases in the amount
of $7,178 secured by property and equipment with various payment terms and
interest rates ranging from 10-22%.
3/31/07 12/31/06
------- --------
$ $
a) Included therein:
Laurus Term Loan 1,272,727 1,315,151
Promissory Notes - TMG 559,750 559,750
Capital Leases 3,234 7,178
----- -----
1,835,711 1,882,079
Less: deferred financing costs on Laurus Term Loan 243,454 326,394
Less: current portion 940,662 824,709
------- -------
651,595 730,976
======= =======
b) Future principal payment obligations as at March 31, 2007, were as
follows:
2007 782,285
2008 648,549
2009 404,877
2010 --
2011 --
---------
1,835,711
=========
c) Interest expense related to long-term debt for the three months ended
March 31, 2007 was $48,788. Interest expense related to long-term debt for
the year ended December 31, 2006 was $140,612.
-24-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
12. CAPITAL STOCK
a) Authorized Shares
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 Shares
At December 31, 2005, the Company had a total of 4,738,322 shares of common
stock issued and outstanding.
On June 30, 2006, the Company issued 3,369,188 shares of its common stock,
no par value per share, to the selling shareholders of TMG for a total
consideration of $699,687. 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.
On July 1, 2006, the Company issued 162,000 shares of its common stock, no
par value, with "piggyback" registration rights to Financial Media
Relations, LLC (FMR), 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 and also includes a
monthly cash fee of $5,000. Subsequent to December 31, 2006, the Company
notified FMR that it was terminating the contract and canceling the 162,000
shares for FMR's failure to deliver any services.
On July 21, 2006, the Company issued 200,000 shares of its common stock, no
par value, as director compensation.
At December 31, 2006, the Company had a total of 9,826,082 shares of common
stock issued and outstanding.
There were no shares of common stock issued during the three months ended
March 31, 2007.
c) Warrants
For each of the periods presented, the following warrants for the purchase
of one common share per warrant at the following prices per common share
and expiry dates were outstanding:
Number of warrants Exercise price
3/31/07 12/31/06 per share Expiry date
------------ ----------------- ------------------ -------------------
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
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
9,083 9,083 $1.25 2010
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
940,750 940,750 $0.23 2013
1,810,674 1,810,674 $0.01 2016
500,000 500,000 $0.01 2026
2,426,870 -- $0.01 2027
------------ ----------------- ------------------ -------------------
8,517,922 6,091,052
------------ ----------------- ------------------ -------------------
-25-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
A summary of changes to number of issued warrants is as follows:
Outstanding at December 31, 2005 2,839,861
-----------
Issued 3,251,424
Cancelled --
Exercised --
Expired (233)
-----------
Outstanding at December 31, 2006 6,091,052
===========
Issued 2,426,870
Cancelled --
Exercised --
Expired --
-----------
Outstanding at March 31, 2007 8,517,922
===========
As disclosed in note 9, 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. On
March 30, 2007, the expiration date of these warrants was amended to
January 26, 2026.
As disclosed in note 11, 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. On
February 28, 2007 the exercise price of these warrants was amended to $0.01
per share.
As disclosed in note 9, on November 15, 2006, the Company issued 940,750
common stock purchase warrants to Laurus Master Fund, Ltd with an exercise
price of $.23 per share and which expire on November 15, 2013.
As disclosed in note 9, on February 28, 2007, the Company issued 2,426,870
common stock purchase warrants to Laurus Master Fund, Ltd with an exercise
price of $.01 per share and which expire on February 28, 2027.
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 March 31,
2007, 1,839,572 options remain outstanding and 162,102 options are
available for future grant. At December 31, 2006, 1,839,572 options remain
outstanding and 162,102 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 February 28, 2007, the exercise price of 379,572 options issued to
Laurus Master Fund, Ltd on June 27, 2005 was amended from $.0001 to $0.01
per share.
