UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
[ ] TRANSITION REPORT UNDER 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 INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER 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 NOVEMBER 19, 2007 THERE WERE 9,839,802 SHARES OF THE ISSUER'S COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES | | NO |X|
THINKPATH INC.
SEPTEMBER 30, 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 September 30, 2007
(unaudited) and December 31, 2006 ............................... 4-5
Interim Consolidated Statements of Operations for the
three and nine months ended September 30, 2007 and 2006 ......... 6
Interim Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 2007 (unaudited)
and the year ended December 31, 2006 ............................ 7
Interim Consolidated Statements of Cash Flows for the nine
months ended September 30, 2007 and 2006 ........................ 8
Notes to Interim Consolidated Financial Statements .............. 9-32
Item 2. Management's Discussion and Analysis or Plan of Operation ....... 33-48
Item 3. Controls and Procedures ......................................... 49
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 50
Item 3. Defaults Upon Senior Securities ................................. 51
Item 4. Submission of Matters to a Vote of Security Holders ............. 51
Item 5. Other Information ............................................... 51
Item 6. Exhibits......................................................... 52
Signatures....................................................... 53
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2007
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
9/30/2007 12/31/2006
--------- ----------
$ $
ASSETS
CURRENT ASSETS
Cash 65,026 114,041
Accounts receivable (note 5) 2,220,782 2,150,413
Prepaid expenses 212,479 132,814
--------- ---------
2,498,287 2,397,268
PROPERTY AND EQUIPMENT (note 6) 509,173 590,283
GOODWILL (note 7) 2,359,318 2,359,318
OTHER ASSETS (note 8) 280,898 302,508
--------- ---------
5,647,676 5,649,377
========= =========
The accompanying notes are an integral part of these interim
consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
9/30/2007 12/31/2006
----------- -----------
$ $
LIABILITIES
CURRENT LIABILITIES
Laurus revolving note (note 9) 2,992,788 2,921,792
Accounts payable (note 10) 2,179,184 1,493,223
Current portion of long-term debt (note 11) 814,191 824,709
Convertible debenture (note 12) 330,234 --
Convertible financing - derivatives (note 12) 61,705 --
6,378,102 5,239,724
----------- -----------
LONG-TERM DEBT (note 11) 1,079,074 730,976
CONVERTIBLE FINANCING - DERIVATIVES (note 9) 447,352 817,303
----------- -----------
7,904,528 6,788,003
=========== ===========
COMMITMENTS AND CONTINGENCIES (note 19)
STOCKHOLDERS' DEFICIENCY
CAPITAL STOCK (note 13) 41,680,424 42,266,530
DEFICIT (42,827,624) (42,376,656)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,109,652) (1,028,500)
----------- -----------
(2,256,852) (1,138,626)
----------- -----------
5,647,676 5,649,377
=========== ===========
The accompanying notes are an integral part of these interim
consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---- ---- ---- ----
$ $ $ $
REVENUE 3,667,560 3,498,968 11,681,245 10,203,105
COST OF SERVICES 2,387,020 2,333,733 7,537,687 6,993,813
----------- ----------- ----------- -----------
GROSS PROFIT 1,280,540 1,165,235 4,143,558 3,209,292
----------- ----------- ----------- -----------
EXPENSES
Administrative 710,298 750,360 2,125,103 2,229,443
Selling 468,571 589,469 1,446,298 1,527,946
Depreciation and amortization 113,285 186,376 329,382 450,083
Write down of property and equipment 104 -- 3,547 --
Financing costs and mark-to-market adjustments (41,694) (38,277) 31,494 415,271
Debt forgiveness -- -- (713,884) (78,062)
Loss on Sale of Subsidiary -- 16,160 -- 16,160
----------- ----------- ----------- -----------
1,250,564 1,504,088 3,221,940 4,560,841
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INTEREST CHARGES
AND INCOME TAXES 29,976 (338,853) 921,618 (1,351,549)
Interest Charges 533,292 150,214 1,353,896 454,409
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (503,316) (489,067) (432,278) (1,805,958)
Income Taxes (note 14) 14,849 (105,562) 18,690 (86,524)
----------- ----------- ----------- -----------
NET LOSS (518,165) (383,505) (450,968) (1,719,434)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND DILUTED 9,504,715 9,940,669 9,131,459 6,491,494
=========== =========== =========== ===========
NET LOSS PER WEIGHTED AVERAGE COMMON STOCK
BASIC AND DILUTED (0.05) (0.04) (0.05) (0.26)
=========== =========== =========== ===========
The accompanying notes are an integral part of these interim
consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
PREFERRED ACCUMULATED
COMMON STOCK STOCK CAPITAL OTHER
NUMBER OF NUMBER OF STOCK COMPREHENSIVE COMPREHENSIVE
SHARES SHARES AMOUNTS DEFICIT LOSS LOSS
------------ --------- ---------- ----------- ------------- -------------
Balance as of December 31, 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 income for the period -- -- (450,968) (450,968)
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments (81,152) (81,152)
-------------
Comprehensive income (532,120)
=============
Common stock returned for
cancellation on debt forgiveness (4,065,820) (369,990)
Preferred stock returned for
cancellation on debt forgiveness (595) (595,000)
Warrants exercised 594,928 75,910
Conversion of convertible debenture
to common stock 218,037 35,268
Accrued liabilities settled through
the issuance of common stock 469,346 38,956
Common stock issued for services 2,797,229 228,750
------------ --------- ---------- ----------- -------------
Balance as of September 30, 2007 9,839,802 105 41,680,424 (42,827,624) (1,109,652)
============ ========= ========== =========== =============
The accompanying notes are an integral part of these interim
consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(AMOUNTS EXPRESSED IN US DOLLARS)
2007 2006
---- ----
$ $
Cash flows from operating activities
Net income (loss) (450,968) (1,719,434)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 329,382 450,083
Deferred income taxes -- (107,711)
Amortization of deferred financing costs 378,750 372,281
Mark-to-market of derivatives (516,039) (258,604)
Loss on extinguishment of debt 168,783 689,858
Interest on convertible debenture 28,363 (388,263)
Write down of property and equipment 3,547 --
Increase in accounts receivable (20,971) (15,820)
Increase in prepaid expenses (74,523) (3,130)
Increase in accounts payable 653,132 30,586
Debt forgiveness (713,884) (78,062)
Common stock issued for services 228,750 100,400
---------- ----------
Net cash provided by (used) in operating activities 14,322 (927,816)
---------- ----------
Cash flows from investing activities
Purchase of property and equipment (83,709) (15,226)
Cash received on disposal of other asset -- 66,920
Cash payment for acquisition net of cash acquired and related costs -- (1,252,091)
---------- ----------
Net cash used in investing activities (83,709) (1,200,397)
---------- ----------
Cash flows from financing activities
Proceeds (repayment) from revolving financing facility (96,174) 593,471
Deferred financing costs incurred (146,637) (125,271)
Proceeds from issuance of debenture 400,000 --
Proceeds from long-term debt -- 1,959,750
Repayment of long-term debt (155,083) (314,472)
---------- ----------
Net cash provided by financing activities 2,106 2,113,478
---------- ----------
Effect of foreign currency exchange rate changes 18,266 5,574
---------- ----------
Net decrease in cash (49,015) (9,161)
Cash
Beginning of period 114,041 123,056
---------- ----------
End of period 65,026 113,895
========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 627,765 454,409
========== ==========
Income taxes paid 18,690 21,187
========== ==========
The accompanying notes are an integral part of these interim
consolidated financial statements.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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 Thinkpath Inc.' (the "Company")
ability to continue as a going concern for a reasonable period of time.
