UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM TO
------------ ------------
COMMISSION FILE NUMBER
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THINKPATH INC.
-----------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
ONTARIO 52-209027
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
201 WESTCREEK BOULEVARD
BRAMPTON, ONTARIO L6T 5S6
---------------------------------------- ---------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 460-3040
-------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
AS OF NOVEMBER 11, 2003 THERE WERE 1,928,575,015 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
THINKPATH INC.
SEPTEMBER 30, 2003 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002 and 2001........................................F2-F3
Interim Consolidated Statements of Income for the three and nine months
ended September 30, 2003 and 2002 ...................................F4
Interim Consolidated Statements of Stockholders' Equity for the nine
months ended September 30, 2003......................................F5
Interim Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 ...................................F6
Notes to Interim Consolidated Financial Statements...............F7-F41
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................2-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........15
Item 4. Controls and Procedures..............................................15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................15
Item 2. Changes in Securities and Use of Proceeds ........................15-16
Item 3. Defaults Upon Senior Securities .....................................16
Item 4. Submission of Matters to a Vote of Security Holders ..............16-17
Item 5. Other Information ...................................................17
Item 6. Exhibits and Reports on Form 8-K ....................................18
1
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
F-1
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002, AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2003 2002 2001
---- ---- ----
$ $ $
ASSETS
CURRENT ASSETS
Cash 67,617 114,018 482,233
Accounts receivable 1,946,742 2,663,823 5,502,113
Inventory -- -- 40,057
Income taxes receivable -- -- 431,817
Prepaid expenses 185,496 196,683 345,341
--------- ---------- ----------
2,199,855 2,974,524 6,801,561
PROPERTY AND EQUIPMENT 1,389,362 1,915,379 2,859,340
GOODWILL 3,748,732 3,748,732 5,128,991
INVESTMENT IN NON-RELATED COMPANIES 45,669 45,669 1,013,926
LONG-TERM RECEIVABLE -- 53,924 83,450
OTHER ASSETS 51,982 49,303 1,287,710
--------- ---------- ----------
7,435,600 8,787,531 17,174,978
========= ========== ==========
F-2
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002, AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2003 2002 2001
---- ---- ----
$ $ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 121,101 209,776 5,039,171
Receivable Discount Facility 1,161,726 2,340,579 --
Accounts payable 2,243,119 3,197,286 4,073,444
Deferred revenue -- 163,609 365,023
Current portion of long-term debt 284,035 380,188 528,285
Current portion of notes payable 179,607 208,254 150,000
12% Convertible Debenture 589,486 192,950 --
----------- ----------- -----------
4,579,074 6,692,642 10,155,923
DEFERRED INCOME TAXES -- -- 150,380
LONG-TERM DEBT 15,483 84,756 582,432
NOTES PAYABLE 683,896 686,703 2,340,000
LIABILITIES PAYABLE IN CAPITAL STOCK -- -- 699,297
----------- ----------- -----------
5,278,453 7,464,101 13,928,032
=========== =========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 22)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 41,532,754 33,367,034 26,571,481
DEFICIT (38,124,773) (30,966,083) (22,719,044)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,250,834) (1,077,521) (605,491)
----------- ----------- -----------
2,157,147 1,323,430 3,246,946
----------- ----------- -----------
7,435,600 8,787,531 17,174,978
=========== =========== ===========
The accompanying notes are an integral part of
these interim consolidated financial statements
F-3
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
2003 2002 2003 2002
---- ---- ---- ----
$ $ $ $
REVENUE 2,649,681 2,886,157 7,611,673 9,949,699
COST OF SERVICES 1,770,861 1,995,900 5,154,467 6,806,265
------------ ----------- ------------ -----------
GROSS PROFIT 878,820 890,257 2,457,206 3,143,434
------------ ----------- ------------ -----------
EXPENSES
Administrative 563,406 1,299,506 1,757,448 2,854,517
Selling 279,048 575,057 782,065 1,880,555
Financing Expenses -- 469,741 -- 469,741
Depreciation and amortization 143,155 252,783 519,791 779,172
Write down goodwill -- 57,808 -- 57,808
------------ ----------- ------------ -----------
985,609 2,654,895 3,059,304 6,041,793
LOSS FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES (106,789) (1,764,638) (602,098) (2,898,359)
Interest Charges 1,700,638 339,971 6,777,521 781,406
------------ ----------- ------------ -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,807,427) (2,104,609) (7,379,619) (3,679,765)
Income Taxes (recovery) 1,343 5,786 13,366 (19,965)
------------ ----------- ------------ -----------
LOSS FROM CONTINUING OPERATIONS (1,808,770) (2,110,395) (7,392,985) (3,659,800)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
(INCLUDING GAIN ON DISPOSAL) (49,062) (30,571) 234,295 512,059
------------ ----------- ------------ -----------
NET LOSS BEFORE PREFERRED STOCK DIVIDENDS (1,857,832) (2,140,966) (7,158,690) (3,147,741)
PREFERRED STOCK DIVIDENDS -- 2,828 -- 58,001
NET LOSS APPLICABLE TO COMMON STOCK (1,857,832) (2,143,794) (7,158,690) (3,205,742)
============ =========== ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND FULLY DILUTED 448,877,336 28,704,219 290,295,250 23,717,204
============ =========== ============ ===========
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK BEFORE PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.00) (0.07) (0.02) (0.13)
============ =========== ============ ===========
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK AFTER PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.00) (0.07) (0.02) (0.14)
============ =========== ============ ===========
The accompanying notes are an integral part of
these interim consolidated financial statements
F-4
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED
COMMON STOCK PREFERRED STOCK CAPITAL OTHER
NUMBER OF NUMBER OF SHARES STOCK COMPREHENSIVE COMPREHENSIVE
SHARES A B C AMOUNTS DEFICIT LOSS LOSS
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of December 31, 2000 11,915,138 1,050 750 - 23,759,415 (12,306,862) (653,547)
============== ========= ======== ======== ============ ============== ============
Net loss for the year before preferred
stock dividends - - - - - (9,683,442) (9,683,442)
-------------
Other comprehensive income (loss), net of tax:
Foreign currency translation - - - - - - 209,506
Adjustment to market value - - - - - - (161,450)
-------------
Other comprehensive income 48,056 48,056
-------------
Comprehensive loss (9,635,386)
=============
Issuance of common stock for cash 525,000 - - - 400,000 -
Issuance of preferred stock - - - 1,230 1,230,000 -
Reduction in common stock payable 596,667 - - - 709,005 -
Dividend on preferred stock - - - - 414,848 (444,647)
Conversion of preferred stock to
common stock 3,864,634 (1,050) (750) (285) - -
Beneficial conversion on
Issuance of preferred stock - - - - 284,093 (284,093)
Options exercised 22,122 - - - 1 -
Debt settled through the issuance
of common stock 93,883 - - - 44,125 -
Common stock and warrants issued
in consideration of services 714,267 - - - 519,994 -
Allowance for deferred taxes
Recoverable on issue expenses - - - - (790,000)
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of December 31, 2001 17,731,711 - - 945 26,571,481 (22,719,044) (605,491)
============== ========= ======== ======== ============ ============== ============
Net loss for the year before preferred
stock dividends - - - - - (8,146,652) (8,146,652)
-------------
Other comprehensive income (loss), net of tax:
Foreign currency translation - - - - - - (171,283)
Adjustment to market value - - - - - - (300,747)
-------------
Other comprehensive income (472,030) (472,030)
-------------
Comprehensive loss (7,674,622)
=============
Reduction in common stock payable 8,387,840 - - - 1,098,955 -
Dividend on preferred stock - - - - 67,530 (67,530)
Conversion of preferred stock to
common stock 23,278,448 - - (945) - -
Beneficial conversion on
issuance of preferred stock - - - - 32,857 (32,857)
Debt settled through the issuance
of common stock 2,982,018 - - - 434,348 -
Common stock and warrants issued
in consideration of services 13,878,026 - - - 1,556,485 -
Warrants issued for cash - - - - 707,050 -
Beneficial conversion on issuance
of convertible debt - - - - 2,898,328 -
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of December 31, 2002 66,258,043 - - - 33,367,034 (30,966,083) (1,077,521)
============== ========= ======== ======== ============ ============== ============
Net loss for the period - - - - - (7,158,690) (7,158,690)
-------------
Other comprehensive income (loss), net of tax:
Foreign currency translation - - - - - - (173,313) (173,313)
Adjustment to market value - - - - - - -
-------------
Other comprehensive income -
-------------
Comprehensive loss (7,332,003)
=============
Conversion of 12% senior secured
convertible debenture 677,062,695 - - - 370,036 -
Interest on 12% senior secured
Convertible debenture 36,844,124 - - - 56,893 -
Debt settled through the issuance
of common stock 16,997,854 - - - 449,333 -
Common stock and warrants issued
in consideration of services 10,980,000 - - - 226,500 -
Warrants issued for cash - - - - 883,552 -
Beneficial conversion on issuance
of convertible debt - - - - 6,179,406 -
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of September 30, 2003 808,142,716 - - - 41,532,754 (38,124,773) (1,250,834)
============== ========= ======== ======== ============ ============== ============
The accompanying notes are an integral part of these interim consolidated
financial statements.
F-5
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002
---- ----
$ $
Cash flows from operating activities
Net loss before preferred stock dividends (7,158,690) (3,147,741)
---------- ----------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Amortization 557,147 987,964
Amortization of beneficial conversion (included in interest) 6,179,406 --
Write down of long-term investment -- 250,620
Write down of goodwill -- 57,808
Decrease (increase) in accounts receivable 872,350 1,326,509
Decrease (increase) in prepaid expenses 32,189 29,062
Increase (decrease) in accounts payable (1,057,702) (864,409)
Decrease (increase) in inventory -- 6,000
Decrease (increase) in long-term receivable 57,775 --
Increase (decrease) in deferred revenue (163,593) (144,225)
Increase in income taxes payable (receivable) -- 269,699
Common stock and warrants issued for services 226,500 578,909
Accounts payable settled with common stock 449,333 --
Debt forgiveness (30,565) --
Gain on disposal of subsidiary -- (497,579)
Gain on disposal of IT Recruitment division (190,627) --
---------- ----------
Total adjustments 6,932,213 2,000,358
---------- ----------
Net cash used in operating activities (226,477) (1,147,383)
---------- ----------
Cash flows from investing activities
Purchase of capital assets (92,295) (253,520)
Disposal (purchase) of other assets -- 16,156
Proceeds on sale of fixed assets -- --
Proceeds on disposal of subsidiary -- 1,320,786
Proceeds on disposal of IT Recruitment division 146,406 --
---------- ----------
Net cash provided from (used in) investing activities 54,111 1,083,422
---------- ----------
Cash flows from financing activities
Repayment of notes payable (31,453) (79,000)
Repayment of long-term debt (1,532,119) (479,532)
Cash received (paid) on long-term debt -- 259,350
Proceeds from issuance of common stock -- --
Proceeds from issuance of debentures and warrants 1,650,000 --
Increase (decrease in bank indebtedness) -- (118,197)
---------- ----------
Net cash provided by financing activities 86,428 (417,379)
---------- ----------
Effect of foreign currency exchange rate changes 39,537 32,189
---------- ----------
Net increase (decrease) in cash and cash equivalents (46,401) (449,151)
Cash and cash equivalents
Beginning of period 114,018 482,233
---------- ----------
End of period 67,617 33,082
========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 598,121 837,303
========== ==========
Income taxes paid (recovered) 13,366 (5,145)
========== ==========
SUPPLEMENTAL NON-CASH ITEMS:
Preferred stock dividend -- 58,001
Common shares issued for liabilities 449,333 1,487,554
Reduction in notes payable -- 1,575,536
========== ==========
The accompanying notes are an integral part of
these interim consolidated financial statements
F-6
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the company's ability to continue
as a going concern for a reasonable period of time. These conditions and
events include significant operating losses, working capital
deficiencies, and violation of certain loan covenants. At September 30,
2003, the Company had a working capital deficiency of $2,379,219, a
deficit of $38,124,773 and has suffered recurring losses from operations.
With insufficient working capital from operations, the Company's primary
sources of cash are a receivable discount facility with Morrison
Financial Services Limited and proceeds from the sale of equity
securities. At September 30, 2003, the balance on the receivable discount
facility was approximately $1,160,000. The company is currently within
margin of its receivable discount facility with Morrison Financial
Services Limited based on 75% of qualifying accounts receivable.
During the nine months ended September 30, 2003, the company closed
$1,650,000 in convertible debentures pursuant to a financing arrangement
entered into on December 5, 2002. The funds were used for various debt
settlements and critical payables.
As at November 11, 2003, management's plans to mitigate and alleviate
these adverse conditions and events include:
a) Commitment from investors for additional convertible debentures of
up to $100,000 to be used for working capital. 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.
b) Ongoing restructuring of debt obligations and settlement of
outstanding claims.
c) Focus on growth in the engineering division, including design
services and technical publications and expansion of the
engineering service offerings to Ontario, Canada to replace
existing lower margin information staffing services.
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 receivable discounting facility with Morrison Financial
Services Limited, 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.
F-7
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
b) Change of Name
The company changed its name from IT Staffing Ltd. to Thinkpath.com Inc.
on February 24, 2000. On June 6, 2001, the company changed its name from
Thinkpath.com Inc. to Thinkpath Inc.
c) Principal Business Activities
Thinkpath Inc. is an information technology and 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.), provides engineering, design, technical
publications and staffing, services to enhance the resource performance
of clients. In addition, the company owns the following companies which
are currently inactive: Systemsearch Consulting Services Inc.,
International Career Specialists Ltd., Microtech Professionals Inc.,
E-Wink Inc. (80%), Thinkpath Training Inc. (formerly ObjectArts Inc.),
Thinkpath Training US Inc. (formerly ObjectArts US Inc.) and TidalBeach
Inc. In 2002, the company sold Njoyn Software Incorporated, a
wholly-owned subsidiary.
d) Basis of interim consolidated financial statement presentation
The interim 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 accounted for by the pooling
of interest method their earnings have been included for all periods
reported. All significant inter-company accounts and transactions have
been eliminated.
e) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts from and to
banks, and any other highly liquid investments purchased with a maturity
of three months or less. The carrying amount approximates fair value
because of the short maturity of those instruments.
f) Other Financial Instruments
The carrying amount of the company's other financial instruments
approximate fair value because of the short maturity of these instruments
or the current nature of interest rates borne by these instruments.
g) Long-Term Financial Instruments
The fair value of each of the company's long-term financial assets and
debt instruments is based on the amount of future cash flows associated
with each instrument discounted using an estimate of what the company's
current borrowing rate for similar instruments of comparable maturity
would be.
h) Property and Equipment
Property and equipment are recorded at cost and are amortized over the
estimated useful lives of the assets principally using the declining
balance method.