-26-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
13. DEFERRED INCOME TAXES AND INCOME TAXES
a) Deferred Income Taxes
The components of the deferred tax liability benefit by source of
temporary differences that gave rise to the benefit are as follows:
3/31/07 12/31/06
------- --------
$ $
Losses available to offset future income taxes 7,665,000 7,543,000
Deferred costs and customer lists 33,000 33,000
Share and debt issue costs 15,000 12,000
Property and equipment 1,009,000 999,000
--------- -------
8,722,000 8,587,000
Less: valuation allowance 8,722,000 8,587,000
--------- ---------
-- --
========= =========
b) Current Income Taxes
Current income taxes consist of:
3/31/07 12/31/06
------- --------
$ $
Amounts calculated at statutory rates (74,234) (1,938,583)
-------- -----------
Permanent differences (56,879) 1,063,826
Valuation allowance 134,654 886,000
------- -------
77,775 1,949,826
------ ---------
Current income taxes 3,541 11,243
Deferred income taxes -- --
----- ------
Income taxes 3,541 11,243
===== ======
Issue expenses totaling approximately $237,000 may be claimed at the rate
of 20% per year 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 $19,162,000, nor a
capital loss totaling $750,000 in the future as a deferred tax asset as at
March 31, 2007. As at the completion of the March 31, 2007 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.
14. COMPREHENSIVE LOSS
3/31/07 12/31/06
------- --------
$ $
Net loss (189,127) (4,857,713)
Other comprehensive loss
Foreign currency translation adjustments (866) (78,827)
----- --------
Comprehensive loss (189,993) (4,936,540)
========= ===========
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 MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
15. SEGMENTED INFORMATION
a) Revenue and Gross Profit by Geographic Area
Three Months Ended March 31,
2007 2006
---- ----
$ $
Revenue
Canada 271,638 432,910
United States of America 3,580,294 2,477,404
--------- ---------
3,851,932 2,910,314
========= =========
Gross Profit
Canada 119,962 166,133
United States of America 1,249,045 655,251
--------- -------
1,369,007 821,384
========= =======
b) Net Loss by Geographic Area
Three Months Ended March 31,
2007 2007
---- ----
$ $
Canada (440,097) (153,010)
United States of America 250,970 (218,646)
------- ---------
(189,127) (371,656)
========= =========
c) Identifiable Assets by Geographic Area
3/31/07 12/31/06
------- --------
$ $
Canada 477,085 606,087
United States of America 5,656,352 5,043,290
--------- ---------
6,133,437 5,649,377
========= =========
d) Revenues from Major Customers and Concentration of Credit Risk
The consolidated entity had the following revenues from major customers:
For the three months ended March 31, 2007, one customer had sales of
$984,142, representing approximately 26% of total revenue.
For the three months ended March 31, 2006, one customer had sales of
$412,614, representing approximately 14% of total revenue.
e) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
16. COMMITMENTS AND CONTINGENCIES
a) Lease Commitments
Minimum payments under operating leases for premises occupied by the
Company and its subsidiaries offices, located throughout Ontario, Canada
and the United States, exclusive of most operating costs and realty taxes,
as at March 31, 2007, for the next five years are as follows:
2007 236,016
2008 213,256
2009 140,477
2010 99,112
2011 --
-------
688,861
=======
The lease commitments do not include an operating lease for premises in New
York that the Company sub leased to Thinkpath Training LLC, the purchaser
of the United States training division. Thinkpath Training LLC is a
non-related company and its principal officer is the daughter of the
Company's Chief Executive Officer, Declan French.
-28-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
In April 2006, the Company was notified by the purchaser that they had
failed to meet their rent obligations and had accumulated rent arrears of
approximately $80,000. The lessor filed a claim against Thinkpath Training
LLC, the sub tenant, and the Company 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 the Company. On July
7, 2006, the Company's motion to vacate the default judgment was denied. On
July 27, 2006, the court agreed to the Company's motion to renew and
reargue its prior motion seeking to vacate the default judgment on August
23, 2006. Upon reargue on September 7, 2006, the court vacated the judgment
and dismissed the petition. On September 21, 2006, the Company received
notice from the landlord demanding payment of the current arrears of
approximately $360,000 in unpaid rent and additional charges and its intent
to commence legal proceedings against the Company in the event that such
payment is not made. In March 2007, the Lessor filed a motion for summary
judgment. The Company was granted an extension until May 2007, to have a
hearing on this motion. The Company continues to defend this claim
vigorously, although it is also working to reach a settlement with the
Lessor. At March 31, 2007, the Company has accrued $100,000 related to this
claim.