These conditions and events include significant recurring operating losses
and working capital deficiencies. At September 30, 2007, the Company had a
deficit of $42,827,624 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 September 30, 2007, the balance on the facility was
$3,291,156 (note 9). The facility consists of a revolving line of credit
based on 90% of eligible accounts receivable which matures on October 31,
2008 and bears interest at an annual rate equal to The Wall Street Journal
prime rate plus 3%.
As at November 19, 2007, management's plans to mitigate and alleviate its
operating losses and working capital deficiencies include:
a) Raise additional working capital via a financing comprised of equity
or convertible debt;
b) Ongoing cost cutting measures as required to maintain profitability;
c) Continued focus on securing customers with high growth potential,
such as those in the aerospace and defense industries; and,
d) Complement organic growth with the acquisition of or merger with
profitable engineering companies.
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 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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 13 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 13 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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" ("SFAS
No. 142"). 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,
"Accounting for Income Taxes" ("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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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,
"Foreign Currency Translations", 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"). 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 SFAS 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
r) Recent Pronouncements
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 No.
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, 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. FIN 48 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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 (The "SEC")
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.
In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue
No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or
Services to be Used in Future Research and Development Activities," ("EITF
07-3") which is effective for fiscal years beginning after December 15,
2007. EITF 07-3 requires that nonrefundable advance payments for future
research and development activities be deferred and capitalized. Such
amounts will be recognized as an expense as the goods are delivered or the
related services are performed. The Company does not expect the adoption
of EITF 07-3 to have a material impact over its financial results.
s) Advertising Costs
Advertising costs are expensed as incurred.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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 September 30, 2007 1,839,572 $.19
Options exercisable December 31, 2006 1,839,572 $.19
Options exercisable September 30, 2007 1,839,572 $.19
Options available for future grant December 31, 2006 162,102
Options available for future grant September 30, 2007 162,102
b) Range of Exercise Prices at September 30, 2007
Weighted Weighted
Exercise Outstanding Average Options Average
Price Options Remaining Life Exercisable Exercise Price
----- ------- -------------- ----------- --------------
$0.01 1,839,572 8.07 1,839,572 $0.19
c) Change in Accounting Policy and Pro-forma net income
At September 30, 2007, the Company had five stock-based employee
compensation plans, which are described more fully in note 13(d).
Effective January 1, 2006, the Company's plans are accounted for in
accordance with the recognition and measurement provisions of Statement
FAS 123, 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", ("APB No. 25"), 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 SEC Staff Accounting Bulletin ("SAB") No.
107, ("SAB 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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
and nine months ended September 30, 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 and nine months ended
September 30, 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 and nine months ended September 30, 2007 and 2006.
On February 28, 2007, the exercise price of 379,572 options issued to
Laurus 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.
On April 19, 2007, the Company executed an agreement with the principal
vendors of TMG which amended certain elements of the provision governing
merger consideration (see Note 11).
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
5. ACCOUNTS RECEIVABLE
9/30/07 12/31/06
$ $
Accounts receivable 2,359,091 2,366,916
Less: Allowance for doubtful accounts (138,309) (216,503)
--------- ---------
2,220,782 2,150,413
========= =========
Allowance for doubtful accounts
Balance, beginning of period 216,503 201,876
Provision 36,389 92,662
Recoveries (114,583) (78,035)
-------- -------
Balance, end of period 138,309 216,503
========= =========
6. PROPERTY AND EQUIPMENT
9/30/07 12/31/06
------------------------------------------ ---------
ACCUMULATED
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 219,121 171,982 47,139 56,997
Computer equipment and software 4,290,973 3,837,513 453,460 518,130
Leasehold improvements 45,139 36,567 8,572 15,156
Automobile 43,425 43,425 -- --
--------- --------- ------- -------
4,598,658 4,089,487 509,171 590,283
--------- --------- ------- -------
Property and equipment
under capital lease included in the
above 79,696 46,194 33,502 37,105
========= ========= ======= =======
Amortization of property and equipment for the nine months ended September
30, 2007 amounted to $161,110, including amortization of property and
equipment under capital lease of $18,996.
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:
9/30/07 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
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
9/30/07 12/31/06
------- --------
$ $
Deferred Financing Costs 218,938 209,559
Customer Lists 61,960 92,949
------- --------
Total 280,898 302,508
======= ========
Included in deferred financing costs are costs related to the Laurus
Convertible Financing Facility that are being amortized over the
three-year term of the debt, beginning July 1, 2005. Also included in
deferred financing costs are costs related to the convertible debenture
issued to Trafalgar Specialized Investment Fund (note 12) that are being
amortized over twenty-six months beginning May 31, 2007. Customer lists
relate to the acquisition of The Multitech Group Inc. (note 4) that are
being amortized over three years, beginning April 1, 2006.
Amortization of other assets for the nine months ended September 30, 2007
amounted to $168,272. Amortization of other assets for the year ended
December 31, 2006 amounted to $322,630.
9. LAURUS REVOLVING NOTE (CONVERTIBILE FINANCING) FACILITY
On June 27, 2005, the Company closed a $3,500,000 convertible financing
facility with 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 the note 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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. On
October 30, 2007, the exercise price of these warrants was amended to
$0.01 per share. 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 September 30, 2007, an assumption of 101%
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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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 month 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 was
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", ("EITF Issue No. 96-19")
and EITF Issue No. 05-07, "Accounting for Modifications to Conversion
Options Embedded in Debt Instruments and Related Issues", ("EITF Issue No.
7"). 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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, whereby Laurus agreed to postpone the December and January
principal payments on the Term Note (note 11) 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
On February 28, 2007, the Company executed an Omnibus Amendment No. 2 with
Laurus, 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, 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.
On October 30, 2007, the Company executed Omnibus Amendment No. 5 with
Laurus, whereby Laurus agreed to postpone the repayment of the over
advance on the revolver facility until April 1, 2008 and to extend the
maturity date of the revolver and over advance until October 31, 2008.
Laurus also agreed to forgive the accrued registration rights penalties of
approximately $660,000 and waive additional penalties until March 31,
2008. Laurus provided a waiver to the company on the cash flow covenant
for the period to date and amended the covenant to include allowable
defaults of variable amounts based on the Company's cash flow projections.
In consideration of the above amendments, the Company agreed to reprice
the 2,100,000 warrants issued on June 27, 2005 to an exercise price of
$0.01 per share. Laurus also required the Company to agree to apply 60% of
any proceeds received from future equity raises to mandatory repayment of
its debt. The Company also commited to register the shares underlying the
remaining warrants and options held by Laurus no later than March 31,
2008.
During the nine months ended September 30, 2007, Laurus exercised 594,928
warrants into shares of the Company's common stock. The warrants were
marked to market until each exercise date and the appropriate amount
transferred to equity upon exercise.