The company's policy is to record leases, which transfer substantially
all benefits and risks incidental to ownership of property, as
acquisition of property and equipment and to record the occurrences of
corresponding obligations as long-term liabilities. Obligations under
capital leases are reduced by rental payments net of imputed interest.
F-8
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
i) Net Income (Loss) and Fully 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.
Fully diluted net income (loss) per common stock is computed by dividing
net income for the year by the weighted average number of common stock
outstanding during the year, assuming that all convertible preferred
stock, stock options and warrants as described in note 12 were converted
or exercised. Stock conversions stock options and warrants which are
anti-dilutive are not included in the calculation of fully diluted net
income (loss) per weighted average common stock.
j) Inventory
Inventory is valued at the lower of cost and the net realizable value.
k) Revenue
1) The company provides the services of engineering staff on a project
basis. The services provided are defined by guidelines to be accomplished
by milestone and revenue is recognized upon the accomplishment of the
relevant milestone. As services are rendered, the costs incurred are
reflected as Work in Progress. Revenue is recognized upon the persuasive
evidence of an agreement, delivery has occurred, the fee is fixed or
determinable and collection reasonably assured.
2) Prior to the sale of the IT recruitment division (Note 17), the
company provided the services of information technology consultants on a
contract basis and revenue was recognized as services were performed.
3) Prior to the sale of the IT recruitment division (Note 17), the
company placed information technology professionals on a permanent basis
and revenue was recognized upon candidates' acceptance of employment. If
the company received non-refundable upfront fees for "retained searches",
the revenue was recognized upon the candidates' acceptance of employment.
4) Prior to the sale of the training division (Note 17), the company
provided advanced training and certification in a variety of technologies
and revenue was recognized on delivery.
5) Prior to the sale of the technology division (Note 17), the company
licensed software in the form of a Human Capital Management System called
Njoyn. The revenue associated with providing this software consisted of
an initial set up fee, customization and training as agreed and an
ongoing monthly per user fee. The allocation of revenue to the various
elements was based on the company's determination of the fair value of
the elements if they had been sold separately. The customers had the
right to choose a provider to host the software which was unrelated to
the company. The set-up fee and customization revenue was recognized upon
delivery of access to the software with customization completed in
accordance with milestones determined by the contract.
Revenue was recognized on a percentage of completion basis for contracts
with significant amounts of customization and clearly defined milestones
agreed to by the customer and an enforceable right to invoice and collect
on a partial completion basis.
For contracts which required significant customization, without clearly
defined milestones, and an inability to estimate costs, revenue was
reflected on a completed contract basis. Substantial completion was
determined based on customer acceptance of the software.
6) Prior to the sale of the technology division (Note 17), the company
also signed contracts for the customization or development of SecondWave,
a web development software in accordance with specifications of its
clients. The project plan defined milestones to be accomplished and the
costs associated. These amounts were billed as they were accomplished and
revenue was recognized as the milestones were reached. The work in
progress for costs incurred beyond the last accomplished milestone was
reflected at the period end. The contracts did not include any
post-contract customer support. Additional customer support services were
provided at standard daily rates, as services are required.
F-9
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
l) Goodwill
Goodwill representing the cost in excess of the fair value of net assets
acquired is being amortized on a straight-line basis over a thirty-year
period. The company calculates the recoverability of goodwill on a
quarterly basis by reference to estimated undiscounted future cash flows.
Effective July 1, 2001, the Company changed its amortization period from
30 to 15 years on a prospective basis.
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets." Under the new rules,
goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment. Separable intangible assets
that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company began applying the new accounting rules
effective January 1, 2002.
Thinkpath completed SFAS No.142 transitional impairment test during the
third quarter of 2002 and concluded that there was no impairment of
recorded goodwill, as the fair value of its reporting units exceeded
their carrying amount as of January 1, 2002. Therefore, the second part
of the transitional test was not required to be performed.
m) Income Taxes
The company accounts for income tax under the provision of Statement of
Financial Accounting Standards 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.
n) Foreign Currency
Assets and liabilities recorded in foreign currencies are translated at
the exchange rate on the balance sheet date. Translation adjustments
resulting from this process are charged or credited to other
comprehensive income. Revenue and expenses are translated at average
rates of exchange prevailing during the year. Gains and losses on foreign
currency transactions are included in financial expenses.
o) 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. These
estimates are reviewed periodically and as adjustments become necessary,
they are reported in earnings in the period in which they become known.
F-10
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
p) 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 be
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 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
Company adopted SFAS 144, effective January 1, 2002. The adoption of SFAS
144 did not have a material impact on the Company's results of operations
or financial condition.
q) 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.
r) Accounting for Stock-Based Compensation In December 1995, SFAS No. 123,
Accounting for Stock-Based Compensation, was issued. It introduced the
use of a fair value-based method of accounting for stock-based
compensation. It encourages, but does not require, companies to recognize
stock-based compensation expenses to employees based on the new fair
value accounting rules. Companies that choose not to adopt the new rules
will continue to apply the existing accounting rules continued in
Accounting Principles Board Option No. 25, Accounting for stock issued to
employees. However, SFAS No. 123 requires companies that choose not to
adopt the new fair value accounting rules to disclose pro forma net
income and earnings per share under the new method. SFAS No. 123 is
effective for financial statements for fiscal years beginning after
December 31, 1995. The company has adopted the disclosure provisions of
SFAS No. 123.
s) Computer software costs Prior to the sale of its wholly-owned subsidiary
Njoyn Software Incorporated, the company accounted for the cost of
developing computer software. The company recorded these costs as
research and development expenses until the technological feasibility of
the product has been established at which time the costs were deferred.
At the end of each year, the company compared the unamortized costs
represented by deferred development costs in Other Assets to the net
realizable value of the product to determine if a reduction in carrying
value is warranted. The software developed for own use which may be sold
as a separate product is the Njoyn software and during development, the
company decided to market the software and therefore for the costs
incurred after technological feasibility was reached has been treated as
Deferred Development costs and the amount evaluated on an annual basis to
determine if a reduction in carrying value is warranted. On March 8,
2002, Thinkpath sold all of its shares in Njoyn Software Incorporated.
t) Investments in Non-Related Companies The company records its investments
in companies in which it holds a 20% or more interest and in which the
company can exercise significant influence over the investee's operating
and financial policies on the equity basis.
The company records its investment in companies in which it holds less
than 20% interest or in which the company has a 20% or greater interest
but the company is unable to exercise significant influence at fair
market value. Changes in fair market value are adjusted in comprehensive
income, unless the impairments are of a permanent nature, in which case
the adjustments are recorded in earnings.
F-11
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
u) Recent Pronouncements
In April 2002, the FASB issued SFAS No. 145, which, among other factors,
changed the presentation of gains and losses on the extinguishments of
debt. Any gain or loss on extinguishments of debt that does not meet the
criteria in APB Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", shall be included in operating earnings and not presented
separately as an extraordinary item. The new standard is effective for
companies with fiscal years beginning after May 15, 2002. However, the
company has elected to adopt the standard as the debt restructuring gain
in the current period, as permitted by SFAS No. 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting
for restructuring and similar costs. SFAS No.146 supersedes previous
accounting guidance, principally Emerging Issues Task Force Issue, or
EITF, No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit on Activity (including Certain Costs
Incurred in a Restructuring)". The company will adopt the provisions of
SFAS No. 146 for restructuring activities initiated after December 31,
2002. SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
In January 2003, the FASB issued SFAS No. 148, Accounting for Stock
-Based Compensation - Transition and Disclosures. This statement provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, this statement also amends the disclosure requirements of
SFAS No. 123 to require more prominent and frequent disclosures in the
financial statements about the effects of stock-based compensation. The
transitional guidance and annual disclosure provisions of this Statement
is effective for the December 31, 2002 financial statements. The interim
reporting disclosure requirements is effective for the March 31, 2003
financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This
Interpretation elaborates on the existing disclosure requirement for most
guarantees including loan guarantees, and clarifies that at the time a
company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and
annual financial statements. The initial recognition and measurement
provisions of the Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities,"
which addresses consolidation by business enterprises of variable
interest entities. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. A variable
interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity
may be essentially passive or it may engage in research and development
or other activities on behalf of another company. The objective of
Interpretation No. 46 is not to restrict the use of variable interest
entities but to improve financial reporting by companies involved with
variable interest entities. Until now, a company generally has included
another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Interpretation No. 46
changes that by requiring a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss
from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation No. 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established.
The Company does not have any variable interest entities, and,
accordingly, adoption is not expected to have a material effect on the
Company.
F-12
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
In April 2003, the Financial Accounting Standards Board issued
Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". The Statement amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities
under Statement 133. The amendments set forth in Statement 149 improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this
Statement clarifies under what circumstances a contract with an initial
net investment meets the characteristic of a derivative as discussed in
Statement 133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. This Statement is effective for contracts entered into or
modified after June 30, 2003 with certain exceptions. The Company does
not believe that the adoption of Statement No. 149 will have a material
effect on the Company.
In May 2003, the Financial Accounting Standards Board issued Statement
No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". The Statement
specifies that certain instruments within its scope embody obligations
of the issuer and that, therefore, the issuer must classify them as
liabilities. This Statement is effective immediately for all financial
instruments entered into or modified after May 31, 2003. For all other
instruments, the Statement goes into effect at the beginning of the
first interim period beginning after June 15, 2003. For contracts that
were created or modified before May 31, 2003 and still exist at the
beginning of the first interim period beginning after June 30, 2003,
entities should record the transition to Statement No. 150 by reporting
the cumulative effect of a change in an accounting principle. Statement
No. 150 prohibits entities from restating financial statements for
earlier years presented. The Company does not believe that the adoption
of Statement No. 150 will have a material effect on the Company.
v) Advertising Costs
Advertising costs are expensed as incurred.
3. ACCOUNTS RECEIVABLE
Sept 30, December 31, December 31,
2003 2002 2001
---- ---- ----
$ $ $
Accounts receivable 2,150,736 2,900,616 6,079,676
Less: Allowance for doubtful accounts (203,994) (236,793) (577,563)
--------- --------- ---------
1,946,742 2,663,823 5,502,113
========= ========= =========
Sept 30, December 31, December 31,
2003 2002 2001
---- ---- ----
$ $ $
Allowance for doubtful accounts
Balance, beginning of period 236,793 577,563 458,833
Provision 31,301 (292,764) 118,730
Recoveries (64,100) (48,006) --
--------- --------- ---------
Balance, end of period 203,994 236,793 577,563
========= ========= =========
F-13
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
4. PROPERTY AND EQUIPMENT
September 30, December 31, December 31,
2003 2002 2001
----------------------------------- ---------- ---------
ACCUMULATED
COST AMORTIZATION NET NET NET
$ $ $ $
Furniture and equipment 739,519 504,344 235,175 255,118 344,693
Computer equipment
and software 5,605,036 4,509,187 1,095,849 1,593,937 2,322,887
Leasehold improvements 208,225 149,887 58,338 66,324 191,760
--------- --------- --------- --------- ---------
6,552,780 5,163,418 1,389,362 1,915,379 2,859,340
========= ========= ========= ========= =========
Assets under capital lease 577,257 505,953 71,304 326,365 474,485
========= ========= ========= ========= =========
Amortization of property and equipment for the three months ended
September 30, 2003 amounted to $157,006 including amortization of
assets under capital lease of $41,316. ($400,142 for the six months
ended June 30, 2003 including amortization of assets under capital
lease of $45,372).
Amortization of property and equipment for the year ended December 31,
2002 amounted to $974,142 including amortization of assets under
capital lease of $110,763.
Amortization for the year ended December 31, 2001 amounted to
$1,594,709 and $1,067,029 for the year ended December 31, 2000.
Amortization includes amortization of assets under capital lease of
$146,217 for the year ended December 31, 2001 and $136,487 for the year
ended December 31, 2000.
5. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
Sept 30, December 31, December 31,
2003 2002 2001
Conexys $ 1 $ 1 $667,511
Digital Cement 45,668 45,668 346,415
Lifelogix -- -- --
-------- ---------- ----------
Total $ 45,669 $ 45,669 $1,013,926
======== ========== ==========
i) Conexys
During the year ended December 31, 1999, $383,146 of the Conexys
investment was included as a short-term investment as the company had
intended to sell these shares on the open market. During fiscal 2000,
the company acquired additional shares of Conexys at a cost of
approximately $284,365 in consideration of services rendered and
reclassified the total investment as available for sale.
Effective February 26, 2003, the common shares of Conexys were
temporarily suspended from trading on the Bermuda Stock Exchange as
it does not have adequate sources of funding for its immediate
operating requirements and is currently investigating various options
to retain and maximize shareholder value including the restructuring
of its debt and refinancing of the company.
At December 31, 2002, the company wrote down its investment by
$667,510 to a carrying value of $1. The write down was considered a
permanent decline in value and as such was recorded as a charge to
operations.