The lease commitments do not include an operating lease for premises
located in Brampton, Ontario that were vacated in February 2007. The
Company has not made any payments on this lease since November 2006 and
will attempt to negotiate a settlement with the landlord for early
termination. The Company may be liable for a lease balance of $173,913
which expires April 2008. The Company relocated its Canadian operations to
Toronto, Ontario and entered a short-term sub lease which expires June 30,
2007 with an option to renew for an indeterminate period. At March 31,
2007, the Company has accrued $45,000 in rent expense to cover the period
from November 2006 until February 2007.
In February 2007, the Company provided the landlord of its Cincinnati
office the required 120 days notice of its intent to terminate the lease.
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 has filed a counterclaim for losses suffered as well
as jeopardy to its reputation by the actions of the vendors. The Company
has not accrued any costs related to this claim.
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.
17. SUBSEQUENT EVENTS
On April 19, 2007, the Company executed an agreement with John and Cecelia
Kennedy which amends certain elements of the provision governing merger
consideration in Section 2.7 of the Agreement and Plan of Merger dated as
of June 29, 2006 among the Company, The Multitech Group, Inc., the
Kennedy's and other parties. Pursuant to the terms of the agreement, the
Kennedy's will return for cancellation 4,065,820 common shares, 595
preferred shares and non-negotiable promissory notes in the aggregate
amount of $475,788 issued upon execution of the Merger Agreement. In
consideration of these events, the Company issued a promissory note in the
amount of $800,000 payable over 60 months beginning January 2008 and
bearing interest at annual rate of 6%.
On May 10, 2007, the Company entered into a Securities Purchase Agreement
with Trafalgar Capital Specialized Investment Fund, Luxembourg with respect
to the purchase of up to $8,000,000 in 12% convertible debentures
convertible into common shares pursuant to Regulation "S". The first
debenture of $400,000 was issued by the Company on May 10, 2007 and is
convertible at a 10% discount to the lowest of the daily volume weighted
average price during the preceding 10 days and becomes due 2 years from its
date of issuance. The Company also issued a Convertible Compensation
Debenture Agreement, dated May 10, 2007 with respect to a debenture in the
amount of $160,000 as a facility fee convertible under the same terms and
also due 2 years from its date of issuance. In the event that Trafalgar
fails to raise an additional minimum amount of $600,000 in convertible
debentures, the Convertible Compensation Debenture Agreement will be
cancelled. The Company also issued 250,000 shares of common stock, no par
value, in consideration of a $40,000 facility fee.
On May 14, 2007, the Company entered into a Service Agreement with ROI
Group LLC, a Delaware corporation for the provision of investor relations
services on behalf of the Company for a period of twelve months. Pursuant
to the agreement, the Company is required to issue 240,000 shares of its
common stock and provide cash payments of $10,000 per month for the
duration of the agreement.
On May 14, 2007, Blair Taylor resigned from the Company's Board of
Directors which resignation was accepted in a resolution adopted during a
meeting of the Board of Directors held on that day. Mr. Taylor did not have
any disagreements with the Company or its Board of Directors. To fill the
vacancy created, the directors appointed Judd Bedford until the next annual
meeting of shareholders.
-29-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
18. 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.
19. COMPARATIVE FIGURES
Certain figures in the March 31, 2006 financial statements have been
reclassified to conform to the basis of presentation used at March 31,
2007.
-30-
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, material handling,
healthcare 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 16 Four Seasons Place,
Toronto, 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.