During the nine months ended September 30, 2007, the Company amortized
$283,790 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 9/30/07 12/31/06
---------- ------- --------
Warrants $421,320 $747,848
Options $26,032 $69,455
-------- --------
$447,352 $817,303
-------- --------
The mark to market of the derivatives including the embedded derivatives
at September 30, 2007 was credited to financing costs in the amount of
$249,012. During the nine months ended September 30, 2007, the derivatives
were marked to market at the end of each reporting period with a credit to
financing costs in the amount of $592,012. The derivatives were marked to
market at the end of each reporting period during the year ended December
31, 2006 with a credit to financing costs in the amount of $293,822.
At the end of each period, the balance on the Laurus facility was as
follows:
9/30/07 12/31/06
------- --------
$ $
Principal balance revolving note 3,291,156 3,387,330
Deferred Financing Costs (298,368) (465,538)
--------- ---------
Total 2,992,788 2,921,792
========= =========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
10. ACCOUNTS PAYABLE
Included in accounts payable at the end of each period are the following:
9/30/07 12/31/06
------- --------
$ $
Trade payables 184,093 410,912
Accrued payroll and payroll liabilities 543,422 369,455
Accrued bonuses 98,214 75,987
Accrued professional fees 353,741 361,269
Registration Rights fee (Laurus) 660,734 --
Other 338,980 275,600
--------- ---------
2,179,184 1,493,223
========= =========
11. LONG-TERM DEBT
i) September 30, 2007
On February 28, 2007, the Company executed an Omnibus Amendment No. 2 with
Laurus (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 nine months ended September 30, 2007.
At September 30, 2007, the balance on the term loan due to Laurus was
$1,218,733 with total interest in the amount of $99,234 paid during the
nine months ended September 30, 2007.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
On April 19, 2007, the Company executed an agreement with John and Cecelia
Kennedy which amended 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
Kennedys and other parties. Pursuant to the terms of the agreement, the
Kennedys returned 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. The Kennedys also
forgave accrued interest and penalties in the amount of $29,846. 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%. These amendments resulted in debt
forgiveness in the amount of $713,884 which is included in the Company's
consolidated statement of earnings for the nine months ended September 30,
2007.
At September 30, 2007 the balance on the promissory note due to the
Kennedys was $800,000 with accrued interest of $21,182 charged to interest
expense in the consolidated statement of earnings.
At September 30, 2007, the Company had three unsecured promissory notes
outstanding to the other shareholders of TMG totaling $34,380. The notes
bear interest at an annual rate equal to the Wall Street Journal prime
rate and mature on June 30, 2008. The Company is making periodic payments
on the notes as cash flow permits. Included in interest expense in the
consolidated statement of operations for the nine months ended September
30, 2007 is interest on the promissory notes of $15,852.
At September 30, 2007, the Company held various capital leases in the
amount of $29,505 secured by property and equipment with various payment
terms and interest rates ranging from 13-18%. These leases mature between
April 2009 and August 2010.
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 Small
Business Administration 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.
On June 30, 2006, Laurus 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 (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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
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%.
9/30/07 12/31/06
------- --------
$ $
a) Included therein:
Laurus Term Loan 1,218,733 1,315,151
Promissory Note - Kennedys 800,000 --
Promissory Notes - TMG 34,380 559,750
Capital Leases 29,505 7,178
--------- ---------
2,082,618 1,882,079
Less: deferred financing costs on Laurus Term Loan 189,353 326,394
Less: current portion 814,191 824,709
--------- ---------
1,079,074 730,976
========= =========
b) Future principal payment obligations as at September 30, 2007, were as
follows:
2007 182,142
2008 836,994
2009 580,699
2010 162,771
2011 159,996
2012 160,016
---------
2,082,618
=========
c) Interest expense related to long-term debt for the nine months ended
September 30, 2007 was $137,641. Interest expense related to long-term
debt for the year ended December 31, 2006 was $140,612.
12. CONVERTIBLE DEBENTURE
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, as consideration of a $20,000 facility fee. On August 13, 2007, the
Company issued an additional 250,000 shares of common stock, no par value,
as consideration of a second $20,000 facility fee.
The debenture includes both a conversion option and foreign currency
option that the Company has determined to be embedded derivatives under
the guidance of FAS 133. Trafalgar has option to convert at any time into
common shares at the conversion price equal to 90% of the volume weighted
average price as quoted by Bloomberg for the 10 trading days preceding the
conversion date. The initial value of this derivative was determined to be
$44,444 and is offset against the debenture amount and will be amortized
over the two year term of the debenture. The conversion option does not
contain a fixed conversion price, but rather a fixed discount of 10%from
the market price at the conversion date. Therefore, its value would not be
expected to vary with movements in the market price of the Company's
shares and its value would not normally vary significantly from its
intrinsic value. The conversion option was initially valued at $44,444. At
September 30, 2007, the conversion option was marked to market and the
value was determined to be $41,111.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
Upon redemption or conversion, the foreign currency clause protects
Trafalgar from adverse movements in the spot US-EURO exchange rate between
the date of issuance of the $400,000 and the redemption or conversion. The
initial value of this derivative was determined to be $8,782 and is offset
against the debenture amount and will be amortized over the two year term
of the debenture. At September 30, 2007, the derivative was marked to
market and the value was determined to be $20,594.
During the three months ended September 30, 2007, Trafalgar converted
three principal amounts of $30,000 and accrued interest of $833 into
shares of the Company's common stock. The derivatives were marked to
market until the respective conversion dates and the relative portion of
the fair value relating to the conversion was transferred into equity. The
values of the principal and deferred charges attributed to the respective
conversions were transferred to equity. The amortization period of the
deferred charges were recalculated at each conversion date.
During the nine months ended September 30, 2007, the Company amortized
$10,082 of the initial value of the derivatives which are included in
financing costs.
At September 30, 2007 the debenture balance was as follows:
9/30/07
-------
$
Convertible Debenture 370,000
Deferred Financing Costs (39,766)
-------
Total 330,234
=======
13. 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.
On April 19, 2007, the Company executed a debt restructuring agreement
with John and Cecelia Kennedy, the primary Vendors of TMG, whereby they
agreed to return for cancellation 4,065,820 shares of common stock, no par
value.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
On May 10, 2007, the Company issued 250,000 shares of common stock, no par
value, as consideration of a $20,000 facility fee pursuant to the
Convertible Compensation Debenture Agreement entered into with Trafalgar
Capital Specialized Investment Fund, Luxembourg. On August 13, 2007, the
Company issued an additional 250,000 shares of common stock, no par value,
as consideration of a second $20,000 facility fee.
On May 14, 2007, the Company issued 240,000 shares of its common stock, no
par value, to 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 a services agreement, Company is also required
to issue cash payments of $10,000 per month for the duration of the
agreement.
On May 18, 2007, the Company issued an aggregate of 469,346 shares of
common stock, no par value, to five employees in consideration of $38,956
in bonus payments accrued at December 31, 2006.
On May 18, 2007, the Company issued an aggregate of 972,892 shares of
common stock, no par value, to three directors in consideration of $80,750
in director fees for services to be performed over the current year.