F-14
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
ii) Digital Cement
During fiscal 2000, the company acquired 1,125,000 shares of Digital
Cement, representing approximately 4% of that company's shares in
consideration of the co-licensing of SecondWave, software developed by
TidalBeach Inc., a wholly-owned subsidiary of Thinkpath Inc. The value
of these shares was determined to be approximately $507,865 based on a
offer to a third party to purchase shares in the company at a price of
$0.50 per share. During 2001, the fair value was adjusted to $346,415
with a charge of $161,450 to comprehensive income. During 2002, the
fair value was adjusted to $45,668 with a charge of $300,747 to
comprehensive income.
iii) Lifelogix
During 2000, the company acquired a twenty percent interest in
LifeLogix in consideration of the source code for Secondwave, the
software which supports LifeLogix's human stress and emotions
management systems. The value of these shares is approximately
$142,715. This investment has been accounted for on the cost basis as
the company does not have the ability to exercise significant
influence over LifeLogix as the majority ownership of the investee is
concentrated among a small group of shareholders who operate
Lifelogix without regard to the views of the company and the company
has been unable to obtain quarterly information. This investment was
written off in 2001.
iv) Tillyard Management
During the year ended December 31, 2001, the company acquired an
interest of $130,242 in Tillyard Management Inc., a property
management company, in consideration of a real estate management
software system developed by Thinkpath Inc. This investment has been
accounted for using the cost method. Tillyard was formed to utilize
and market the real estate management software. The value of the
investment was established based upon the capitalization for the
investee and our share of that capitalization. As sufficient funding
and interest was not forthcoming, the operations of Tillyard were
abandoned and the Company wrote down its investment at December 31,
2001.
6. 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:
Sept 30, December 31, December 31,
2003 2002 2001
------------------------------------------------ ---------- ----------
ACCUMULATED IMPAIRMENT
COST AMORTIZATION LOSSES NET NET NET
IT Recruitment $ 448,634 $ 303,337 $ 145,297 $ -- $ -- $ 145,297
(Systemsearch
Consulting Services)
Technical Publications
& Engineering 5,518,858 535,164 1,234,962 3,748,732 3,748,732 4,983,694
(CadCam Inc.)
---------- ---------- ---------- ---------- ---------- ----------
5,967,492 838,501 1,380,259 3,748,732 3,748,732 5,128,991
========== ========== ========== ========== ========== ==========
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.
During the third quarter of 2002, the company completed its
transitional goodwill impairment test as of January 1, 2002 and
determined that no adjustment to the carrying value of goodwill was
needed.
F-15
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
The IT recruitment unit was tested for impairment in the third quarter,
after the annual forecasting process. Due to a decrease in margins and
the loss of key sales personnel, operating profits and cash flows were
lower than expected in the first nine months of 2002. Based on that
trend, the earnings forecast for the next two years was revised. At
September 30, 2002, a goodwill impairment loss of $57,808 was
recognized in the IT recruitment reporting unit. The fair value of that
reporting unit was estimated using the expected present value of future
cash flows.
During the fourth quarter, the IT recruitment unit experienced further
decline, indicating impairment. The fair value of the unit was
estimated using the expected present value of future cash flows. At
December 31, 2002, a further goodwill impairment loss of $87,489 was
recognized.
The Technical Publications and Engineering unit was tested for
impairment in the fourth quarter, as operating profits, cash flows and
forecasts were lower than expected. At December 31, 2002, a goodwill
impairment loss of $1,234,962 was recognized. The fair value of that
reporting unit was estimated using the expected present value of future
cash flows.
On an ongoing basis, absent any impairment indicators, the company
expects to perform a goodwill impairment test as of the end of the
third quarter of every year.
The following table presents the impact of adopting SFAS No. 142 on net
loss and net loss per share had the standard been in effect for the
year ended December 31, 2001.
2001
----------
Reported loss from continuing operations (8,559,402)
Adjustments:
Amortization of goodwill 454,908
---------
Adjusted loss from continuing operations (8,104,494)
==========
Reported loss from continuing operations, before preferred dividends,
(0.57) basic and fully diluted loss per common share
Impact of amortization of goodwill 0.03
-----
Adjusted loss from continuing operations, before preferred
dividends, basis and fully diluted loss per common share (0.54)
=====
Reported loss from continuing operations after preferred dividends (9,288,142)
Adjustments:
Amortization of goodwill 454,908
--------
Adjusted loss from continuing operations after preferred dividends (8,833,234)
=========
Reported loss from continuing operations, after preferred dividends,
basic and fully diluted loss per common share (0.62)
Impact of amortization of goodwill 0.03
-----
Adjusted loss from continuing operations, after preferred (0.59)
dividends, basis and fully diluted loss per common share =====
Amortization for the year ended December 31, 2001 was $454,908. Effective
July 1, 2001, the Company changed its amortization period from 30 to 15 years on
a prospective basis. The goodwill amortization and any impairment write down
reported in 2001 relate to continuing operations.
F-16
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
In accordance with the requirements of SFAS 121 and SFAS 142, the
impairment of goodwill has resulted in the writedown of the following
amounts;
2002 2001
-------- ---------
Systemsearch Consulting Services 145,297 238,673
CadCam Inc. 1,234,962 --
MicroTech Professionals Inc. -- 2,762,718
International Career Specialists -- --
E-Wink Inc. -- --
--------- ----------
1,380,259 3,001,391
========= ==========
Systemsearch Consulting Services Inc., MicroTech Professionals Inc.,
International Career Specialists and E-Wink Inc. are inactive
companies.
7. OTHER ASSETS
Sept 30, December 31, December 31,
2003 2002 2001
$ $ $
Deferred development cost -- -- 993,765
Deferred financing costs -- -- --
Deferred contracts -- -- 250,000
Cash surrender value of life insurance 51,982 49,303 43,945
-------- --------- ---------
51,982 49,303 1,287,710
======== ========= =========
Amortization of other assets for the year ended December 31, 2002
amounted to $317,886. Amortization for the year ended December 31, 2001
amounted to $510,038.
8. BANK INDEBTEDNESS
i) September 30, 2003
At September 30, 2003, the company had $1,160,000 with Morrison Financial
Services Limited under a receivable discount facility which allows the
company to borrow up to 75% of the value of qualified accounts
receivables.
ii) December 31, 2002
On December 5, 2002, Bank One's security and indebtedness were purchased
by Morrison Financial Services Limited. Bank One accepted a $1,100,000
discount on the payoff of its debt. On July 1, 2002 the company entered
into a Forbearance and Modification Agreement with Bank One which was
subsequently amended on August 1, 2002, August 15, 2002, September 1,
2002, September 16, 2002, September 30, 2002, October 15, 2002, November
15, 2002, and November 30, 2002. Under the terms of the agreement, the
Bank was entitled to forbearance fees and payment of related legal fees
and expenses. The Bank charged the company approximately $250,000 in
forbearance fees and $18,000 in legal fees.
Morrison Financial Services Limited charged the company a 15% fee or
$165,000 for the discount negotiation with Bank One. The discount amount
of $1,100,000 was recognized by the company as debt forgiveness and the
fee of $165,000 was netted against this amount for total debt forgiveness
of $935,000.
F-17
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
iii) December 31, 2001
At December 31, 2001, the Company had $4,870,000 outstanding with Bank
One. The revolving line of credit provided for a maximum borrowing amount
of $4,760,000 at variable interest rates based on eligible accounts
receivable. At December 31, 2001, the Company had an overdraft of
$110,000. The Company did not have an authorized overdraft facility with
Bank One, however the bank allowed an overdraft of up to $500,000 on a
regular basis for approximately ten weeks. At December 31, 2001 and
thereafter, the Company was not in compliance with the covenants contained
in the revolving line of credit agreement.
As a result of the default on the loan covenants governing the company's
credit line facility, Bank One restricted the company's repayment of
certain subordinated loans and notes payable which affected payments to
the Business Development Bank of Canada, Roger Walters and Denise
Dunne-Fushi.
9. CONVERTIBLE DEBENTURE
Pursuant to a share purchase agreement dated December 5, 2002, the Company
entered into an agreement (the "12% Senior Secured Convertible Debenture
Agreement"), with a syndicate of investors for debentures of up to
$3,000,000. The first debenture of $800,000 was purchased together with
50,285,714 warrants on closing. The debenture will become due twelve
months from the date of issuance. The investors will have the right to
acquire up to $800,000 worth of the Company's common stock at a price the
lesser of $.0175 or 50% of the average of the three lowest prices on three
separate trading days during the sixty-day trading period prior to
conversion. The warrants are exercisable at any time and in any amount
until December 5, 2009 at a purchase price of $.0175 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock. On July 22, 2003, 12,571,428 of
these warrants were repriced from $.0175 to $.00137 per share. On October
14, 2003, 12,571,428 of these warrants were repriced from $.00137 to
$.00075 per share.
On December 18, 2002, the Company entered into a share purchase agreement
with Tazbaz Holdings Limited for the issuance and sale by the Company of a
$100,000 principal amount Convertible Debenture and 5,625,000 warrants to
purchase shares of the Company's common stock. The debenture will become
due twelve months from the date of issuance. Tazbaz Holdings Limited will
have the right to acquire up to $100,000 worth of our common stock at a
price the lesser of $.0175 or 50% of the average of the three lowest
prices on three separate trading days during the sixty-day trading period
prior to conversion. The warrants are exercisable at any time and in any
amount until December 18, 2009 at a purchase price of $.0175 per share.
The Company is required to pay interest to Tazbaz Holdings Limited on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock.
The proceeds of $900,000 received by the company were allocated between
the warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants in the amount of
$707,050. The value of the beneficial conversion feature was determined to
be $2,898,328 which was credited to paid in capital and charged to
earnings as interest expense in 2002.
During the three months ended March 31, 2003, the company sold an
additional $875,000 in convertible debentures along with 84,285,714
warrants. The debenture will become due twelve months from the date of
issuance. The investors will have the right to acquire up to $875,000
worth of the Company's common stock at a price the lesser of $.0175 or 50%
of the average of the three lowest prices on three separate trading days
during the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of seven years from
closing at a purchase price of $.0175 per share. The Company is required
to pay interest to the debenture holder on the aggregate unconverted and
outstanding principal amount of the debenture at the rate of 12% per
annum, payable on each conversion date and maturity date in cash or shares
of common stock. On June 30, 2003, 45,714,286 of these warrants were
repriced from $.0175 to $.00875 per share. On July 22, 2003, 22,857,143 of
these warrants were repriced from $.0175 to $.00137 per share. On October
14, 2003, 108,349,371 of these warrants were repriced from $.00137 to
$.00075 per share.
F-18
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
The proceeds of $875,000 received by the company were allocated between
the warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants in the amount of
$446,285.
At March 31, 2003, the value of the beneficial conversion feature on all
issued convertible debentures was determined to be $3,935,684 which was
credited to paid in capital and charged to earnings as interest expense.
During the three months ended June 30, 2003, the company sold an
additional $575,000 in convertible debentures along with 109,777,942
warrants. The debenture will become due twelve months from the date of
issuance. The investors will have the right to acquire up to $575,000
worth of the Company's common stock at a price the lesser of $.0175 or 50%
of the average of the three lowest prices on three separate trading days
during the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of seven years from
closing at purchase prices ranging from $.0175 to $.00137 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock. On October 14, 2003, 85,492,228 of
these warrants were repriced from $.00137 to $.00075 per share.
The proceeds of $575,000 received by the company were allocated between
the warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants in the amount of
$321,167.
At June 30, 2003, the value of the beneficial conversion feature on all
issued convertible debentures was determined to be $539,142 which was
credited to paid in capital and charged to earnings as interest expense.
During the three months ended September 30, 2003, the company sold an
additional $200,000 in convertible debentures along with 123,588,850
warrants. The debenture will become due twelve months from the date of
issuance. The investors will have the right to acquire up to $575,000
worth of the Company's common stock at a price the lesser of $.0175 or 50%
of the average of the three lowest prices on three separate trading days
during the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of seven years from
closing at purchase prices ranging from $.0175 to $.00075 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock. On October 14, 2003, 120,734,708
of these warrants were repriced from $.00137 to $.00075 per share.
The proceeds of $200,000 received by the company were allocated between
the warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants in the amount of
$116,100.
At September 30, 2003, the value of the beneficial conversion feature on
all issued convertible debentures was determined to be $1,336,102 which
was credited to paid in capital and charged to earnings as interest
expense.
10. LONG-TERM DEBT
i) September 30, 2003
At September 30, 2003, the company had a loan balance of $249,356 with
Terry Lyons and one principal payment of $10,000 has been made.
ii) December 31, 2002
At December 31, 2002, the Company had a loan balance of $31,397 with the
Business Development Bank of Canada. The loan was assigned to the Company
when it combined with TidalBeach Inc. in November 2000. The loan is
secured by a general security agreement with monthly payments of $950.00
and bears interest at 12.5%.
On December 5, 2002, Morrison Financial Services Limited purchased
additional debt belonging to the Business Development Bank of Canada of
approximately $440,000 in consideration of $100,000.
Morrison Financial Services Limited charged the company a 15% fee or
$45,000 for the discount negotiation with the Business Development Bank of
Canada. The discount amount of $341,467 was recognized by the company as
debt forgiveness and the fee of $45,000 was netted against this amount for
total debt forgiveness of $296,467.
F-19
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
In May 2002, the company secured a loan of $259,356 from an individual,
Terry Lyons which was secured by the company's IRS refund. The company
paid a placement fee of 10% to Mr. Lyons. Although the company received
its IRS refund in July 2002, Mr. Lyons agreed to an extension of the loan
until October 31, 2003. The loan is payable in twelve monthly payments of
$21,613 beginning November 30, 2002 and bears interest at 30% per annum.
This loan is subordinated to Morrison Financial Services Limited and no
principal payments have been made.
iii) December 31, 2001
At December 31, 2001, the Company had $419,079 in subordinated debt
outstanding to the Business Development Bank of Canada. At December 31,
2001 and thereafter, the Company was not in compliance with the covenant
contained in the loan agreements. The Business Development Bank of Canada
agreed to postpone principal repayment of its subordinated loans until
March 2002.