-31-
STATEMENTS OF OPERATIONS--PERCENTAGES
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
Three Months
Ended March 31,
2007 2006
% %
REVENUE 100 100
COST OF SERVICES 64 72
--- ---
GROSS PROFIT 36 28
EXPENSES
ADMINISTRATIVE 17 21
SELLING 12 16
DEPRECIATION AND AMORTIZATION 3 3
WRITE DOWN OF PROPERTY AND EQUIPMENT 0 0
FINANCING COSTS 0 (4)
--- ---
INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES 3 (8)
INTEREST CHARGES 8 5
--- ---
LOSS BEFORE INCOME TAXES (5) (13)
INCOME TAXES 0 0
--- ---
NET LOSS (5) (13)
=== ===
-32-
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2006
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.
For the three months ended March 31, 2007 we derived 93% of our revenue in the
United States compared to 85% for the three months ended March 31, 2006. This
increase is a result of both the new sales from the TMG acquisition which is US
based and acquired effective April 1, 2006 and the decline in project sales in
Canada during the first quarter of 2007. Consolidated revenues for the three
months ended March 31, 2007 increased by $940,000 or 32% to $3,850,000 as
compared to $2,910,000 for the same period last year. This increase is largely
attributable to the acquisition of TMG which contributed $620,000 in
revenue in the first quarter of 2007. In addition, sales from one major customer
increased from $410,000 or 14% of total revenue to $980,000 or 26% of total
revenue.
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
March 31, 2007 increased by $390,000 or 19% to $2,480,000 as compared to
$2,090,000 for the three months ended March 31, 2006. This increase is related
to the aforementioned increase in revenue. As a percentage of revenue, the cost
of services for the three months ended March 31, 2007 was 64% compared to 72%
for the three months ended March 31, 2006.
GROSS PROFIT
Gross profit is calculated by subtracting all direct costs from net revenue.
Gross profit for the three months ended March 31, 2007 increased by $550,000 or
67%. This increase is related to the increase in revenue. As a percentage of
revenue, gross profit for the three months ended March 31, 2007 is 36% compared
to 28% for the three months ended March 31, 2006. This increase is a result of
significant overtime hours during the first quarter of 2007 which are charged to
the customer at higher rates as well as the collection of a direct
hardware/software fee on some projects.
EXPENSES
Total expenses for the three months ended March 31, 2007 increased by 19% or
$200,000 to $1,240,000 compared to $1,040,000 for the three months ended March
31, 2006.
ADMINISTRATIVE EXPENSES
Administrative expenses increased by $60,000 or 10% to $665,000 for the three
months ended March 31, 2007 compared to $605,000 for the three months ended
March 31, 2006. This increase is largely attributable to the acquisition of TMG
and the related administrative salaries, office expenses and insurance premiums.
These costs were not included in the first quarter of 2006 as the effective date
of the transaction was April 1, 2006. As a percentage of revenue, administrative
expenses for the three months ended March 31, 2007 were 17% compared to 21% for
the three months ended March 31, 2006. This decline is largely due to cost
reductions that were implemented in February 2007 including a 20% salary
reduction of the executive officers.
-33-
SELLING EXPENSES
Selling expenses for the three months ended March 31, 2007 were $470,000 which
is consistent with 2006. As a percentage of revenue, selling expenses for the
three months ended March 31, 2007 were 12% compared to 16% for the three months
ended March 31, 2006. This decrease, despite the addition of the new TMG sales
salaries, is largely due to a 10% salary reduction of all the general managers
as part of the aforementioned cost reductions implemented in February 2007.
DEPRECIATION AND AMORTIZATION
For the three months ended March 31, 2007, depreciation and amortization
expenses increased by $10,000, or 11%, to $100,000 compared to $90,000 for the
three months ended March 31, 2006. The increase is largely attributable to the
amortization of $60,000 on additional capital assets and other assets including
contracts and customer lists acquired with the TMG acquisition. This increase
was offset by the decrease in depreciation expense on property and equipment as
many assets have either been fully amortized or written off as impaired at
December 31, 2006. As a percentage of revenue, depreciation and amortization
expense for the three months ended March 31, 2007 was 3%, which is consistent
with the same period in 2006.
WRITE DOWN OF PROPERTY AND EQUIPMENT
At March 31, 2007, we wrote down property and equipment in the amount of
approximately $3,000. 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.