On May 18, 2007, the Company issued 1,084,337 shares of common stock, no
par value, to Bearcat Holdings Inc. in consideration of $90,000 for
financial and advisory services to be performed over the current year.
On August 13, 2007, the Company issued 250,000 shares of common stock, no
par value, to Trafalgar Capital Specialized Investment Fund as
consideration of a second $20,000 facility fee.
During the three months ended September 30, 2007, the Company issued
218,037 shares of common stock, no par value, to Trafalgar Capital
Specialized Investment Fund upon conversion of $30,000 convertible
debentures and interest.
During the three months ended September 30, 2007, the Company issued
594,928 shares of common stock, no par value, to Laurus upon the exercise
of 594,928 warrants.
At September 30, 2007 the Company had a total of 9,839,802 shares of
common stock issued and outstanding.
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 per
9/30/07 12/31/06 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
1,715,746 1,810,674 $0.01 2016
-- 500,000 $0.01 2026
2,426,870 -- $0.01 2027
---------------------------------------------------------------------
7,922,994 6,091,052
---------------------------------------------------------------------
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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 (594,928)
Expired --
---------
Outstanding at September 30, 2007 7,922,994
=========
As disclosed in note 9, on June 27, 2005, the Company issued to Laurus
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. On October 30, 2007, the exercise price of these
warrants was amended to $0.01 per share.
As disclosed in note 9, on January 26, 2006, the Company issued 500,000
additional common stock purchase warrants to Laurus 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 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 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 with an exercise price of $.01
per share and which expire on February 28, 2027.
During the nine months ended September 30, 2007, the Company issued
594,928 shares of common stock to Laurus upon the exercise of 594,928
warrants.
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
September 30, 2007, 1,839,572 options remain outstanding and 162,102
options are available for future grant under all the plans. At December
31, 2006, 1,839,572 options remain outstanding and 162,102 options are
available for future grant under all the plans.
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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
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 on June 27, 2005 was amended from $.0001 to $0.01 per share.
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.
On April 19, 2007, the Company reached an agreement with the Vendors of
TMG whereby 595 of the above 700 shares were returned for cancellation.
At September 30, 2007, the Company had 105 shares of Series D preferred
stock issued and outstanding.
14. 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:
9/30/07 12/31/06
--------- ---------
$ $
Losses available to offset future income taxes 8,095,000 7,543,000
Deferred costs and customer lists 33,000 33,000
Share and debt issue costs 36,000 12,000
Property and equipment 881,000 999,000
--------- ---------
9,045,000 8,587,000
Less: valuation allowance 9,045,000 8,587,000
========= =========
-- --
========= =========
b) Current Income Taxes
Current income taxes consist of:
9/30/07 12/31/06
--------- ---------
$ $
Amounts calculated at statutory rates (172,911) (1,938,583)
--------- ---------
Permanent differences (265,533) 1,063,826
Valuation allowance 457,134 886,000
========= =========
191,601 1,949,826
========= =========
Current income taxes 18,690 11,243
Deferred income taxes -- --
========= =========
Income taxes 18,690 11,243
========= =========
Issue expenses totaling approximately $393,000 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 $20,236,000, nor a
capital loss totaling $750,000 in the future as a deferred tax asset as at
September 30, 2007. As at the completion of the September 30, 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
15. COMPREHENSIVE LOSS
9/30/07 12/31/06
------- --------
$ $
Net loss (450,968) (4,857,713)
Other comprehensive loss
Foreign currency translation adjustments (81,152) (78,827)
-------- ----------
Comprehensive loss (532,120) (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.
16. SCHEDULE OF NON-CASH ITEMS PER STATEMENT OF CASH FLOW
The Company issued common shares and preferred shares for the following:
Nine Months ended September 30,
2007 2006
---- ----
$ $
Common stock issued for liabilities and services 267,706 350,024
Common stock returned for cancellation on debt forgiveness (369,990) --
Preferred stock returned for cancellation on debt (595,000) --
forgiveness
Common stock issued for investment -- 763,000
Preferred stock issued for investment -- 699,687
-----------------------------
(697,284) 1,812,711
=============================
17. SEGMENTED INFORMATION
a) Revenue and Gross Profit by Geographic Area
Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
---- ---- ---- ----
$ $
Revenue
Canada 287,518 419,949 866,805 1,259,179
United States of America 3,379,982 3,079,019 10,814,440 8,943,926
--------- --------- ---------- ----------
3,667,500 3,498,968 11,681,245 10,203,105
========= ========= ========== ==========
Gross Profit
Canada 116,453 156,892 345,069 440,214
United States of America 1,164,087 1,008,343 3,798,489 2,769,078
--------- --------- ---------- ----------
1,280,540 1,165,235 4,143,558 3,209,292
========= ========= ========== ==========
b) Net Income (Loss) by Geographic Area
Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
---- ---- ---- ----
$ $
Canada (707,202) (406,208) (1,974,232) (1,490,542)
United States of America 189,037 22,703 1,523,264 (228,892)
-------- -------- -------- ----------
(518,165) (383,505) (450,968) (1,719,434)
======== ======== ======== ==========
c) Identifiable Assets by Geographic Area
9/30/07 12/31/06
------- --------
$ $
Canada 646,391 606,087
United States of America 5,001,285 5,043,290
--------- ---------
5,647,676 5,649,377
========= =========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
d) Revenues from Major Customers and Concentration of Credit Risk
The consolidated entity had the following revenues from major customers:
For the nine months ended September 30, 2007, one customer had sales of
$3,470,117, representing approximately 30% of total revenue.
For the nine months ended September 30, 2006, one customer had sales of
$1,039,710 representing approximately 10% of total revenue.
e) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
18. SUBSEQUENT EVENTS
On October 3, 2007 the Company entered into an agreement with Crucible
Capital Group, Inc. granting Crucible the exclusive right as its
consultant and financial advisors on a best efforts basis for a minimum
term of three months. The Company agreed to issue monthly payments of
$6,000 and options to purchase shares of the Corporation's common stock in
the amount of $24,000 and to pay success fees upon completion of
successful financings.
On October 17, 2007, the Company signed back a lease proposal with its
Toronto landlord for a three year lease in new space beginning January 1,
2008. The new monthly lease amount is estimated to be approximately
$3,500.
On October 30, 2007, the Company executed Omnibus Amendment No. 5 with
Laurus Master Fund, Ltd. further amending its debt facilities. Laurus
agreed to postpone the repayment of the over advance on the revolver
facility until April 1, 2008 and to extend the maturity date of the
revolver and over advance until October 31, 2008. Laurus also agreed to
forgive the accrued registration rights penalties of approximately
$660,000 and waive additional penalties until March 31, 2008. Laurus
provided a waiver to the company on the cash flow covenant for the period
to date and amended the covenant to include allowable defaults of variable
amounts based on the Company's cash flow projections. In consideration of
the above amendments, the Company agreed to reprice the 2,100,000 warrants
issued on June 27, 2005 to an exercise price of $0.01 per share. The
Company also agreed to apply 60% of any proceeds received from future
equity raises to mandatory repayment of its debt and to register the
shares underlying the remaining warrants and options held by Laurus no
later than March 31, 2008.