Sept 30, December 31, December 31,
2003 2002 2001
$ $ $
a) Included therein:
A loan with Business Development Bank of Canada ("BDC") secured by a
general security agreement at the bank's floating base rate plus a
variance of 6% per year on the principal outstanding. On July 17, 2003,
the Company settled the loan amount of approximately $38,000 including
accrued interest for a one-time payment of $10,000. The discount amount
of approximately $30,565 was recognized as debt forgiveness -- 31,397 419,079
A loan with T. Lyons payable in monthly payments of $21,613 which were
to begin November 30, 2002 249,356 259,356 --
and bearing interest at 30% per annum. This loan is subordinated to
Morrison Financial Services Limited and one payment of $10,000 was made
in August 2003
A loan with Bank One payable in 19 remaining monthly payments of
$13,889 plus interest based on prime
This loan was paid in full on March 31, 2002 -- -- 263,889
Various capital leases with various payment terms and
interest rates 50,162 174,191 427,749
-------- ---------- - ---------
299,518 464,944 1,110,717
Less: current portion 284,035 380,188 528,285
-------- ---------- - ---------
$ 15,483 $ 84,756 $ 582,432
======== ========== = =========
b) Future principal payments obligations as at September 30, 2003, were as
follows:
2003 199,502
2004 100,016
2005 --
2006 --
2007 --
----------
$ 299,518
==========
c) Interest expense related to long-term debt was $31,427 for the three
months ended September 30, 2003 ($63,518 for the six months ended June
30, 2003). Interest expense related to long-term debt was $138,240 for
the year ended December 31, 2002 ($99,651 in 2001).
F-20
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
11. NOTES PAYABLE
a) On August 1, 2002, the company restructured its note payable to Roger
Walters, reducing the principal from $675,000 to $240,000 in
consideration of the issuance of 1,000,000 shares of its common stock.
The company agreed to issue and register the shares upon obtaining
shareholder approval of an amendment to its Articles of Incorporation
increasing its authorized capital stock. Principal payments of $4,000
will be made monthly and started September 1, 2002 until August 1,
2007. This loan is non-interest bearing.
Also as part of the restructuring, the company agreed to price
protection on the 1,756,655 shares that were issued to Mr. Walters in
January 2002. In the event that the bid price is less than $.27 per
share when Mr. Walters seeks to sell his shares in an open market
transaction, the Company will be obligated to issue additional shares
of unregistered common stock with a value equal to the difference
between $.27 per share and the closing bid price to a floor of $.14 per
share.
The company has accounted for its modification in the terms of its
notes payable as troubled debt restructuring. Accordingly, the company
has recognized a gain on the restructuring of the old debt based upon
the difference between the total carrying value of the original debt
(with any accrued interest) and the total future cash flows of the
restructured debt. The gain on the restructured debt, included in
expenses in the consolidated statement of operations is as follows:
Old debt
Principal balance $ 675,000
Accrued interest -
-------
Carrying value 675,000
Common stock issued (2,631,185 shares at $0.0942) (247,858)
Principle balance of new debt (240,000)
Interest (payable through maturity) -
-------
Gain on restructured debt $ 187,142
=======
All future cash payments under the modified terms will be accounted for
as reductions of note payable and no interest expense will be
recognized for any period between the closing date and the maturity
date.
The loan is subordinated to Morrison Financial Services Limited and the
12% Senior Secured Convertible Debenture holders. The company has not
made any principal payments to Mr. Walters since December 2002 and is
currently in default of the loan agreement. In the event that the
company defaults on payment, the principal balance will bear interest
at 12% per annum until payment is made.
b) On August 1, 2002, the company restructured its note payable to Denise
Dunne-Fushi, reducing the principal from $1,740,536 to $600,000 in
consideration of the issuance of 4,000,000 shares of its common stock.
In addition a prior debt conversion of $225,000 that was to be paid in
capital was forgiven. The company agreed to issue and register the
shares upon obtaining shareholder approval of an amendment to its
Articles of Incorporation increasing its authorized capital stock.
Principal payments of $10,000 per month will begin November 1, 2002
bearing 5% interest until October 1, 2007. In addition, the company
agreed to cover the monthly expense associated with Ms. Dunne-Fushi's
family health benefits until May 2004 and vehicle lease until August
2004.
The company has accounted for its modification in the terms of its
notes payable as troubled debt restructuring. Accordingly, the company
has recognized a gain on the restructuring of the old debt based upon
the difference between the total carrying value of the original debt
(with any accrued interest) and the total future cash flows of the
restructured debt. The gain on the restructured debt, included in
expenses in the consolidated statement of operations is as follows:
F-21
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
Old debt
Principal balance $ 1,740,536
Accrued interest -
Capital stock payable 225,000
---------
Carrying value 1,965,536
Common stock issued (4,000,000 shares at $0.0942) (376,800)
Principle balance of new debt (600,000)
Interest, insurance and vehicle lease costs (98,987)
---------
Gain on restructured debt $ 889,749
=========
All future cash payments under the modified terms will be accounted for
as reductions of note payable and no interest, insurance or vehicle
expense will be recognized for any period between the closing date and
the maturity date.
The loan is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and the 12% Senior
Secured Convertible Debenture holders. The company has not made any
principal payments to Ms. Dunne-Fushi since December 2002 and is
currently in default of the loan agreement. In the event of default,
Ms. Dunne-Fushi has the option of enforcing the security she holds.
Sept 30, December 31, December 31,
2003 2002 2001
$ $ $
Note Payable to Roger Walters 224,000 224,000 750,000
Note Payable to Denise Dunne 639,503 670,957 1,740,000
--------- --------- ----------
863,503 894,957 2,490,000
Less: current portion 179,607 208,254 150,000
--------- --------- ----------
$683,896 $686,703 $2,340,000
========= ========= ==========
c) Capital repayments as at September 30, 2003
2003 179,607
2004 193,911
2005 182,250
2006 176,250
2007 131,485
----------
$ 863,503
==========
12. CAPITAL STOCK
a) Authorized
800,000,000 Common stock, no par value (100,000,000 at
December 31, 2002)
1,000,000 Preferred stock, issuable in series, rights to be
determined by the Board of Directors
b) Issued
On June 8, 1999, the company was successful in its Initial Public
Offering. 1,100,000 common stock were issued at an issuance price of
$5.00 per share. Net proceeds received, after all costs, was $3,442,683.
The company trades on the OTC:BB under the trading symbol "THTH-F". As
part of the Initial Public Offering, the underwriters exercised the over-
allotment, resulting in 107,000 common stock being issued for net
proceeds of $465,000. Deferred costs of $1,351,365, which were incurred
as part of the completion of the Initial Public Offering, have been
applied against the proceeds raised by the offering, and are included in
the net proceeds.
F-22
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
On June 30, 1999, 163,767 common stock were issued in conjunction with
the acquisition of Cad Cam Inc., with a carrying value of $500,000.
During 2000, the company effected two acquisitions accounted for as
pooling of interest and therefore the capital stock of the company
outstanding at January 1, 1999 and December 31, 1999 have been restated
to reflect the aggregate capital stock and shareholder equity amounts as
follows:
# $
Original Balance as of December 31, 1998 1,717,875 1,448,368
Issuance of Shares for pooling of interest 777,260 344,576
--------- ---------
Revised Balance as of December 31, 1998 2,495,135 1,792,944
========= =========
As part of the acquisition of ObjectArts Inc., the company issued 196,800
common shares for a total consideration of $837,151 on the conversion of
debt to common shares.
On April 25, 2000, 133,333 common stock were issued for the purchase of
MicroTech Professionals Inc., for a total consideration of $500,000.
During 2000, 300,000 common stock were issued as partial consideration
for the purchase of shares of E-Wink Inc. for a value of $975,000.
On August 22, 2000, 1,063,851 shares of common stock and 560,627 warrants
were issued in a private placement for net proceeds of $2,333,715 (gross
proceeds of $2,681,600).
During 2000, 3,533,111 common stock were issued for services rendered
totaling $3,160,288. An amount of $110,000 has been included in the
acquisition of MicroTech and the balance of $3,050,288 has been included
in financing expenses as of December 31, 2000. The shares were valued at
the date of issue based upon the trading price.
During 2000, 1,694,343 common stock were issued on the conversion of
Preferred Stock.
The company has issued 1,800,000 common shares of the company in
consideration of services rendered related to the acquisition of various
subsidiaries. These shares are included in common stock issued in
consideration of services in the amount of $1,125,000 and have been
included in Acquisition costs and financing expenses for December 31,
2000.
On September 13, 2000, Thinkpath Inc. entered into an agreement with
Burlington Capital Markets Inc. to aid the company in further
acquisitions. The agreement with Burlington Capital Markets Inc.
(Burlington) provided for the issuance of 250,000 shares of our common
stock at a cash purchase price of $.01 per share upon signing of the
agreement. We further agreed to issue 250,000 at a cash price of $.01 per
share upon the successful completion of the Company's first acquisition
initiated through Burlington. We further agreed to issue warrants to
purchase an aggregate of 400,000 shares of our common stock according to
the following schedule: (i) 100,000 shares at an exercise price of $5.00
per share, exercisable at any time after October 13, 2000; (ii) 100,000
shares at an exercise price of $7.00 per share, exercisable at any time
after November 13, 2000; (iii) 100,000 shares at an exercise price of
$9.00 per share, exercisable at any time after December 13, 2000, and
(iv) 100,000 shares at an exercise price of $11.00 per share, exercisable
at any time after February 13, 2001. Such warrants were exercisable in
whole or in part 5 years from the respective vesting date and contained a
cashless exercise provision and registration rights.
Compensation was to be paid to Burlington at a monthly fee of $10,000 for
the term of the agreement with a minimum notice period for termination of
six months. Through Burlington, the company began to pursue the
acquisition of Aquila Holdings Limited and a letter of intent was signed
on October 4, 2000. The company and Aquila subsequently agreed to
postpone the transaction. The agreement with Burlington was subsequently
terminated and no warrants were issued. In the aggregate, Burlington
received 425,000 shares of our common stock and $10,000 pursuant to the
agreement. The additional 175,000 shares constituted compensation to
Burlington Capital Markets Inc. as a settlement on the termination of the
agreement for their entitlement to the monthly fees and the arrival at a
letter of intent for the acquisition of Aquila. The difference between
the fair market value of the shares and the purchase price of $.01
represents the value agreed between the Company and Burlington for its
acquisition services. The total of 425,000 common shares has been
reflected as issued for an aggregate cost of $717,250 based on the stock
price at the date of the performance was complete. This amount has been
expensed in the year ended December 31, 2000 and is included in financing
expenses.
F-23
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
During January 2001, the Company agreed to issue 250,000 warrants to
acquire shares of the company at $1.50 and to re-price a total of 330,693
options to an exercise price of $1.00. In consideration of the foregoing,
a total of 275,000 shares were issued for an amount of $275,000 in cash.
The terms of the warrants are indicated in note 12(e). The value of the
repricing of the warrants and the new warrants issued have been treated
as the part of the allocation of the proceeds on the issuance of the
common stock.
On June 6, 2001, the Company amended its Articles of Incorporation to
increase its authorized common stock from 15,000,000 to 30,000,000.
During the year December 31, 2001, the Company issued 400,000 shares of
its common stock in consideration of $203,000 in cash.
During the year ended December 31, 2001, the Company issued 30,632 shares
of its common stock in consideration of legal services, 300,000 shares of
its common stock in consideration of investment banking services, 596,667
shares to reduce common stock payable of $709,005, and 93,883 shares in
settlement of accounts payable. The shares were valued at the date of
issue based upon the trading price.
On May 24, 2002, the company entered into a loan agreement with Tazbaz
Holdings Inc., an Ontario Corporation. Pursuant to the agreement, Tazbaz
securitized an overdraft position of the company with Bank One in the
amount of $650,000 in consideration of an aggregate of 3,221,126 shares
of its common stock.
On June 24, 2002, the company entered into consulting agreements with
each of Mark Young and George Georgiou pursuant to which Messrs. Young
and Georgiou shall perform consulting services with respect to corporate
and debt restructuring. In consideration for such services the company
issued 2,250,000 and 1,000,000 shares of its common stock to Messrs.
Young and Georgiou, respectively. Pursuant to the agreement the company
registered such shares of common stock under an S-8 registration
statement. The shares were valued at the date of issue based upon the
trading price.
On October 1, 2002, the company entered into consulting agreements with a
group of seven consultants with expertise in restructuring, financing,
legal and management services for one-year terms to assist the company
with its restructuring and refinancing efforts. In consideration for such
services the Company issued warrants to purchase 10,600,000 shares of our
common stock at an exercise price of $0.025 per share.
On October 4, 2002, the company's securities were delisted from The
Nasdaq SmallCap Market, for failure to comply with the minimum bid price
or net tangible assets requirements for continued listing, as set forth
in Nasdaq's Marketplace Rule 4310(c)(4). The company also failed to meet
the initial inclusion requirements under Nasdaq's Marketplace Rule
4310(c)(2)(A) including minimum stockholders' equity of $5 million,
market capitalization of $50 million or net income of $750,000 (excluding
extraordinary or non-recurring items) in the most recently completed
fiscal year or in two of the last three most recently completed fiscal
years.
On October 16, 2002, the Company amended its Articles of Incorporation to
increase its authorized common stock from 30,000,000 to 100,000,000.
During the year ended December 31, 2002, the Company issued 588,235
shares of its common stock as payment of an executive bonus in the amount
of $100,000, 8,387,840 shares to reduce common stock payable of
$1,098,955, and 2,393,783 shares in settlement of various accounts
payable and liabilities in the amount of $334,348.
During the year ended December 31, 2002, the company issued both shares
of its common stock and warrants as payment for a variety of services:
1,230,000 shares in consideration of investor relations and marketing
services in the amount of $79,000; 1,651,495 shares and warrants in
consideration of finance services in the amount of $719,664; 546,531
shares in consideration of restructuring services in the amount of
$45,321; 3,250,000 shares pursuant to the June 24, 2002 consulting
agreements with Mr. Young and Mr. Georgiou in the amount of $520,000; and
7,200,000 shares on the exercise of warrants pursuant to the October 1,
2002 consulting agreements in the amount of $192,500. The shares were
valued at the date of issue based upon the trading price.
On January 24, 2003, the company amended its Articles of Incorporation to
increase its authorized common stock from 100,000,000 to 800,000,000.
F-24
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
On January 28, 2003, the company registered an aggregate of 12,427,535
shares of common stock, no par value per share, issued to Declan A.
French, the company's Chief Executive Officer, pursuant to an amendment
to his employment agreement.
On February 7, 2003, the company entered into a consulting agreement
with Rainery Barba, who shall perform legal and advisory services for a
period of one year. In consideration for such services the company
registered an aggregate of 4,000,000 shares of common stock, no par
value per share.