FINANCING COSTS AND MARK-TO-MARKET ADJUSTMENTS
During the three months ended March 31, 2007, we amortized $115,000 of the
initial value of the derivatives and embedded derivatives attached to the Laurus
Master Fund, Ltd. revolving debt facility and term loan. At March 31, 2007, the
fair value of the derivatives and embedded derivatives were marked-to-market
with $280,000 credited to financing costs.
-34-
On February 28, 2007, we executed an Omnibus Amendment No. 2 with Laurus Master
Fund, Inc., whereby Laurus agreed to postpone the March 2007 through to August
2007 principal payments on the term loan with the postponed principal to be
amortized equally over the remaining term of the loan beginning September 1,
2007, increased the revolver over advance to $1,690,000 and increased the stated
amount of the revolver note to $3,650,000. The agreement also amended the
exercise price of the options issued in June 2005 and the warrants issued in
June 2006 from $0.0001 to $0.01. On March 21, 2007, we executed an Omnibus
Amendment No. 3 with Laurus Master Fund, Inc., whereby the revolver note was
increased to $4,000,000. Any principal indebtedness outstanding on the revolver
in excess of $3,650,000 will bear interest at an annual rate equal to The Wall
Street Journal prime rate plus 23% ("contract rate") but never less than 8%. In
consideration of these modifications to the revolving facility, we issued to
2,426,870 common stock purchase warrants to Laurus with an exercise price of
$0.01 per share which expire on February 28, 2027.
The warrants were valued at February 28, 2007 using standard Black-Scholes
methodology with a dilution effect and determined to have a value of $233,282.
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 and
amortized over the remaining term of the loan.
In accordance with EITF 96-19, these modifications to the debt have been
evaluated by comparing the present value of the cash flows under the old debt
with the present value of the cash flows under the new debt, both discounted at
the effective interest rate of the old debt.
To assess the revisions to the term loan, the remaining cash flows as at
February 28, 2007 on the original term loan issued on June 30, 2006 were
compared to modified cash flows on the term loan modified as of February 28,
2007. In this case, the allocated fair value of the additional warrants issued
on November 15, 2006 and on February 28, 2007 were considered as a cash flow at
inception of the new term loan.
As the difference of 27% was greater than 10%, the modifications resulted in an
extinguishment of the old debt. As a result, the modification is to be accounted
for in the same manner as a debt extinguishment and all fees paid to or received
from Laurus are to be associated with the extinguishment of the old debt
instrument and included in determining the debt extinguishment gain or loss.
In accordance with EITF 96-19, the new debt must be accounted for at fair value.
In order to fair value the new term loan, the effective rate of the convertible
debenture issued to Trafalgar on May 10, 2007 was calculated and the conversion
option was extracted in order to obtain an effective rate of approximately 24%.
The resulting loss of $168,784 including the write off of the value attributed
to the warrants as of February 28, 2007 is included in financing costs in the
consolidated statement of operations for the three months ended March 31, 2007.
-35-
To assess the revisions to the revolver, we compared the product of the
remaining term and the maximum available credit of the old arrangement with the
borrowing capacity of the new arrangement. As the borrowing capacity of the new
arrangement is greater than the borrowing capacity of the old arrangement, the
fair value of the warrants associated with the revolver and over advance would
be deferred and amortized over the remaining term of the facility.
During the three months ended March 31, 2006, we amortized $142,105 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 March
31, 2006, the fair value of the derivates and embedded derivatives were
marked-to-market with a total of $266,313 credited to financing costs.
INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES
For the three months ended March 31, 2007, income before interest charges and
income taxes increased by $345,000 to income of $125,000, compared to a loss of
$220,000 for the three months ended March 31, 2006.
INTEREST CHARGES
For the three months ended March 31, 2007, interest charges increased by
$170,000, or 121%, to $310,000, from $140,000 for the three months ended March
31, 2006.