On November 7, 2007, the Company entered into an agreement with John and
Cecelia Kennedy which effectively cancelled their three year employment
agreements dated June 29, 2006 in consideration of a severance payment of
$100,000 payable bi-weekly beginning January 1, 2008 for a period of
twenty-four months, as well as payment of any earned 2007 bonuses and
earned and unused 2007 vacation.
19. COMMITMENTS AND CONTINGENCIES
a) Lease Commitments
Minimum payments under operating leases for premises occupied by the
Company and its subsidiaries offices, located throughout Ontario, Canada
and the United States, exclusive of most operating costs and realty taxes,
as at September 30, 2007, for the next five years are as follows:
2007 78,325
2008 213,256
2009 140,477
2010 99,112
2011 --
=======
531,170
=======
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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 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.
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 September 2007, to have a
hearing on this motion. On September 26, 2007, the lessor was granted
summary judgment and all parties were referred to a hearing to determine
the amount of damages the lessor is entitled to. The date of this hearing
is December 10, 2007. The Company is currently discussing its options with
counsel, including the possibility of moving to reargue, appeal or offer
of settlement. At September 30, 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
may be held 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 November 15, 2007, with
an option to renew for an indeterminate period. At June 30, 2007, the
Company has accrued $45,000 in rent expense to cover the period from
November 2006 until February 2007.
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.
20. 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2007
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
21. COMPARATIVE FIGURES
Certain figures in the September 30, 2006 financial statements have been
reclassified to conform to the basis of presentation used at September 30,
2007.
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 Quarterly Report on
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.
STATEMENTS OF OPERATIONS--PERCENTAGES
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---- ---- ---- ----
% % % %
REVENUE 100 100 100 100
COST OF SERVICES 65 67 65 69
GROSS PROFIT 35 33 35 31
EXPENSES
Administrative 19 21 18 22
Selling 13 17 12 15
Depreciation and amortization 3 5 3 4
Write down of property and equipment -- -- -- --
Financing costs (1) (1) -- 4
Debt forgiveness -- -- (6) (1)
---- ---- ---- ----
INCOME (LOSS) BEFORE INTEREST CHARGES AND 1 (9) 8 (13)
INCOME TAXES
Interest charges 15 4 12 5
==== ==== ==== ====
INCOME (LOSS) BEFORE INCOME TAXES (14) (13) (4) (18)
Income taxes -- (3) -- (1)
---- ---- ---- ----
NET LOSS (14) (10) (4) (17)
==== ==== ==== ====
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2006
REVENUE
Our revenue is comprised of engineering services including the complete
planning, staffing, development, design, and 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 September 30, 2007 we derived 92% of our revenue in
the United States compared to 88% for the three months ended September 30, 2006.
This increase is a result of both the increase in sales from one major customer
based in the United States and the decline in project sales in Canada during the
current period. Consolidated revenues for the three months ended September 30,
2007 increased by $170,000, or 5%, to $3,670,000 as compared to $3,500,000 for
the same period last year. This increase is largely attributable to the increase
in sales from one major customer from $321,000, or 9%, of total revenue to
$1,240,000, or 34%, 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
September 30, 2007 increased by $60,000, or 3%, to $2,390,000 as compared to
$2,330,000 for the three months ended September 30, 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 September 30, 2007 was 65%
compared to 67% for the three months ended September 30, 2006.
GROSS PROFIT
Gross profit is calculated by subtracting all direct costs from net revenue.
Gross profit for the three months ended September 30, 2007 increased by
$115,000, or 10%, to $1,280,000 as compared to $1,165,000 for the three months
ended September 30, 2006. This increase is related to the increase in revenue.
As a percentage of revenue, gross profit for the three months ended September
30, 2007 is 35% compared to 33% for the three months ended September 30, 2006.
This increase is a result of substantial overtime hours billed during the three
months ended September 30, 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 September 30, 2007 decreased by
$250,000, or 17%, to $1,250,000 compared to $1,500,000 for the three months
ended September 30, 2006. The significant reduction in 2007 is largely
attributable to the cost cutting measures implemented in the first quarter.
ADMINISTRATIVE EXPENSES
Administrative expenses decreased by $40,000, or 5%, to $710,000 for the three
months ended September 30, 2007 compared to $750,000 for the three months ended
September 30, 2006. As a percentage of revenue, administrative expenses for the
three months ended September 30, 2007 were 19% compared to 21% for the three
months ended September 30, 2006. This decline is largely due to cost reductions
that were implemented in February 2007 including a 20% salary reduction of the
executive officers' salaries and the relocation of the corporate office in
Toronto, Ontario resulting in savings of approximately $160,000 per annum in
rent, telephone and associated expenses.
SELLING EXPENSES
Selling expenses for the three months ended September 30, 2007 decreased by
$120,000, or 20%, to $470,000 as compared to $590,000 for the three months ended
September 30, 2007. This increase is attributable to the reduction in sales
staff and corresponding commissions and travel expenses. As a percentage of
revenue, selling expenses for the three months ended September 30, 2007 were 13%
compared to 16% for the same period in 2006.
DEPRECIATION AND AMORTIZATION
For the three months ended September 30, 2007, depreciation and amortization
expenses decreased by $80,000, or 42%, to $110,000 compared to $190,000 for the
three months ended September 30, 2006. Depreciation expense on property and
equipment has decreased 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 September 30,
2007 was 3% compared to 5% for the same period in 2006.
FINANCING COSTS AND MARK-TO-MARKET ADJUSTMENTS
During the three months ended September 30, 2007, Laurus Master Fund, Ltd.
("Laurus") exercised 594,928 warrants into shares of our common stock. The
warrants were marked-to-market at each exercise date with an amount of
approximately $59,000 charged to financing costs.
During the three months ended September 30, 2007, we amortized approximately
$127,000 of the initial value of the derivatives attached to the Laurus
revolving debt facility and term loan which are included in financing costs.
At September 30, 2007, the fair value of the derivatives embedded in the Laurus
debt instruments were marked-to-market with approximately $249,000 credited to
financing costs.
During the three months ended September 30, 2007, Trafalgar Capital Specialized
Investment Fund, Luxembourg ("Trafalgar") converted three principal amounts of
$30,000 and accrued interest of approximately $800 into shares of our common
stock. The derivatives were marked-to-market at each conversion date with
approximately $9,000 charged to financing costs.
During the three months ended September 30, 2007, we amortized approximately
$6,000 of the initial value of the embedded derivatives attached to the
Trafalgar convertible debenture.
At September 30, 2007 the conversion option derivative and the foreign currency
derivative on the Trafalgar convertible debenture were marked-to-market with
approximately $6,000 charged to financing costs.
During the three months ended September 30, 2006, we amortized $85,000 of the
initial value of the derivatives and embedded derivatives attached to the Laurus
debt financing closed on June 27, 2005. At the end of the quarter, the fair
value of the derivates and embedded derivatives were marked-to-market with a
total of $120,000 credited to financing costs.
LOSS ON SALE OF SUBSIDIARY
The consolidated statement of operations for the three months ended September
30, 2006 includes a loss on sale of subsidiary in the amount of $16,000. In July
2006, we were assessed by Canada Customs and Revenue Agency and required to pay
Goods and Services Tax of approximately $16,000 on the sale of our Toronto IT
recruitment division to Brainhuner.com Ltd. which occurred on June 27, 2003.
INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES
For the three months ended September 30, 2007, income before interest charges
and income taxes increased by $370,000 to income of $30,000 compared to a loss
of $340,000 for the three months ended September 30, 2006
INTEREST CHARGES
For the three months ended September 30, 2007, interest charges increased by
$380,000, or 253%, to $530,000 from $150,000 for the three months ended
September 30, 2006.
Included in interest charges for the three months ended September 30, 2007 is
$210,000 paid to Laurus on the term loan and revolver facility, $10,000 in
interest on the Kennedy's' promissory note, $20,000 in accrued interest on the
convertible debenture balance, and $10,000 including the TMG promissory notes,
capital leases and miscellaneous charges. Also included in the three months
ended September 30, 2007 is approximately $280,000 in accrued interest and
penalties for failure to file and effect a registration agreement underlying the
options and warrants of Laurus as per the Registration Rights Agreement executed
in June 2005.
Included in the interest charges for the three months ended September 30, 2006
is $120,000 paid on the revolving facility and term loan with Laurus, $10,000 on
the TMG promissory notes and $20,000 on capital leases and bank charges.
LOSS BEFORE INCOME TAXES
For the three months ended September 30, 2007, loss before income taxes
increased by $10,000, to a loss of $500,000 compared to a loss of $490,000 for
the three months ended September 30, 2006.
INCOME TAXES
Income taxes for the three months ended September 30, 2007 were $15,000. Income
taxes for the three months ended September 30, 2006 includes a revaluation of
the deferred income tax liability of $107,000 which was offset by taxes paid of
$2,000.
NET LOSS
For the three months ended September 30, 2007, net loss increased by $140,000,
or 37%, to a loss of $520,000 compared to a loss of $380,000 for the three
months ended September 30, 2006.
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2006
REVENUE
For the nine months ended September 30, 2007 we derived 93% of our revenue in
the United States compared to 88% for the nine months ended September 30, 2006.
This increase is a result of both the increase in sales from one major customer
based in the United States and the decline in project sales in Canada during
2007. Consolidated revenues for the nine months ended September 30, 2007
increased by $1,480,000, or 14%, to $11,680,000 as compared to $10,200,000 for
the same period last year. This increase is largely attributable to the increase
in sales from one major customer from $1,040,000, or 10%, of total revenue to
$3,460,000 or 30% of total revenue.
COSTS OF SERVICES
Costs of services for the nine months ended September 30, 2007 increased by
$550,000, or 8%, to $7,540,000 as compared to $6,990,000 for the nine months
ended September 30, 2006. This increase is related to the aforementioned
increase in revenue. As a percentage of revenue, the cost of services for the
nine months ended September 30, 2007 was 65% compared to 69% for the nine months
ended September 30, 2006.
GROSS PROFIT
Gross profit for the nine months ended September 30, 2007 increased by $930,000,
or 29%, to $4,140,000 as compared to $3,210,000 for the nine months ended
September 30, 2006. This increase is related to the aforementioned increase in
revenue. As a percentage of revenue, gross profit for the nine months ended
September 30, 2007 is 35% compared to 31% for the nine months ended September
30, 2006. This increase is a result of substantial overtime hours billed during
the nine months ended September 30, 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 nine months ended September 30, 2007 decreased by 29%, or
$1,340,000, to $3,220,000 compared to $4,560,000 for the nine months ended June
20, 2006. The significant reduction in 2007 is largely attributable to the cost
cutting measures implemented in the first quarter as well as the offset of debt
forgiveness in the amount of $710,000.
ADMINISTRATIVE EXPENSES
Administrative expenses decreased by $105,000, or 5%, to $2,125,000 for the nine
months ended September 30, 2007 compared to $2,230,000 for the nine months ended
September 30, 2006. As a percentage of revenue, administrative expenses for the
nine months ended September 30, 2007 were 18% compared to 22% for the nine
months ended September 30, 2006. This decline is largely due to cost reductions
that were implemented in February 2007 including a 20% salary reduction of the
executive officer's salaries and the relocation of the corporate office in
Toronto, Ontario resulting in savings of approximately $160,000 per annum in
rent, telephone and associated expenses.
SELLING EXPENSES
Selling expenses for the nine months ended September 30, 2007 decreased by
$80,000, or 5% to $1,450,000 as compared to $1,530,000 for the nine months ended
September 30, 2007. This decrease is a result of the reduction in the number of
sales staff and associated expenses. As a percentage of revenue, selling
expenses for the nine months ended September 30, 2007 were 12% compared to 15%
for the same period in 2006.
DEPRECIATION AND AMORTIZATION
For the nine months ended September 30, 2007, depreciation and amortization
expenses decreased by $120,000, or 27%, to $330,000 compared to $450,000 for the
nine months ended September 30, 2006. Depreciation expense on property and
equipment has decreased 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 nine months ended September 30,
2007 was 3% compared to 4% for the same period in 2006.
WRITE DOWN OF PROPERTY AND EQUIPMENT During the nine months ended September 30,
2007, we wrote down property and equipment in the amount of approximately
$3,500. 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
On February 28, 2007, we executed an Omnibus Amendment No. 2 with Laurus,
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, 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
approximately $230,000. 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 September 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, was 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 approximately $170,000 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 nine months
ended September 30, 2007.
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 nine months ended September 30, 2007, we amortized approximately
$370,000 of the initial value of the derivatives and embedded derivatives
attached to the Laurus revolving debt facility and term loan. At each period end
and at each warrant exercise the fair value of the derivatives and embedded
derivatives on the Laurus debt were marked-to-market with a net amount of
approximately $533,000 credited to financing costs during the nine months ended
September 30, 2007.
On May 10, 2007, we entered into a Securities Purchase Agreement with Trafalgar
Capital Specialized Investment Fund, Luxembourg ("Trafalgar") 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.
The debenture includes both a conversion option and foreign currency option that
we have determined to be embedded derivatives under the guidance of FAS 133.
Trafalgar has option to convert at any time into common shares at the conversion
price equal to 90% of the volume weighted average price as quoted by Bloomberg
for the 10 trading days preceding the conversion date. The initial value of this
derivative was determined to be approximately $44,000 and is offset against the
debenture amount and will be amortized over the two year term of the debenture.
The conversion option does not contain a fixed conversion price, but rather a
fixed discount of 10% from the market price at the conversion date.
Upon redemption or conversion, a foreign currency clause protects Trafalgar from
adverse movements in the spot US-EURO exchange rate between the date of issuance
of the $400,000 and the redemption or conversion. The initial value of this
derivative was determined to be approximately $9,000 and is offset against the
debenture amount and will be amortized over the two year term of the debenture.
During the nine months ended September 30, 2007, we amortized approximately
$10,000 of the initial value of the embedded derivatives attached to the
Trafalgar convertible debenture.
At each period end and at each conversion date the fair value of the derivatives
attached to the Trafalgar convertible debenture were marked-to-market with a net
amount of approximately $16,000 charged to financing costs during the nine
months ended September 30, 2007.