On February 7, 2003, the company entered into a consulting agreement
with Dailyfinancial.com Inc. who shall perform corporate consulting
services in connection with mergers and acquisitions, corporate finance
and other financial services. In consideration for such services the
company issued 4,200,000 shares of common stock, no par value per
share.
During the three months ended March 31, 2003, the company issued
3,502,695 shares of its common stock in settlement of various accounts
payable and liabilities in the amount of $80,147.
During the three months ended March 31, 2003, the company issued both
shares of its common stock and warrants as payment for a variety of
services: 2,280,000 shares and warrants in consideration of finance
services in the amount of $57,000; 4,000,000 shares in consideration of
legal services pursuant to the February 7, 2003, agreement with Rainery
Barba; 4,200,000 shares in consideration of financial services pursuant
to the February 7, 2003 agreement with Dailyfinancial.com Inc.; 500,000
shares in consideration of financial services.
During the three months ended March 31, 2003, the company issued
37,966,363 shares of its common stock upon the conversion of 12% Senior
Secured Convertible Debentures in the amount of $61,012.
During the three months ended June 30, 2003, the company issued
1,067,624 shares of its common stock in settlement of various accounts
payable and liabilities in the amount of $8,434.
During the three months ended June 30, 2003, the company issued
189,912,747 shares of its common stock upon the conversion of 12%
Senior Secured Convertible Debentures in the amount of $376,900.
During the three months ended September 30, 2003, the company issued
486,027,709 shares of its common stock upon the conversion of 12%
Senior Secured Convertible Debentures in the amount of $560,120.
c) Liabilities payable in common stock
During the year ended December 31, 2001, the company issued 316,667
shares to reduce a note payable of $625,000 to Denise Dunne related to
the purchase of MicroTech Professionals Inc. The company also issued
280,000 shares in relation to a settlement with an Njoyn employee. The
balance at December 31, 2001, represents $474,297 to Roger Walters in
settlement of a note payable, and $225,000 to Denise Dunne also in
settlement of a note payable.
During the year ended December 31, 2002, the company issued 4,387,840
shares of its common stock to reduce a note payable of $909,297 to
Roger Walters related to the purchase of CadCam Inc.
During the year ended December 31, 2002, the company issued 4,000,000
shares of its common stock to reduce a note payable of $1,140,536 to
Denise Dunne related to the purchase of MicroTech Professionals Inc.
d) Preferred Stock
On December 30, 1999, 15,000 shares of series A, 8% cumulative,
convertible, preferred stock, no par value were issued in a private
placement for gross proceeds of $1,500,000. The preferred stock were
convertible into common stock at the option of the holders under
certain conditions, at any time after the effective date of the
registration statement. The conversion price was based on the trading
price at December 30, 1999 or 80% of the average of the ten trading
days immediately preceding the conversion of the respective shares of
Series A, preferred stock. The stockholders of the Series A, 8%
cumulative, convertible stock were entitled to receive preferential
cumulative quarterly dividends in cash or shares at a rate of 8% simple
F-25
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
interest per annum on the stated value per share. The intrinsic value
of the conversion price at date of issue was reflected as a dividend of
$138,000.
At any time after the effective date of the registration statement,
Thinkpath Inc. had the option to redeem any or all of the shares of
Series A, 8% cumulative, convertible, preferred stock by paying to the
holders a sum of money equal to 135% of the stated value of the
aggregate of the shares being redeemed if the conversion price was less
than $2.00.
Thinkpath Inc. held the option to cause the investors in the December
30, 1999 placement offering to purchase an additional $500,000 worth of
Series A, 8% cumulative, convertible, preferred stock upon the same
terms as described above. This right was exercised in July, 2000.
On April 16, 2000, 2,500 shares of Series A, 8% cumulative,
convertible, preferred stock, no par value were issued in a private
placement for gross proceeds of $250,000. The proceeds were reduced by
any issue expenses.
On April 16, 2000, 1,500 shares of Series B, 8% cumulative,
convertible, preferred stock, no par value were issued in a private
placement for gross proceeds of $1,500,000. The proceeds were reduced
by any issue expenses.
On July 7, 2000, 5000 shares of Series A, 8% cumulative, convertible,
preferred stock, no par value were issued in a private placement for
gross proceeds of $500,000. The proceeds were reduced by any issue
expenses.
The preferred stock were convertible into common stock at the option of
the holders under certain conditions, at any time after the effective
date of the registration statement.
As of June 30, 2003, there were no Series A or B Convertible Preferred
Stock outstanding.
Pursuant to a share purchase agreement dated April 18, 2001, the
Company issued 1,105 shares of Series C 7% Cumulative Convertible
Preferred Stock (Series C Preferred Stock). Each share of Series C
Preferred Stock had a stated value of $1,000 per share. The shares of
Series C Preferred Stock were convertible into shares of the Company's
common stock at the option of the holders, at any time after issuance
until such shares of Series C Preferred Stock were manditorily
converted or redeemed by the Company, under certain conditions. The
Company was required to register 200% of the shares of common stock
issuable upon the conversion of the 1,105 shares of Series C Preferred
Stock. In addition, upon the effective date of such registration
statement, the Company was obligated to issue to the holders of Series
C Preferred Stock an aggregate of 500 shares of Series C Preferred
Stock in consideration for $500,000, under certain conditions.
The number of shares of the Company's common stock into which the
Series C Preferred stock was convertible into that number of shares of
common stock equal to (i) the sum of (A) the stated value per share and
(B) at the holder's election, accrued and unpaid dividends on such
share, divided by (ii) the Conversion Price". The "Conversion Price"
was the lesser of (x) 87.5% of the average of the 5 lowest daily volume
weighted average prices of the Company's common stock during the period
of 60 consecutive trading days immediately prior the date of the
conversion notice; or (y) 90% of the average of the daily volume
weighted average prices during the period of the 5 trading days prior
to the applicable closing date ($.4798 with respect to the 1,105 shares
of Series C 7% Preferred Stock issued and outstanding). The Conversion
Price was subject to certain floor and time limitations.
During the year ended December 31, 2001, the Company issued 3,864,634
common stock on the conversion of 1,050 Series A preferred stock, 750
Series B preferred stock and 285 Series C preferred stock. The Company
paid dividends of $723,607 on the conversions.
During the year ended December 31, 2002, the Company issued 23,278,448
shares of its common Stock on the conversion of 945 Series C preferred
stock. The Company paid dividends of $100,387 on the conversions. As of
June 30, 2003, there were no Series C preferred stock outstanding.
F-26
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
The proceeds received on the issue of Class C preferred shares have
been allocated between the value of detachable warrants issued and the
preferred shares outstanding on the basis of their relative fair
values. Paid in capital has been credited by the value of the warrants
and retained earnings charged for the amount of preferred dividends
effectively paid. The conversion benefit existing at the time of issue
of the preferred Class C shares has been computed and this amount has
been credited to paid in capital for the Class C preferred shares and
charged to retained earnings as dividends on the Class C preferred
shares.
e) Warrants
On December 30, 1999, 475,000 warrants were issued in conjunction with
the private placement of the Series A, preferred stock. They are
exercisable at any time and in any amount until December 30, 2004 at a
purchase price of $3.24 per share. These warrants have been valued at
$1,091,606 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.33%. This amount has been
treated as a cumulative effect adjustment to retained earnings. For
purposes of earnings per share, this amount has been included with
preferred share dividend in the 2000 financial statements.
In connection with the Initial Public Offering, the underwriters
received 110,000 warrants. They are exercisable at a purchase price of
$8.25 per share until June 1, 2004.
On April 16, 2000, we issued 50,000 warrants in connection with a
private placement of Series A stock and 300,000 warrants on the issue
of Class B preferred shares. The warrants were issued with a strike
price of $3.71 and expire April 16, 2005. These warrants have been
valued at $939,981 based on the Black Scholes model utilizing a
volatility rate of 100% and a risk-less interest rate of 6.18%. This
amount has been treated as a preferred share dividend in the 2000
financial statements.
In connection with the private placement of Series B preferred stock
225,000 warrants were issued. They are exercisable at a purchase price
of $3.58. These warrants have been valued at $533,537 based on the
Black Scholes model utilizing a volatility rate of 100% and a risk-less
interest rate of 6.13%. This amount has been treated as a preferred
share dividend in the 2000 financial statements.
In 2000, in connection with the purchase of the investment in E-Wink
500,000 warrants were issued. They are exercisable at a purchase price
of $3.25 and expire March 6, 2005. These warrants have been valued at
$1,458,700 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.50%. This amount has been
treated as part of the cost of the E-Wink investment.
In 2000, in connection with the private placement of August 22, 2000,
560,627 warrants were issued. They are exercisable at a purchase price
of $2.46 and expire August 22, 2005. These warrants have been valued at
$1,295,049 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.13%. This amount has been
treated as an allocation of the proceeds on the common stock issuance.
On January 26, 2001, the Company: (i) repriced warrants to purchase up
to 100,000 shares of its common stock, which warrant was issued to a
certain investor in our April 2000 private placement offering of Series
B 8% Cumulative Preferred Stock, so that such warrant is exercisable at
any time until April 16, 2005 at a new purchase price of $1.00 per
share; (b) repriced warrants to purchase an aggregate of up to 280,693
shares of its common stock, which warrants were issued to the placement
agent, certain financial advisors, and the placement agent's counsel in
our August 2000 private placement offering of units, so that such
warrants are exercisable at any time until August 22, 2005 at a new
purchase price of $1.00 per share; and (c) issued warrants to purchase
up to 250,000 shares of its common stock exercisable at any time and in
any amount until January 26, 2006 at a purchase price of $1.50 per
share. In February 2001, 150,000 of such warrants were exercised by KSH
Investment Group, the placement agent in the Company's August 2000
private placement offering. The exercise prices of the revised and
newly issued warrants are equal to, or in excess of, the market price
of our common stock on the date of such revision or issuance.
F-27
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
Following verbal agreements in December 2000, on January 24, 2001, the
company signed an agreement with The Del Mar Consulting Group, a
California corporation, to represent it in investors' communications
and public relations with existing shareholders, brokers, dealers and
other investment professionals. The company issued a non-refundable
retainer of 400,000 shares to Del Mar and are required to pay $4,000
per month for on-going consulting services. In addition, Del Mar has a
warrant to purchase 400,000 shares of common stock at $1.00 per share
and 100,000 shares at $2.00 which expires January 24, 2005 and which
are exercisable commencing August 1, 2001. As the agreement to issue
the non- refundable retainer was reached in December 2000, the 400,000
shares with a value of $268,000 has been included in the shares issued
for services rendered and has been included in financing expenses for
December 31, 2000. The commitment to issue the non-refundable deposit
was effected in December 2000. The value of the warrants of $216,348
has been included in paid in capital in January 2001 and the expense
was reflected over the six month period ending August 1, 2001. In April
2001, the warrants were cancelled and new warrants were issued which
are exercisable at $0.55. 200,000 of the warrants are exercisable
commencing April 2001 and the balance are exercisable commencing August
1, 2001. The value of the change in the warrants of $29,702 has been
included in the paid in capital in April 2001 and the additional
expense was amortized in the period ending August 1, 2001.
During the year ended December 31, 2001, the company issued 22,122
shares to the Business Development Bank of Canada on the exercise of
warrants at $1.00.
During the year ended December 31, 2001, the Company issued 723,436
warrants to the Series C Preferred Stock investors of which 663,484
have a strike price of $0.54 and expire on April 18, 2005. The balance
of 59,952 have a strike price of $0.63 and expire on June 8, 2005. As
of December 31, 2002, all 723,436 warrants issued in connection with
the purchase of the Series C Preferred Stock remain outstanding and
none have been exercised.
On May 24, 2002, the company entered into an agreement with Tazbaz
Holdings Limited, pursuant to which Tazbaz securitized an overdraft
position of the company with Bank One in the amount of $650,000 until
the Bank's repayment on December 5, 2002. Pursuant to this agreement
the company issued 10,000,000 warrants; 6,000,000 of which are
exercisable at any time and in any amount until November 15, 2009 at a
purchase price of $.08 per share, and 4,000,000 of which are
exercisable at any time and in any amount until November 15, 2009 at a
purchase price of $.04 per share.
On October 1, 2002, the company entered into consulting agreements with
a group of seven consultants with expertise in restructuring,
financing, legal and management services for one-year terms to assist
the company with its restructuring and refinancing efforts. In
consideration for such services the company issued 10,600,000 warrants
which are exercisable at any time and in any amount until September 30,
2003 at a purchase price of $.025 per share. As of December 31, 2002,
7,200,000 warrants had been exercised with net proceeds of $192,500.
On December 5, 2002, the company issued 50,285,714 warrants to holders
of the 12% Senior Secured Convertible Debentures which are exercisable
at any time and in any amount until December 5, 2009 at a purchase
price of $.0175 per share. On July 22, 2003, 12,571,428 of these
warrants were repriced from $.0175 to $.00137 per share. On October 14,
2003, 12,571,428 of these warrants were repriced from $.00137 to
$.00075 per share.
Pursuant to the December 18, 2002 convertible debenture, the company
issued 5,625,000 warrants to Tazbaz Holdings Limited, which are
exercisable at any time and in any amount until December 18, 2009 also
at a purchase price of $0.175 per share.
During the three months ended March 31, 2003, the company issued
84,285,714 warrants to holders of the 12% Senior Secured Convertible
Debentures which are exercisable at any time and in any amount for
seven years from the date of closing at a purchase price of $.0175 per
share. On June 30, 2003, 45,714,286 of these warrants were repriced
from $.0175 to $.00875 per share. On July 22, 2003, 22,857,143 of these
warrants were repriced from $.0175 to $.00137 per share. On October 14,
2003, 108,349,371 of these warrants were repriced from $.00137 to
$.00075 per share.
During the three months ended June 30, 2003, the company issued
109,777,942 warrants to holders of the 12% Senior Secured Convertible
Debentures which are exercisable at any time and in any amount for
seven years from the date of closing at purchase prices ranging from
$.0175 to $.00137 per share. On October 14, 2003, 85,492,228 of these
warrants were repriced from $.00137 to $.00075 per share.
During the three months ended September 30, 2003, the company issued
123,588,850 warrants to holders of the 12% Senior Secured Convertible
Debentures which are exercisable at any time and in any amount for
seven years from the date of closing at purchase prices ranging from
$.0175 to $.00137 per share. On October 14, 2003, 120,734,708 of these
warrants were repriced from $.00137 to $.00075 per share.