Included in interest charges for the three months ended March 31, 2007 is
$180,000 paid to Laurus Master Fund, Ltd. on the term loan and revolver
facility, $15,000 in interest and penalties on the outstanding TMG promissory
notes and $15,000 in interest on capital leases and miscellaneous charges. Also
included at March 31, 2007 is approximately $100,000 in accrued interest and
penalties for failure to file and effect a registration agreement underlying the
options and warrants of Laurus Master Fund, Ltd. as per the Registration Rights
Agreement executed in June 2005. Accumulated interest and penalties under this
agreement had been waived by Laurus Master Fund, Ltd. from the period October
2005 until March 1, 2007.
Included in the interest charges for the three months ended March 31, 2006 is
$110,000 paid on the revolving convertible note balance and overadvance with
Laurus Master Fund, Ltd. and $30,000 on various loans and leases.
LOSS BEFORE INCOME TAXES
For the three months ended March 31, 2007, loss before income taxes decreased by
$175,000, or 49%, to $185,000, as compared to $360,000 for the three months
ended March 31, 2006.
-36-
INCOME TAXES
Income taxes for the three months ended March 31, 2007 were $3,500 compared to
$8,000 for the same period in 2006.
NET LOSS
For the three months ended March 31, 2007, net loss decreased by $180,000, or
49%, to a net loss of $190,000, compared to a net loss of $370,000 for the three
months ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
With insufficient working capital from operations, our primary source of cash is
a revolving note facility with Laurus Master Fund, Ltd.
On February 28, 2007, we executed an Omnibus Amendment No. 2 with Laurus Master
Fund, Inc., whereby the over advance was increased to $1,690,000 and the stated
amount of the revolver note was increased to $3,650,000. In consideration of
these modifications, the Company issued 2,426,870 common stock purchase warrants
to Laurus with an exercise price of $0.01 per share expiring on February 28,
2027.
On March 21, 2007, we executed an Omnibus Amendment No. 3 with Laurus Master
Fund, Inc., whereby the revolver note was increased to $4,000,000. Any principal
indebtedness outstanding on the revolver in excess of $3,650,000 will bear
interest at an annual rate equal to The Wall Street Journal prime rate plus 23%
("contract rate") but never less than 8%.
At March 31, 2007, the principal balance on the revolving note facility was
$3,706,218 including an overadvance position in the amount of $1,237,961.
At March 31, 2007, the balance on the term loan with Laurus Master Fund, Ltd.
was $1,272,727. Pursuant to the Omnibus Amendment No. 2 with Laurus Master Fund,
Inc., Laurus agreed to postpone the March 2007 through to August 2007 principal
payments on the term note with the postponed principal to be amortized equally
over the remaining term of the loan beginning September 1, 2007.
At March 31, 2007, we had outstanding five unsecured promissory notes to the
shareholders of TMG totaling $559,750. Quarterly payments on the notes in the
amount of $69,969 were to have started 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. As at March 31, 2007, no principal or interest payments
had been made on he notes due to cash flow constraints.
At March 31, 2007, we held various capital leases in the amount of $3,234
secured by property and equipment with various payment terms and interest rates
ranging from 10-22%. These leases mature between April 2007 and July 2007.
At March 31, 2007, we had cash of $70,000, a working capital deficiency of
$3,090,000 and a cash flow deficiency from operations of $280,000. At March 31,
2006 we had cash of $95,000, a working capital deficiency of $1,100,000 and cash
flow from operations of $205,000.
-37-
At March 31, 2007, we had a cash flow deficiency from investing activities of
$20,000 related to the purchase of property and equipment. At March 31, 2006 we
had a cash flow deficiency from investing activities of $5,000 largely related
to the purchase of property and equipment.
At March 31, 2007 we had cash flow from financing activities of $250,000 largely
attributable to proceeds from the revolving facility with Laurus of $320,000
less deferred costs of $20,000 and debt repayment of $50,000. At March 31, 2006,
we had cash flow from financing activities of $145,000 attributable primarily to
proceeds from the convertible financing facility with Laurus of $165,000 less
debt repayment of $20,000.
Although we believe that our current working capital and cash flows from
continuing operations will be adequate to meet our anticipated cash requirements
for the next twelve months, 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 we will be able to close this financing or that additional
financing will be available or that 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
-38-
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; (4) 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.