During the nine months ended September 30, 2006, we amortized $370,000 of the
initial value of the derivatives and embedded derivatives attached to the Laurus
Master Fund, Ltd. convertible debt financing closed on June 27, 2005. During the
nine months ended September 30, 2006, the fair value of the derivatives and
embedded derivatives were marked-to-market at each period end with a total of
approximately $260,000 credited to financing costs.
DEBT FORGIVENESS
On April 19, 2007, we executed an agreement with John and Cecelia Kennedy which
amended 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 returned 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. The Kennedy's also forgave accrued interest and penalties in the
amount of $29,846. 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%. These amendments
resulted in debt forgiveness in the amount of $710,000 which is included in the
consolidated statement of operations for the nine months ended September 30,
2007.
On June 30, 2006 we reached a settlement with W. Terry Lyons with respect to the
secured loan outstanding to him in the amount of $178,000 including accrued
interest. In consideration of a monetary payment of $100,000 and execution of a
Full and Final Release, Lyons released all rights and debt held by him and
forgave the balance of the loan of $78,000 which is included in debt forgiveness
in the consolidated statement of operations for the nine months ended September
30, 2006.
LOSS ON SALE OF SUBSIDIARY
In July 2006, we were assessed by Canada Customs and Revenue Agency and required
to pay Goods and Services Tax of approximately $16,000 on the sale of our
Toronto IT recruitment division to Brainhuner.com Ltd. which occurred on June
27, 2003.
INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES
For the nine months ended September 30, 2007, income before interest charges and
income taxes increased by $2,270,000, or 168% to income of $920,000 compared to
a loss of $1,350,000 for the nine months ended September 30, 2006
INTEREST CHARGES
For the nine months ended September 30, 2007, interest charges increased by
$900,000, or 200%, to $1,350,000 from $450,000 for the nine months ended
September 30, 2006.
Included in interest charges for the nine months ended September 30, 2007 is
$590,000 paid to Laurus on the term loan and revolver facility, $20,000 accrued
on the Kennedy's promissory note, $15,000 on the TMG notes, $30,000 accrued on
the Trafalgar convertible debenture in interest on the outstanding TMG
promissory notes, and $20,000 in interest on capital leases and miscellaneous
charges. Also included at September 30, 2007 is approximately $680,000 in
accrued interest and penalties for failure to file and effect a registration
agreement underlying the options and warrants of Laurus as per the Registration
Rights Agreement executed in June 2005.
Included in the interest charges for the nine months ended September 30, 2006 is
$330,000 paid on the revolving facility and over advance with Laurus Master
Fund, Ltd., and $120,000 on long-term debt and bank charges.
LOSS BEFORE INCOME TAXES
For the nine months ended September 30, 2007, loss before income taxes decreased
by $1,375,000, or 76%, to a loss of $430,000 as compared to a loss of $1,805,000
for the nine months ended September 30, 2006.
INCOME TAXES
Income taxes for the nine months ended September 30, 2007 were $19,000 compared
to a credit of $90,000 for the same period in 2006. Income taxes for the nine
months ended September 30, 2006 includes a revaluation of the deferred tax
liability of $107,711 which was offset by tax expenses of $20,000.
NET LOSS
For the nine months ended September 30, 2007, net loss decreased by $1,270,000,
or 74%, to net loss of $450,000 compared to a net loss of $1,720,000 for the
nine months ended September 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
With insufficient working capital from operations, our primary source of cash is
a $4,000,000 revolving note facility with Laurus. The facility consists of a
revolving line of credit based on 90% of eligible accounts receivable which
matures on October 31, 2008 and bears interest at an annual rate equal to The
Wall Street Journal prime rate plus 3%. The facility also includes an over
advance of up to $1,692,424 which bears interest at an annual rate of 24%. At
September 30, 2007, the balance on the facility was $3,291,156 including an over
advance position in the amount of $1,245,735.
On October 30, 2007, we executed Omnibus Amendment No. 5 with Laurus further
amending our debt facilities. Laurus agreed to postpone the repayment of the
over advance on the revolver facility until April 1, 2008 and to extend the
maturity date of the revolver and over advance until October 31, 2008. Laurus
also agreed to forgive the accrued registration rights penalties of
approximately $660,000 and waive additional penalties until March 31, 2008.
Laurus provided a waiver on the cash flow covenant for the period to date and
amended the covenant to include allowable defaults of variable amounts based on
our cash flow projections. In consideration of the above amendments, we agreed
to reprice the 2,100,000 warrants issued on June 27, 2005 to an exercise price
of $0.01 per share. We also agreed to apply 60% of any proceeds received from
future equity raises to mandatory repayment of our debt. We also committed to
register the shares underlying the remaining warrants and options held by Laurus
no later than March 31, 2008.
At September 30, 2007, the balance on the term loan with Laurus was $1,218,733.
At September 30, 2007, we had $370,000 outstanding in a 12% convertible
debenture to Trafalgar. Included in interest expense at September 30, 2007, is
accrued interest of $27,480 due to Trafalgar upon conversion.
At September 30, 2007 the balance on the promissory note due to the Kennedy's
was $800,000. Included in interest expense at September 30, 2007 is accrued
interest payable to the Kennedy's in the amount of $21,182.
At September 30, 2007, we had three unsecured promissory notes outstanding to
the other shareholders of TMG totaling $34,380. The notes bear interest at an
annual rate equal to the Wall Street Journal prime rate and mature on September
30, 2008. We are making periodic payments on the notes as cash flow permits.
Included in interest expense at September 30, 2007 is accrued interest payable
to the note holders in the amount of $7,218.
At September 30, 2007, we held various capital leases in the amount of $29,505
secured by property and equipment with various payment terms and interest rates
ranging from 13-18%. These leases mature between April 2009 and August 2010.
At September 30, 2007, we had cash of $65,000, a working capital deficiency of
$3,880,000 and cash flow from operations of $14,000. At September 30, 2006 we
had cash of $114,000, a working capital deficiency of $2,200,000 and a cash flow
deficiency from operations of $930,000.
At September 30, 2007, we had a cash flow deficiency from investing activities
of $80,000 related to the purchase of property and equipment. At September 30,
2006 we had a cash flow deficiency from investing activities of $1,200,000
largely related to the acquisition of TMG.
At September 30, 2007 we had cash flow from financing activities of $2,000
largely attributable to proceeds of $400,000 from the sale of a convertible
debenture less deferred costs of $150,000 and debt repayment of $248,000. At
September 30, 2006 we had cash flow from financing activities of $2,110,000
largely attributable to proceeds from the term note with Laurus of $1,400,000,
proceeds from the revolver facility of $590,000 and the issuance of promissory
notes to the TMG vendors of $560,000 less deferred costs of $130,000 and
long-term debt repayment of $310,000.
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 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.
In June 2006, the 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 ("SEC") 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.
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.
In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue No.
07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to be
Used in Future Research and Development Activities," ("EITF 07-3") which is
effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires
that nonrefundable advance payments for future research and development
activities be deferred and capitalized. Such amounts will be recognized as an
expense as the goods are delivered or the related services are performed. We do
not expect the adoption of EITF 07-3 to have a material impact over our
financial results.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
On December 12, 2001, the SEC issued FR-60, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies", which encourages additional
disclosure with respect to a company's critical accounting policies, the
judgments and uncertainties that affect a company's application of those
policies, and the likelihood that materially different amounts would be reported
under different conditions and using different assumptions.