F-28
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
f) Stock Options
The company had outstanding stock options issued in conjunction with
its long-term financing agreements for 22,122 common stock which were
exercised in July 2001, the cost of which has been expensed prior to
January 1, 1999, and additional options issued to a previous employee
of the company for 200,000 shares exercisable at $2.10, of which 18,508
were exercised during 2000. The balance of 181,492 options remain
outstanding.
During 1999, 250,500 options to purchase shares of the company were
issued to related parties. The options are exercisable at $3.19.
In connection with the acquisition of Cad Cam Inc. 100,000 options to
purchase shares of the company were delivered in quarterly installments
of 25,000 options each, starting January 1, 2000. The exercise amounts
ranged from $2.12 to $3.25. The exercise price was amended to $1.00 and
these options will be exercisable between April 4, 2001 to 2004. The
cost of re-pricing of these options totaling $100,000 has been recorded
in Acquisition costs and financing expenses for the year ended December
31, 2000.
In July 1999, the directors of the company adopted and the stockholders
approved the adoption of the company's 1998 Stock Option Plan. In May
2000, the directors approved the adoption of the 2000 Stock Option
Plan. In June 2001, the directors approved the adoption of the 2001
Stock Option Plan. Each of the plans provides for the issuance of
435,000 options. In October 2002, the directors of the company adopted
and the stockholders approved the adoption of the company's 2002 Stock
Option Plan which provides for the issuance of 6,500,000 options.
The plans are administrated by the Compensation Committee or 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 and options may be
granted to officers, directors, consultants, key employees, advisors
and similar parties who provide their skills and expertise to the
company.
Options granted under the plans generally require a three-year vesting
period, and shall be at an exercise price that may not be less than the
fair market value of the common stock on the date of the grant. Options
are non-transferable and if a participant ceases affiliation with the
company by reason of death, permanent disability or retirement at or
after age 65, the option remains exercisable for one year from such
occurrence but not beyond the option's expiration date. Other types of
termination allow the participant 90 days to exercise the option,
except for termination for cause, which results in immediate
termination of the option.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the company become available again
for issuance under the plans, subject to applicable securities
regulation.
The plans may be terminated or amended at any time by the Board of
Directors, except that the number of common stock reserved for issuance
upon the exercise of options granted under the plans may not be
increased without the consent of the stockholders of the company.
Included in the options granted in 2000 were 260,000 options issued to
related parties in December 2000. The options are exercisable at $0.70
and expire December 2005.
F-29
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
13. FINANCING EXPENSES
Financing expenses represent the following;
a) Acquisition costs incurred which are not related to a successfully
completed acquisition and the costs incurred on the merger with entities
treated as a pooling of interest.
b) Financing expenses include consulting services for financing and the
cost of options and warrants.
14. RESTRUCTURING COSTS
i) December 31, 2002
At the end of December 31, 2001 the Company had a restructuring reserve
balance of $79,118 as a result of certain of the Company's actions to
better align its cost structure with expected revenue growth rates. The
restructuring activities related to the closure of one training
location in London, Ontario resulting in costs to sever 3 employees
with long-term contracts until December 2002 and the lease commitment
for the premises in London Ontario. These long-term contracts do not
require the employees to provide services until the date of involuntary
termination. Other employees at the London location, without contracts,
were terminated during March 2001 and April 2001
The accrual was relieved throughout fiscal 2002 as severance payments
were completed. Details of the restructuring costs and reserve balance
is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance
non/cash December 31,2001 Costs December 31, 2002
Severance packages
London-Training Cash 66,518 -- (66,518) --
Lease cancellations
London-Training Cash 12,600 -- (12,600) --
------- ------- ------- -------
Commitments 79,118 -- (79,118) --
======= ======= ======= =======
ii) December 31, 2001
At the end of December 31, 2000 the Company had a restructuring reserve
balance of $571,339 as a result of certain of the Company's actions to
better align its cost structure with expected revenue growth rates. The
restructuring activities related to the closure of one training
location in London, Ontario resulting in costs to sever 3 employees
with long-term contracts until December 2002 and the lease commitment
for the premises in London Ontario. These long-term contracts do not
require the employees to provide services until the date of involuntary
termination. Other employees at the London location, without contracts,
have been terminated during March 2001 and April 2001. During the three
months ended September 2001, the lease cancellation costs for London
have been reduced by $30,700 and the severance costs for London have
been reduced by $56,000. These amounts represent settlements reached
with the landlord and one of the three employees with long term
contracts. The employee agreed to a reduction in the term of the
contract which resulted in a reduction of the liability of $56,000.
In February 2001, the company started to close down one of its research
and development (R&D) Operations located in Toronto. The company
continued to terminate employees until April 2001. The premises are
subject to a long-term lease and will be utilized for corporate needs
in the future. Restructuring costs include rent for the current period
for the Toronto R&D space. The company moved its operations into this
space at the end of October 2001.
F-30
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
The remaining accrual will be relieved throughout fiscal 2001, as
leases expire and severance payments, some of which are paid on a
monthly basis, are completed. Details of the restructuring costs and
reserve balance is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance
non/cash December 31, 2000 Costs December 31, 2001
Severance packages
London-Training Cash 435,173 50,696 (419,351) 66,518
Toronto-R&D Cash 17,640 (25,348) 7,708 --
Lease cancellations
London-Training Cash 118,526 27,159 (133,085) 12,600
Toronto-R&D Cash 439,714 (439,714) --
------- ------- ------- -------
Commitments 571,339 492,221 (984,442) 79,118
======= ======= ======= =======
15. DEFERRED INCOME TAXES AND INCOME TAXES
a) Deferred Income Taxes
The components of the future tax liability classified by source of
temporary differences that gave rise to the benefit are as follows:
Sept 30, December 31, December 31,
2003 2002 2001
$ $ $
Accounting amortization in excess of tax
amortization 9,875 9,875 9,875
Losses available to offset future income
taxes 3,915,449 3,113,829 2,909,873
Share issue costs 429,785 429,785 532,405
Adjustment cash to accrual method (148,461) (148,461) (496,879)
Investment tax credit -- -- --
--------- --------- ---------
4,206,648 3,405,028 2,955,274
Less: Valuation allowance 4,206,648 3,405,028 3,105,654
--------- --------- ---------
-- -- (150,380)
========= ========= =========
As part of the acquisitions of Cad Cam Inc. and MicroTech Professionals
Inc., there was a change of control which resulted in the subsidiaries
being required to change from the cash method to the accrual method of
accounting for income tax purposes.
b) Current Income Taxes
Current income taxes consist of:
Sept 30, December 31, December 31,
2003 2002 2001
$ $ $
Amount calculated at Federal and
Provincial statutory rates (2,863,476) (3,258,661) (3,533,461)
---------- ---------- ---------
Increase (decrease) resulting from:
Permanent differences 2,058,365 2,928,884 1,629,464
Timing differences -- -- (141,868)
Valuation allowance 791,745 299,374 2,895,654
--------- ---------- ---------
2,850,110 3,228,258 4,383,250
--------- ---------- ---------
Current income taxes 13,366 (30,403) 849,789
========= ========== =========
F-31
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
Issue expenses totaling approximately $1,300,000 may be claimed at the
rate of 20% per year until 2005. To the extent that these expenses
create a loss, the loss is available to be carried forward for seven
years from the year the loss is incurred. As the US subsidiaries have
been acquired by a non-US entity, the taxable income will be increased
by approximately $1,025,000 over the next two years as the company is
required to change its taxation method from the cash basis to the
accrual basis. The company has not reflected the benefit of utilizing
non-capital losses totaling approximately $12,320,000 or a capital
loss totaling $750,000 in the future as a deferred tax asset as at
September 30, 2003. As at the completion of the September 30, 2003
financial statements, management believed it was more likely than not
that the results of future operations would not generate sufficient
taxable income to realize the deferred tax assets.
16. OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the nine months ended September 30,
2003:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments (173,313) -- (173,313)
Adjustment to market value -- -- --
--------- ------- ---------
Other comprehensive income (loss) (173,313) -- (173,313)
========= ======== =========
Comprehensive income (loss) for the year ended December 31, 2002:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments (171,283) -- (171,283)
Adjustment to market value (300,747) -- (300,747)
--------- ------- ---------
Other comprehensive income (loss) (472,030) -- (472,030)
========= ======== =========
Comprehensive income (loss) for the year ended December 31, 2001:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments 209,506 - 209,506
Adjustment to market value (230,643) 69,193 (161,450)
--------- ------- ---------
Other comprehensive income (loss) (21,137) 69,193 48,056
========= ======== =========
The foreign currency translation adjustments are not currently adjusted
for income taxes since the company is situated in Canada and the
adjustments relate to the translation of the financial statements from
Canadian dollars into United States dollars done only for the
convenience of the reader.
F-32
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
17. DISCONTINUED OPERATIONS
Effective March 8, 2002, the Company sold its technology division,
Njoyn Software Incorporated to Cognicase Inc., a Canadian company. Net
proceeds after broker fees were $1,350,000 of which the company
received $800,000 in cash and $550,000 worth of unrestricted common
shares on closing. The shares were sold on March 11, 2002 for value of
$524,673. As part of the transaction, Cognicase assumed all of the
staff in the Company's technology division, including the employees of
TidalBeach Inc. The company will not have future revenues from either
its Njoyn or Secondwave products and therefore the technology
operations have been reported as discontinued.
There was no technology revenue for the three months ended September
30, 2003 and 2002. The operating loss for the three months ended
September, was $12,018 in 2003 and $16,842 in 2002. On disposal, Njoyn
had approximately $950,000 in assets consisting primarily of deferred
development charges and approximately $30,000 in liabilities consisting
primarily of capital lease obligations. The gain on disposal of
$400,229 has been reflected in the Income (loss) from discontinued
operations in 2002. No income taxes have been reflected on this
disposition as the sale of the shares gives rise to a capital loss, the
benefit of which, is more likely than not to be realized.
Effective May 1, 2002, the Company signed an agreement with triOS
Training Centres Limited, an Ontario company, for the purchase of
certain assets of the Toronto training division, Thinkpath Training for
a nominal amount of cash and the assumption of all prepaid training
liabilities. As part of the transaction, triOS assumed the Toronto
training staff and is subletting the classroom facilities. The gain on
disposal of $97,350 has been reflected in the Income (loss) from
discontinued operations in 2002.
On November 1, 2002, the Company entered into a series of agreements
with Thinkpath Training LLC, a New York company, for the purchase of
certain assets of the New York training division, Thinkpath Training
for a nominal amount of cash and the assumption of all prepaid training
liabilities. As part of the transaction, Thinkpath Training LLC assumed
the New York training staff, some assets and is subletting the
classroom facilities.
As a result of these two transactions, the company will not have future
revenues from its training division and therefore the operations have
been reported as discontinued.
There was no training revenue for the three months ended September 30,
2003 and $276,534 in 2002. The operating loss from the training
division for the three months ended September 30, was $29,016 in 2003
and $123,573 in 2002.
Effective June 27, 2003, the Company signed an agreement with
Brainhunter.com Ltd., an Ontario company, for the purchase of certain
assets of the Toronto IT recruitment division for a nominal amount of
cash and the assumption of all employee liabilities. The gain on
disposal of $190,627 has been reflected in the Income (loss) from
discontinued operations in 2003. As a result of this transaction, the
Company will not have future revenues from its IT recruitment division
and therefore the operations have been reported as discontinued.
IT recruitment revenue for the three months ended September 30, was
$17,666 in 2003 and $3,540,305 in 2002. The operating loss from the IT
recruitment division for the three months ended September 30, was
$8,027 in 2003 compared to income of $109,845 in 2002.
F-33
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
The following table presents the revenues, loss from operations and
other components attributable to the discontinued operations of Njoyn
Software Incorporated, TidalBeach Inc., Thinkpath Training Inc. and
Thinkpath Training US Inc. and the IT recruitment division for the
three and nine months ending:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT 30, 2003 SEPT 30, 2002 SEPT 30, 2003 SEPT 30, 2002
----------------- ------------------ ----------------- -----------------
Revenues 17,666 3,816,839 1,606,533 11,577,593
----------------- ------------------ ----------------- -----------------
Income (loss) from operations
before income taxes
(48,762) (16,202) 44,593 29,300
Provision for Income Taxes
(recovery) 300 14,369 925 14,820
Gain on disposal of Njoyn
Software -- -- -- 400,229
Gain on disposal of Training
Canada -- -- -- 97,350
Gain on disposal of IT
Recruitment division -- -- 190,627 --
----------------- ------------------ ----------------- -----------------
Income (loss) from discontinued
operations (49,062) (30,571) 234,295 512,059
================= ================== ================= =================
18. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended September 30, 2003, the company issued
common shares and warrants for the following:
Services rendered $226,500
Accounts payable 449,333
----------
$675,833
===========
During the year ended December 31, 2002, the company issued common
shares and warrants for the following;
Services rendered $1,556,485
Liabilities payable in common stock 1,197,942
Accounts payable 434,348
----------
$3,188,775
==========
F-34
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
19. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, 2003 Sept 30, 2002 Sept 30, 2003 Sept 30, 2002
------------- ------------- ------------- -------------
$ $ $ $
Canada 224,222 -- 387,742 --
United States of America 2,425,459 2,886,157 7,223,931 9,949,699
---------- ---------- ---------- ----------
2,649,681 2,886,157 7,611,673 9,949,699
========== ========== ========== ==========
b) Net Income (Loss) by Geographic Area
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, 2003 Sept 30, 2002 Sept 30, 2003 Sept 30, 2002
------------- ------------- ------------- -------------
$ $ $ $
Canada (1,995,967) (1,483,483) (7,536,146) (1,963,669)
United States of America 138,135 (657,483) 377,456 (1,184,072)
---------- ---------- ---------- ----------
(1,857,832) (2,140,966) (7,158,690) (3,147,741)
========== ========== ========== ==========
c) Identifiable Assets by Geographic Area
Sept 30, December 31, December 31,
2003 2002 2001
-------------- ------------- --------------
$ $ $
Canada 1,603,517 2,644,647 4,995,715
United States of America 5,832,083 6,142,884 12,179,263
---------- ---------- ----------
7,435,600 8,787,531 17,174,978
========== ========== ==========
d) Revenue and Gross Profit by Operating Segment
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, 2003 Sept 30, 2002 Sept 30, 2003 Sept 30, 2002
------------- ------------- ------------- -------------
$ $ $ $
Revenue
Tech Pubs and Engineering 2,544,152 2,545,438 7,271,146 8,703,119
IT Documentation 105,529 340,719 340,527 1,246,580
---------- ---------- ---------- ----------
2,649,681 2,886,157 7,611,673 9,949,699
========== ========== ========== ==========
Gross Profit
Tech Pubs and Engineering 854,889 808,671 2,386,039 2,829,812
IT Documentation 23,931 81,586 71,167 313,622
---------- ---------- ---------- ----------
878,820 890,257 2,457,206 3,143,434
========== ========== ========== ==========
F-35
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
e) Revenues from Major Customers
The consolidated entity had the following revenues from major
customers:
For the three months ended September 30, 2003 and 2002, no single
customer consisted of more than 10% of the company's revenues.
f) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
20. EARNINGS PER SHARE
The company has adopted Statement No. 128, Earnings Per Share, which
requires presentation, in the consolidated statement of income, of both
basic and diluted earnings per share.