-39-
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
we recognize in our financial statements the benefit of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 become effective as
of the beginning of our 2008 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact that FIN 48 will have on our
financial statements.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
(FAS 157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. The provisions of
FAS 157 become effective as of the beginning of the 2009 fiscal year. We are
currently evaluating the impact that FAS 157 will have on our financial
statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108), which addresses how to quantify the effect of financial
statement errors. The provisions of SAB 108 become effective as of the end of
the 2007 fiscal year. We do not expect the adoption of SAB 108 to have a
significant impact on our financial statements.
In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158") which
requires an employer to recognize the overfunded or underfunded status of a
defined benefit plan as an asset or liability in its consolidated balance sheet.
Under SFAS 158, actuarial gains and losses and prior service costs or credits
that have not yet been recognized through earnings as net periodic benefit cost
will be recognized in other comprehensive income, net of tax, until they are
amortized as a component of net periodic benefit cost. SFAS 158 is effective as
of the end of the fiscal year ending after December 15, 2006 and shall not be
applied retrospectively. We are currently evaluating the impact that the
adoption of SFAS 158 will have on our consolidated financial statements.
In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration
Payment Arrangements." This FASB Staff Position ("FSP") addresses an issuer's
accounting for registration payment arrangements. This FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting for Contingencies. The guidance in this FSP amends
FASB Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity , and FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others , to include scope exceptions for
registration payment arrangements. This FSP further clarifies that a financial
instrument subject to a registration payment arrangement should be accounted for
in accordance with other applicable generally accepted accounting principles
("GAAP") without regard to the contingent obligation to transfer consideration
pursuant to the registration payment arrangement. This FSP is effective
immediately for registration payment arrangements and the financial instruments
subject to those arrangements that are entered into or modified subsequent to
the date of issuance of this FSP.
-40-
For registration payment arrangements and financial instruments subject to those
arrangements that were entered into prior to the issuance of this FSP, this
guidance shall be effective for financial statements issued for fiscal years
beginning after December 15, 2006, and interim periods within those fiscal
years. Early adoption of this FSP for interim or annual periods for which
financial statements or interim reports have not been issued is permitted. Early
adoption of this FSP for interim or annual periods for which financial
statements or interim reports have not been issued is permitted.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" (FAS 159). FAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. The provisions of FAS 159 become effective as of the beginning of
the 2008 fiscal year. We are currently evaluating the impact that FAS 159 will
have on our financial statements.
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.
-41-
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.
REVENUE RECOGNITION
We recognize revenue under engineering service contracts when a contract has
been executed, the contract price is fixed and determinable, delivery of
services or products has occurred, and collection of the contract price is
considered probable and can be reasonably estimated. Revenue is earned under
time-and-materials, fixed-price and cost-plus contracts.
We recognize revenue on time-and-materials contracts to the extent of billable
rates times hours delivered, plus expenses incurred. For fixed price contracts
within the scope of Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (SOP 81-1), revenue is
recognized on the percentage of completion method using costs incurred in
relation to total estimated costs or upon delivery of specific products or
services, as appropriate. For fixed price-completion contracts that are not
within the scope of SOP 81-1, revenue is generally recognized as earned
according to contract terms as the service is provided. We provide our customers
with a number of different services that are generally documented through
separate negotiated task orders that detail the services to be provided and the
compensation for these services. Services rendered under each task order
represent an independent earnings process and are not dependent on any other
service or product sold. We recognize revenue on cost-plus contracts to the
extent of allowable costs incurred plus a proportionate amount of the fee
earned, which may be fixed or performance-based. We consider fixed fees under
cost-plus contracts to be earned in proportion to the allowable costs incurred
in performance of the contract, which generally corresponds to the timing of
contractual billings. We record provisions for estimated losses on uncompleted
contracts in the period in which those losses are identified. We consider
performance-based fees under any contract type to be earned only when it can
demonstrate satisfaction of a specific performance goal or it receive
contractual notification from a customer that the fee has been earned. In all
cases, we recognize revenue only when pervasive evidence of an arrangement
exists services have been rendered, the contract price is fixed or determinable,
and collection is reasonably assured.