Management is required to make certain estimates and assumptions during the
preparation of the consolidated financial statements in accordance with GAAP.
These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates. Certain accounting policies and estimates have a more significant
impact on our financial statements than others, due to the magnitude of the
underlying financial statement elements.
CONSOLIDATION
Our determination of the appropriate accounting method with respect to our
investments in subsidiaries is based on the amount of control we have, combined
with our ownership level, in the underlying entity. Our consolidated financial
statements include the accounts of our parent company and our wholly-owned
subsidiaries. All of our investments are accounted for on the cost method. If we
had the ability to exercise significant influence over operating and financial
policies of a company, but did not control such company, we would account for
these investments on the equity method.
Accounting for an investment as either consolidated or by the equity method
would have no impact on our net income (loss) or stockholders' equity in any
accounting period, but would impact individual income statement and balance
sheet items, as consolidation would effectively "gross up" our income statement
and balance sheet. However, if control aspects of an investment accounted for by
the cost method were different, it could result in us being required to account
for an investment by consolidation or the equity method. Under the cost method,
the investor only records its share of the investee's earnings to the extent
that it receives dividends from the investee; when the dividends received exceed
the investee's earnings subsequent to the date of the investor's investment, the
investor records a reduction in the basis of its investment. Under the cost
method, the investor does not record its share of losses of the investee.
Conversely, under either consolidation or equity method accounting, the investor
effectively records its share of the investee's net income or loss, to the
extent of its investment or its guarantees of the investee's debt.
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.
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.
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 "Foreign Currency Translation" 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 summarized below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. 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 Quarterly Report
on Form 10-QSB.
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.
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 October 3, 2007 we entered into an agreement with Crucible Capital Group,
Inc. granting Crucible the exclusive right as our consultant and financial
advisors on a best efforts basis for a minimum term of three months. We agreed
to issue to Crucible monthly payments of $6,000 and options to purchase shares
of our common stock in the amount of $24,000 and to pay success fees upon
completion of successful financings.
On October 17, 2007, we signed back a lease proposal with our Toronto landlord
for a three year lease in new space beginning January 1, 2008. The new monthly
lease amount is estimated to be approximately $3,500.
On October 30, 2007, we executed Omnibus Amendment No. 5 with Laurus Master
Fund, Ltd. further amending our debt facilities. Laurus agreed to postpone the
repayment of the over advance on the revolver facility until April 1, 2008 and
to extend the maturity date of the revolver and over advance until October 31,
2008. Laurus also agreed to forgive the accrued registration rights penalties of
approximately $660,000 and waive additional penalties until March 31, 2008.
Laurus provided a waiver on the cash flow covenant for the period to date and
amended the covenant to include allowable defaults of variable amounts based on
our cash flow projections. In consideration of the above amendments, we agreed
to reprice the 2,100,000 warrants issued on June 27, 2005 to an exercise price
of $0.01 per share. We also agreed to apply 60% of any proceeds received from
future equity raises to mandatory repayment of our debt. We also committed to
register the shares underlying the remaining warrants and options held by Laurus
no later than March 31, 2008.
On November 7, 2007, we entered into an agreement with John and Cecelia Kennedy
which effectively cancelled their three year employment agreements dated June
29, 2006 in consideration of a severance payment of $100,000 payable bi-weekly
beginning January 1, 2008 for a period of twenty-four months, as well as payment
of any earned 2007 bonuses and earned and unused 2007 vacation.
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 Rule 13a-15 promulgated under The Securities
Exchange Act of 1934, as amended (The "Exchange Act"). 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, summarized 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 over
financial reporting identified in connection with the evaluation described above
during the Company last fiscal quarter that has materially affected or is
reasonably likely to materially affect the Company's internal control over
financing 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:
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 was to August 31, 2006. In April 2006, we were notified
by the lessor that Thinkpath Training had failed to meet their rent obligations.
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
September 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
During the three months ended September 30, 2007, we sold unregistered
securities as described below. There were no underwriters involved in the
transactions and there were no underwriting discounts or commissions paid in
connection therewith, except as disclosed below. The purchasers of the
securities in such transactions represented their intention to acquire the
securities for investment purposes only and not with a view to or for sales in
connection with any distribution thereof and appropriate legends were affixed to
the certificates for the securities issued in such transactions. The purchasers
of the securities in the transactions below were each sophisticated investors
who were provided information about us and were able to bear the risk of loss of
their entire investment.
On August 13, 2007, we issued 250,000 shares of common stock, no par value, to
Trafalgar Capital Specialized Investment Fund as consideration of a second
$20,000 facility fee.
During the three months ended September 30, 2007, we issued 218,037 shares of
common stock, no par value, to Trafalgar Capital Specialized Investment Fund
upon conversion of $30,000 convertible debentures and interest.
During the three months ended September 30, 2007, we issued 594,928 shares of
common stock to Laurus Master Fund, Ltd. upon the exercise of 594,928 warrants
and proceeds of $5,000.
We believe all of the above issuances were exempt from registration pursuant to
the exemption provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
As previously disclosed, on June 29, 2005, we entered into a security agreement
with Laurus Master Fund, Ltd. ("Laurus") which established a $3.5 million
convertible financing facility based on eligible accounts receivables (the
"Original Agreement"). On October 30, 2007, we executed Omnibus Amendment No. 5
("Omnibus Amendment No. 5") with Laurus, Valens U.S. SPV I, LLC, and Valens
Offshore SPV II, further amending our debt facilities, including the Original
Agreement. A copy of Omnibus Amendment No. 5 is attached hereto as Exhibit 10.1.
Under Omnibus Amendment No. 5, Laurus agreed to postpone the repayment of the
over advance on the revolver facility until April 1, 2008 and to extend the
maturity date of the revolver and over advance until October 31, 2008. A copy of
the Amended and Restated Over advance Side Letter is attached hereto as Exhibit
10.2. Laurus also agreed to forgive the accrued registration rights penalties of
approximately $660,000 and waive additional penalties until March 31, 2008.
Laurus provided a waiver on the cash flow covenant for the period to date and
amended the covenant to include allowable defaults of variable amounts based on
our cash flow projections. In consideration of the above amendments, we agreed
to reprice the exercise price of the 2,100,000 warrants issued on June 27, 2005
from $.0001 per share to $0.01 per share. We also agreed to apply 60% of any
proceeds received from future equity raises to mandatory repayment of our debt.
We further committed to register with the SEC, no later than March 31, 2008, the
shares underlying the remaining warrants and options held by Laurus.
ITEM 6. EXHIBITS
10.1 Omnibus Amendment No. 5.
10.2 Amended and Restated Over advance Side Letter
10.3 Letter Agreement dated October 2, 2007 between Thinkpath Inc. and Crucible
Capital Group, Inc.
10.4 Memorandum of Agreement dated November 7, 2007 between Thinkpath Inc. and
John and Cecelia Kennedy
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer 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.
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: November 19, 2007 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
INDEX TO EXHIBITS
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer 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.