NINE
MONTHS
THREE THREE MONTHS ENDED NINE
MONTHS ENDED ENDED SEPT 30, MONTHS ENDED
SEPT 30, 2003 SEPT 30, 2002 2003 SEPT 30, 2002
---------------- ---------------- --------------- ---------------
Numerator
Net loss from continuing operations (1,808,770) (2,110,395) (7,392,985) (3,659,800)
Preferred stock dividends -- 2,828 -- 58,001
------------ ----------- ------------ -----------
Loss available to common
stockholders (1,808,770) (2,113,223) (7,392,985) (3,717,801)
------------ ----------- ------------ -----------
Income (loss) from discontinued
operations (49,062) (30,571) 234,295 512,059
------------ ----------- ------------ -----------
Net loss (1,857,832) (2,143,794) (7,158,690) (3,205,742)
============ =========== ============ ===========
Denominator
Weighted Average common stock
outstanding 448,877,336 28,704,219 290,295,250 23,717,204
============ =========== ============ ===========
Basic and fully diluted loss per
common share from continuing
operations (0.00) (0.07) (0.03) (.15)
============ =========== ============ ===========
Basic and fully diluted loss per
common share after preferred stock
dividends (0.00) (0.07) (0.03) (.16)
============ =========== ============ ===========
Basic and fully diluted loss per
common share after discontinued
operations (0.00) (0.07) (0.02) (.14)
============ =========== ============ ===========
F-36
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
NINE
MONTHS
THREE THREE MONTHS ENDED NINE
MONTHS ENDED ENDED SEPT 30, MONTHS ENDED
SEPT 30, 2003 SEPT 30, 2002 2003 SEPT 30, 2002
---------------- ---------------- --------------- ---------------
Average common stock outstanding 448,877,336 28,704,219 290,295,250 23,717,204
Average common stock issuable
-- -- -- --
---------------- ---------------- --------------- ---------------
Average common stock outstanding
assuming dilution
448,877,336 28,704,219 290,295,250 23,717,204
=============== =============== =============== ===============
The outstanding options and warrants as detailed in note 12 were not
included in the computation of the fully diluted earnings per common
share as the effect would be anti-dilutive.
The earnings per share calculation (basic and fully diluted) does not
include any common stock for common stock payable as the effect would be
anti-dilutive.
As indicated in Note 24, the company has issued 1,863,916,906 shares of
its common stock to the convertible debenture holders upon the
conversion of $2,033,000 of debentures and accrued interest.
21. STOCK OPTION PLANS
OPTIONS WEIGHTED
AVERAGE
EXERCISE
PRICE
--------- --------
Options outstanding at January 1, 2000 472,625 2.21
Options granted to key employees and directors 969,500 2.22
Options exercised during the year (18,508) 2.10
Options forfeited during the year (4,000) 3.19
Options expired during the year -
---------
Options outstanding at December 31, 2000 1,419,617 2.21
Options granted to key employees and directors 35,000 .68
Options granted to consultant 50,000 .70
Options exercised during the year (22,125) .01
Options forfeited during the year (257,500) 3.21
Options expired during the year -
---------
Options outstanding at December 31, 2001 1,224,992
Options forfeited during the year (114,500) 3.22
---------
Options outstanding at December 31, 2002 1,110,492
=========
Options granted, exercised, forfeited or expired
during the period (13,000) 3.19
---------
Options outstanding at September 30, 2003 1,097,492
=========
Options exercisable December 31, 2000 714,117 1.95
Options exercisable December 31, 2001 1,059,659 1.75
Options exercisable December 31, 2002 1,065,992
Options available for future grant December 31, 2000 --
Options available for future grant December 31, 2001 261,500
Options available for future grant December 31, 2002 6,614,500
F-37
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
b) Range of Exercise Prices at September 30, 2003
Outstanding Weighted Options Options Weighted
Options Average Outstanding exercisable Average
Remaining Average Exercise
Life Exercise Price Price
$2.10 - $3.25 552,492 1.61 years $2.81 520,992 $2.79
$1 and under 545,000 2.06 years $0.75 545,000 $0.75
c) Pro-forma net income
At September 30, 2003, the company has four stock-based employee
compensation plans, which are described more fully in Note 12(f). The
company accounts for those plans under the recognition and measurement
principles of APB Opinion No.25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee
compensation cost is reflected n net income, as all options granted
under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the
company had applied the fair value recognition provisions of FASB
Statement No. 123 Accounting for Stock-Based Compensation, to
stock-based employee compensation.
THREE THREE NINE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2003 2002 2003 2002
----------- ----------- ---------- -----------
Net loss, as reported (1,857,832) (2,140,966) (7,158,690) (3,147,741)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (20,858) (73,138) (85,114) (219,414)
----------- ----------- ----------- -----------
Pro forma net loss (1,878,690) (2,214,104) (7,243,804) (3,367,155)
=========== =========== =========== ===========
Net loss, after preferred share
dividends (1,857,832) (2,143,794) (7,158,690) (3,205,742)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (20,858) (73,138) (85,114) (219,414)
----------- ----------- ---------- -----------
Pro forma net loss after
preferred share dividends (1,878,690) (2,216,932) (7,243,804) (3,425,156)
=========== =========== ============ ===========
Earnings per share:
Basic and fully diluted
loss per share, as reported (0.00) (0.07) (0.02) (0.13)
=========== =========== ============ ===========
pro forma loss per share (0.00) (0.08) (0.02) (0.14)
=========== =========== ============ ===========
loss per share, after preferred
dividends (0.00) (0.07) (0.02) (0.14)
=========== =========== ============ ===========
pro forma loss per share,
after preferred dividends (0.00) (0.08) (0.02) (0.14)
=========== =========== ============ ===========
F-38
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
d) Black Scholes Assumptions
The fair value of each option grant used for purposes of estimating the
pro forma amounts summarized above is estimated on the date of grant
using the Black-Scholes option price model with the weighted average
assumptions shown in the following table:
2001 GRANTS
-----------
Risk free interest rates 4.76%
Volatility factors 100%
Weighted average expected life 4.90 years
Weighted average fair value per share .74
Expected dividends --
There were no option grants in the year ended December 31, 2002. There
were no option grants in the nine months ended September 30, 2003.
22. COMMITMENTS AND CONTINGENCIES
a) Lease Commitments
Minimum payments under operating leases for premises occupied by the
company and its subsidiaries offices, located throughout Ontario, Canada
and the United States, exclusive of most operating costs and realty
taxes, as at September 30, 2003, for the next five years are as follows:
2003 $102,039
2004 427,532
2005 338,315
2006 112,343
2007 112,343
Thereafter --
---------
$1,092,572
==========
The lease commitments do not include two operating leases for premises
that the company is currently sub leasing to the purchasers of the
Canadian and United States training divisions. If the purchasers were to
default on payment or abandon the premises, the company would be liable
for annual payments of $282,096 expiring August 31, 2006 and $150,534
expiring September 30, 2010.
The lease commitments do not include an operating lease for premises
located in the United States that were closed in the fourth quarter of
2002. The company has not made any payments on this lease since the
premises were abandoned. The company does not intend to make any further
payments and the lessor has not tried to enforce payment. The company
may be liable for a lease balance of $44,597 which expires November 30,
2004.
b) On October 1, 2003, SITQ National Inc. ("SITQ'), a former landlord,
filed a statement against the Company and its Directors, with the
Superior Court of Justice of Ontario, Canada, Court File No.
03-CV-256327CM3, demanding payment of rent arrears of approximately
$760,000 and alleging damages for breach of lease for future rent in
the sum of $3,250,000. The lease covered premises located in Ontario,
Canada that were abandoned by the Company in April 2003. The term of
the lease does not expire until December 31, 2010. The rent arrears of
$760,000 has been accrued but management believes there is no merit
for the breach of lease for future rent of $3,250,000 and accordingly
has made no provision in the accounts or in these financial statements
with respect to this matter. The Company intends to defend this claim
vigorously.
F-39
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
c) The Company is party to various lawsuits arising from the normal
course of business and its restructuring activities. No material
provision has been recorded in the accounts for possible losses or
gains. Should any expenditure be incurred by the Company for the
resolution of these lawsuits, they will be charged to the operations
of the year in which such expenditures are incurred.
23. RELATED PARTY TRANSACTIONS
On November 1, 2002, the Company entered into a series of agreements
with Thinkpath Training LLC, a New York company, for the purchase of
certain assets of the New York training division, Thinkpath Training
for a nominal amount of cash and the assumption of all prepaid training
liabilities. As part of the transaction, Thinkpath Training LLC assumed
the New York training staff, some assets and is subletting the
classroom facilities. The owner of Thinkpath Training LLC, is the
daughter of the Company's Chief Executive Officer.
24. SUBSEQUENT EVENTS
Subsequent to September 30, 2003, the Company closed an additional
$225,000 in convertible debentures together with 313,333,333 warrants.
The funds were used for various debt settlements and critical payables.
The debentures will become due twelve months from the date of issuance.
The investors will have the right to acquire up to $225,000 worth of
the Company's common stock at a price the lesser of $.0175 or 50% of
the average of the three lowest prices on three separate trading days
during the sixty-day trading period prior to conversion. The warrants
are exercisable at any time and in any amount for a period of 7 years
from the original purchase date at a purchase price of $.00075 per
share. The Company is required to pay interest to the debenture holder
on the aggregate unconverted and outstanding principal amount of the
debenture at the rate of 12% per annum, payable on each conversion date
and maturity date in cash or shares of common stock.
The proceeds received by the Company were allocated between the
warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants.
On October 14, 2003, 327,147,735 of the warrants issued to the
convertible debenture holders at December 5, 2002 and throughout the
first nine months of 2003, were repriced from $.00137 to $.00075 per
share.
As of November 11, 2003, the Company has issued 1,863,916,906 shares of
its common stock upon to the convertible debenture holders upon the
conversion of $2,033,000 of debentures and accrued interest.
On October 2, 2003, the company held its Annual General Meeting and
Special Meeting of Shareholders where the following resolutions were
passed: the election of the Board of Directors including Declan French,
John Dunne, Arthur Marcus and Lloyd MacLean; the appointment of
Schwartz Levitsky Feldman LLP as the company's independent auditors for
the ensuing year; and, the amendment of the company's Articles of
Incorporation to increase its authorized capital stock from 800,000,000
to an unlimited number of shares.
On October 6, 2003, the Company entered into a settlement agreement
with the Canadian Imperial Bank of Commerce ("CIBC") in the sum of
$150,000. This settlement was pursuant to a claim filed against
Thinkpath Training Inc., a subsidiary of the Company, with the Superior
Court of Justice of Ontario, Canada, Court File No. 41967, demanding
payment of damages in the sum of $150,000 pursuant to an operating
account overdraft balance. The settlement includes payment of the
overdraft, accrued interest and legal fees and will be paid in monthly
installments over fifteen months beginning October 25, 2003. The
settlement amount has been accrued in full.
F-40
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
25. 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 does not believe it is subject to any significant
concentration of credit risk. Cash and short-term investments are in
place with major financial institutions and corporations.
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 value of the accounts receivable, bank indebtedness, and
accounts payable on acquisition of subsidiary company approximates the
fair value because of the short-term maturities on 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 estimated on the quoted
market prices for the same or similar debt instruments. The fair value of
the long-term debt approximates the carrying value.
26. COMPARATIVE FIGURES
Certain figures in the September 30, 2002 financial statements have been
reclassified to conform with the basis of presentation used at September
30, 2003.
F-41
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto and the other historical
financial information of Thinkpath Inc. contained elsewhere in this Form 10-Q.
The statements contained in this Form 10-Q 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-Q 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-Q 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
We are a global provider of engineering services including design,
build, drafting, technical publishing and documentation, and on-site engineering
support. Our customers include defense contractors, aerospace, automotive,
health care and manufacturing companies, including Lockheed Martin, General
Dynamics, General Electric, General Motors, Ford Motors, Magna, ABB and Hill-Rom
Company.
On December 12, 2001, the Securities and Exchange Commission issued
FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, which encourages additional disclosure with respect to a company's
critical accounting policies, the judgments and uncertainties that affect a
company's application of those policies, and the likelihood that materially
different amounts would be reported under different conditions and using
different assumptions.
Management is required to make certain estimates and assumptions during
the preparation of the consolidated financial statements in accordance with
GAAP. These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates. Certain of our accounting policies and estimates have a more
significant impact on our financial statements than others, due to the magnitude
of the underlying financial statement elements.
CONSOLIDATION
Our determination of the appropriate accounting method with respect to
our investments in subsidiaries is based on the amount of control we have,
combined with our ownership level, in the underlying entity. Our consolidated
financial statements include the accounts of our parent company and our
wholly-owned subsidiaries. All of our investments are accounted for on the cost
method. If we had the ability to exercise significant influence over operating
and financial policies of a company, but did not control such company, we would
account for these investments on the equity method.