-42-
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.
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, we acquired goodwill in the amount of $1,895,262 in
connection to its acquisition of The Multitech Group which has been allocated to
the Technical Publications and Engineering reporting unit.
At December 31, 2006, 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 $2,043,496 which represents the amount of goodwill impairment.
-43-
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 occur, 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 the
"CUSTOMERS" section set forth in Part I, Item 1 of our Annual Report on Form
10-KSB filed with the SEC on April 17, 2007.
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.
-44-
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
On April 19, 2007, we executed an agreement with John and Cecelia Kennedy which
amends certain elements of the provision governing merger consideration in
Section 2.7 of the Agreement and Plan of Merger dated as of June 29, 2006 among
Thinkpath, The Multitech Group, Inc., the Kennedy's and other parties. Pursuant
to the terms of the agreement, the Kennedy's will return for cancellation
4,065,820 common shares, 595 preferred shares and non-negotiable promissory
notes in the aggregate amount of $475,788 issued upon execution of the Merger
Agreement. In consideration of these events, we issued a promissory note in the
amount of $800,000 payable over 60 months beginning January 2008 and bearing
interest at annual rate of 6%.
On May 10, 2007, we entered into a Securities Purchase Agreement with Trafalgar
Capital Specialized Investment Fund, Luxembourg with respect to the purchase of
up to $8,000,000 in 12% convertible debentures convertible into common shares
pursuant to Regulation "S". The first debenture of $400,000 was issued on May
10, 2007 and is convertible at a 10% discount to the lowest of the daily volume
weighted average price during the preceding 10 days and becomes due 2 years from
its date of issuance. We also issued a Convertible Compensation Debenture
Agreement, dated May 10, 2007 with respect to a debenture in the amount of
$160,000 as a facility fee convertible under the same terms and also due 2 years
from its date of issuance. In the event that Trafalgar fails to raise an
additional minimum amount of $600,000 in convertible debentures, the Convertible
Compensation Debenture Agreement will be cancelled. We also issued 250,000
shares of common stock, no par value, in consideration of a $40,000 facility
fee.
On May 14, 2007, we entered into a Service Agreement with ROI Group LLC, a
Delaware corporation for the provision of investor relations services for a
period of twelve months. Pursuant to the agreement, we are required to issue
240,000 shares of our common stock and provide cash payments of $10,000 per
month for the duration of the agreement.
-45-
On May 14, 2007, Blair Taylor resigned from our Board of Directors which
resignation was accepted in a resolution adopted during a meeting of the Board
of Directors held on that day. Mr. Taylor did not have any disagreements with us
or our Board of Directors. To fill the vacancy created, the directors appointed
Judd Bedford until the next annual meeting of shareholders.
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 to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summerized and reported, within the time periods specified in the SEC's rules
and forms.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in other
factors that has materially affected or is reasonably likely to materially
affect the Company's internal control over financial reporting.
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:
-46-
In November 2002, we sold certain assets of our training division to Thinkpath
Training LLC ("Thinkpath Training"). Pursuant to this agreement, Thinkpath
Training assumed certain liabilities including the property lease in New York
for this division which expires August 31, 2006. In April 2006, we were notified
by the lessor that Thinkpath Training had failed to meet their rent obligations
and had rent arrears of approximately $80,000.
The lessor filed a claim against Thinkpath Training, the sub tenant, and
Thinkpath Inc. 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. Upon reargue on September 7, 2006, the court vacated the judgment and
dismissed the petition. On September 21, 2006, we received notice from the
landlord demanding payment of the current arrears of approximately $360,000 in
unpaid rent and additional charges and its intent to commence legal proceedings
against us in the event that such payment is not made. In March 2007, the lessor
filed a motion for summary judgment. We were granted an extension until May
2007, to have a hearing on this motion. We continue to defend this claim
vigorously, although we are also working to reach a settlement with the lessor.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
10.62 Service Agreement between Thinkpath Inc and ROI Group, LLC dated May 14,
2007.
31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-47-
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THINKPATH INC.
Dated: May 21, 2007 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
-48-