Accounting for an investment as either consolidated or by the equity
method would have no impact on our net income (loss) or stockholders' equity in
any accounting period, but would impact individual income statement and balance
sheet items, as consolidation would effectively "gross up" our income statement
and balance sheet. However, if control aspects of an investment accounted for by
the cost method were different, it could result in us being required to account
for an investment by consolidation or the equity method. Under the cost method,
the investor only records its share of the investee's earnings to the extent
that it receives dividends from the investee; when the dividends received exceed
the investee's earnings subsequent to the date of the investor's investment, the
investor records a reduction in the basis of its investment. Under the cost
method, the investor does not record its share of losses of the investee.
Conversely, under either consolidation or equity method accounting, the investor
effectively records its share of the investee's net income or loss, to the
extent of its investment or its guarantees of the investee's debt.
At September 30, 2003, all of our investments in non-related companies
totaling $45,669 were accounted for using the cost method. Accounting for an
investment under either the equity or cost method has no impact on evaluation of
impairment of the underlying investment; under either method, impairment losses
are recognized upon evidence of permanent losses of value.
2
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, which has four basic criteria
that must be met before revenue is recognized:
- - Existence of persuasive evidence that an arrangement exists; - Delivery has
occurred or services have been rendered; - The seller's price to the buyer is
fixed and determinable; and, - Collectibility is reasonably assured.
Our various revenue recognition policies are consistent with these
criteria. We have developed proprietary technology in two areas: human capital
management and Web development. Njoyn is a Web-based human capital management
system that automates and manages the hiring process. The revenue associated
with providing this software is allocated to an initial set-up fee,
customization and training fees as agreed with the customer and an ongoing
monthly per user fee. The allocation of revenue to the various elements is based
on our determination of the fair value of the elements as if they had been sold
separately. The set-up fee and customization revenue is recognized upon delivery
of access to the software with customization completed in accordance with
milestones determined by the contract. Revenue for the training is recorded as
the services are rendered and the ongoing monthly fee is recorded each calendar
month. There is no additional fee charged to customers for hosting.
Effective March 8, 2002, we sold our technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. As part of the
transaction, Cognicase assumed all of the (eight employees) staff in our
technology division. As a result of the sale to Cognicase, we will not have
future revenues from Njoyn and the operations have been reported as
discontinued.
Our other proprietary technology, SecondWave, is a Web development
product that allows companies to create, manage and automate their own dynamic,
adaptive Web sites. The software learns from each visitor's behavior and targets
his or her needs and interests with customized content and communications. We
enter into contracts for the customization or development of SecondWave in
accordance with the specifications of our customers. The project plan defines
milestones to be accomplished and the costs associated with this project. These
amounts are billed as they are accomplished and revenue is recognized as the
milestones are reached. The work in progress for costs incurred beyond the last
accomplished milestone is reflected at the period end. To date these amounts
have not been material and have not been set up at the period ends. The
contracts do not include any post-contract customer support. Additional customer
support services are provided at standard daily rates, as services are required.
As a result of the sale of Njoyn to Cognicase Inc. and their assumption
of all of our technology staff, we will no longer have future revenues from
SecondWave Inc. and the operations have also been reported as discontinued.
Carrying Value Goodwill and Intangible Assets
Prior to January 1, 2002, our goodwill and intangible assets were
accounted for in accordance with Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. This statement required us to evaluate the carrying
value of our goodwill and intangible assets upon the presence of indicators of
impairment. Impairment losses were recorded when estimates of undiscounted
future cash flows were less than the value of the underlying asset. The
determination of future cash flows or fair value was based upon assumptions and
estimates of forecasted financial information that may differ from actual
results. If different assumptions and estimates were used, carrying values could
be adversely impacted, resulting in write downs that would adversely affect our
earnings. In addition, we amortized our goodwill balances on a straight-line
basis over 30 years. The evaluation of the useful life of goodwill required our
judgment, and had we chosen a shorter time period over which to amortize
goodwill, amortization expense would have increased, adversely impacting our
operations.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. This statement requires
us to evaluate the carrying value of goodwill and intangible assets based on
assumptions and estimates of fair value and future cash flow information. These
assumptions and estimates may differ from actual results. If different
assumptions and estimates are used, carrying values could be adversely impacted,
resulting in write downs that could adversely affect our earnings.
3
During the third quarter of 2002, we completed our transitional
goodwill impairment test as of December 31, 2001 and determined that no
adjustment to the carrying value of goodwill was needed.
The IT recruitment unit was tested for impairment in the third quarter
of 2002, after the annual forecasting process. Due to a decrease in margins and
the loss of key sales personnel, operating profits and cash flows were lower
than expected in the first nine months of 2002. Based on that trend, the
earnings forecast for the next two years was revised. At September 30, 2002, we
recognized a goodwill impairment loss of $57,808 in the IT recruitment unit. The
fair value of that reporting unit was estimated using the expected present value
of future cash flows.
During the fourth quarter of 2002, the IT recruitment unit experienced
further decline, indicating impairment. The fair value of the unit was estimated
using the expected present value of future cash flows. At December 31, 2002, a
further goodwill impairment loss of $87,589 was recognized.
The Technical Publications and Engineering unit was also tested for
impairment in the fourth quarter of 2002, as operating profits, cash flows and
forecasts were lower than expected. At December 31, 2002, a goodwill impairment
loss of $1,234,962 was recognized. The fair value of that reporting unit was
estimated using the expected present value of future cash flows.
On an ongoing basis, absent any impairment indicators, we expect to
perform a goodwill impairment test as of the end of the third quarter during the
fourth quarter of each year.
The books and records of our Canadian operations are recorded in
Canadian dollars. For purposes of financial statement presentation, we convert
balance sheet data to United States dollars using the exchange rate in effect at
the balance sheet date. Income and expense accounts are translated using an
average exchange rate prevailing during the relevant reporting period. 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.
THE THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Revenue
For the three months ended September 30, 2003, we derived 92% of our
revenue in the United States compared to 100% for the three months ended
September 30, 2002. The decrease in total revenue derived from the United States
is a result of the slight increase in engineering sales in Canada. At the
beginning of this year, a division was started to focus on building engineering
services in Ontario in lieu of IT recruitment services which had traditionally
dominated our sales in Canada.
As a result of this shift in focus, effective June 27, 2003, we
sold certain assets of our IT recruitment division to Brainhunter.com, an
Ontario company, for a nominal amount of cash and the assumption of all employee
liabilities. The gain on disposal of $190,627 has been reflected in the Income
(loss) from discontinued operations in 2003. As a result of this transaction,
the Company will not have future revenues from its IT recruitment division and
therefore the operations have been reported as discontinued.
For the three months ended September 30, 2003, our primary source of
revenue was engineering services including engineering design and build,
technical publications and documentation and on-site engineering support.
Engineering services represented 96% of total revenue compared to 88% for the
three months ended September 30, 2002. Revenue from engineering services for the
three months ended September 30, 2003 was $2,550,000 which was the same as the
three months ended September 30, 2002.
4
Our engineering services include the complete planning, staffing,
development, design, implementation and testing of a project. It can also
involve enterprise-level planning and project anticipation. Our specialized
engineering services include: design, build and drafting, technical publications
and documentation. We outsource our technical publications and engineering
services on both a time and materials and project basis. For project work, the
services provided are defined by guidelines to be accomplished by milestone and
revenue is recognized upon the accomplishment of the relevant milestone. As
services are rendered, the costs incurred are reflected as Work in Progress.
Revenue is recognized upon the persuasive evidence of an agreement, delivery of
the service, and when the fee is fixed or determinable and collection is
probable. Customers we provide engineering services to include General Dynamics,
General Electric, General Motors, Lockheed Martin, Boeing, Caterpillar, Cummins
Engines, Magna and ABB.
For the three months ended September 30, 2003, information technology
documentation services represented approximately 4% of our revenue compared to
12% for the three months ended September 30, 2002. Revenue from information
technology documentation services for the three months ended September 30, 2003
decreased by $230,000 or 68% to $110,000 compared to $340,000 for the three
months ended September 30, 2002.
The substantial decrease in revenue from information technology
documentation services is primarily due to the loss of sales personnel and the
general economic slowdown in this industry. This division offers a very
specialized service, and relied on several key customers in a very localized
market. Many of these customers have either cancelled projects or have put a
number of their projects on hold. In response to these conditions, we terminated
the staff in this division and transferred the existing contracts to another
office.
We provide outsourced information technology documentation services in
two ways: complete project management and the provision of skilled project
resources to supplement a customer's internal capabilities. Revenue is
recognized on the same basis as technical publications and engineering
outsourcing services. Selected information technology documentation services
customers include Fidelity Investments, SMD Tech Aid Corporation, CDI
Corporation, and the Gillette Company.
Gross Profit
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of engineering services include wages, benefits,
software training and project expenses. The average gross profit for the
engineering division was 32% for the three months ended September 30, 2003 which
is consistent with the three months ended September 30, 2002. The increase in
gross profit for technical publications and engineering services is a result of
the increase in higher margin contracts in engineering design, technical
publications and documentation compared to the traditional on-site engineering
support. In addition, we are engaging in more time-and-materials based contracts
versus fixed-cost contracts which prevents against project and costs overruns.
The direct costs of information technology documentation services
include contractor wages, benefits, and project expenses. The average gross
profit for the information technology division for the three months ended
September 30, 2003 was 23% compared to 24% for the three months ended September
30, 2002. The decline in gross profit in the current period is a result of the
decrease in higher margin permanent placements and increase in lower margin
contract placements of documentation specialists.
THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Revenue
For the nine months ended September 30, 2003, we derived 95% of our
revenue in the United States compared to 100% for the nine months ended
September 30, 2002. The decrease in total revenue derived from the United States
is a result of the aforementioned slight increase in engineering sales in
Canada.
For the nine months ended September 30, 2003, our primary source of
revenue was engineering services including engineering design and build,
technical publications and documentation and on-site engineering support.
Engineering services represented 96% of total revenue compared to 87% for the
nine months ended September 30, 2002. Revenue from engineering services for the
nine months ended September 30, 2003 decreased by $1,430,000 or 16% to
$7,270,000 compared to $8,700,000 for the nine months ended September 30, 2002.
The decrease in engineering sales is a result of the reduction of the sales
force for this division.
5
For the nine months ended September 30, 2003, information technology
documentation services represented approximately 4% of our revenue compared to
13% for the nine months ended September 30, 2002. Revenue from information
technology documentation services for the nine months ended September 30, 2003
decreased by $910,000 or 73% to $340,000 compared to $1,250,000 for the nine
months ended September 30, 2002.
The substantial decrease in revenue from information technology
documentation services is primarily due to the loss of sales personnel and the
general economic slowdown in this industry. This division offers a very
specialized service, and relied on several key customers in a very localized
market. Many of these customers have either cancelled projects or have put a
number of their projects on hold. In response to these conditions, we terminated
the staff in this division and transferred the existing contracts to another
office.
Gross Profit
The average gross profit for the engineering division was 33% for the
nine months ended September 30, 2003 which is consistent with the nine months
ended September 30, 2002.
The average gross profit for the information technology division for
the nine months ended September 30, 2003 was 21% compared to 25% for the nine
months ended September 30, 2002. The decline in gross profit in the current
period is a result of the decrease in higher margin permanent placements and
increase in lower margin contract placements of documentation specialists.
6
RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS--PERCENTAGES
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
-------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE 100 % 100 % 100 % 100 %
- ------- ---- ---- ---- ----
COST OF SALES 67 % 69 % 68 % 68 %
---- ---- ---- ----
GROSS PROFIT 33 % 31 % 32 % 32 %
---- ---- ---- ----
EXPENSES
Administrative 21 % 45 % 23 % 29 %
Selling 11 % 20 % 10 % 19 %
Financing Expenses -- % 16 % -- % 5 %
Depreciation and amortization 5 % 9 % 7 % 8 %
Write down goodwill -- % 2 % -- % 1 %
---- ---- ---- ----
Income (loss) from continuing
operations before interest charges (4)% (61)% (8)% (30)%
Interest charges 64 % 12 % 89 % 8 %
---- ---- ---- ----
Income (loss) from continuing
operations (68)% (73)% (97)% (38)%
Income taxes -- % -- % -- % -- %
---- ---- ---- ----
Income (loss) from continuing
operations (68)% (73)% (97)% (38)%
Income (loss) from discontinued
operations (2)% (1)% 3 % 5 %
Net Income (loss) (70)% (74)% (94)% (33)%
---- ---- ---- ----
7
THE THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Results of Operations
Revenue. Revenue for the three months ended September 30, 2003
decreased by $240,000 or 8%, to $2,650,000, as compared to $2,890,000 for the
three months ended September 30, 2002. The decrease is primarily attributable to
the reduction in sales staff as a result of our cost cutting initiatives
undertaken in 2002 and early 2003.
Cost of Sales. The cost of sales for the three months ended September
30, 2003 decreased by $230,000, or 12%, to $1,770,000, as compared to $2,000,000
for the three months ended September 30, 2002. The decrease in cost of sales for
the three months ended September 30, 2003 is consistent with the decrease in
revenue. The cost of sales as a percentage of revenue decreased from 69% for the
three months ended September 30, 2002 to 67% for the three months ended
September 30, 2003.
Gross Profit. Gross profit for the three months ended September 30,
2003 decreased by $10,000, or only 1%, to $880,000 compared to $890,000 for the
three months ended September 30, 2002. As a percentage of revenue, gross profit
increased from 31% for the three months ended September 30, 2002 to 33% for the
three months ended September 30, 2003.
Expenses. Expenses for the three months ended September 30, 2003
decreased by $1,660,000, or 63%, to $990,000 compared to $2,650,000 for the
three months ended September 30, 2002.
Administrative expenses decreased by $740,000 or 57% to $560,000 for
the three months ended September 30, 2003 compared to $1,300,000 for the three
months ended September 30, 2002. General administrative expenses including
salaries and rent have decreased significantly over last year as a result of
restructuring and general cost cutting.
Selling expenses for the three months ended September 30, 2003
decreased by $300,000, or 52%, to $280,000 from $580,000 for the three months
ended September 30, 2002. This decrease is attributable to the considerable
downsizing in sales staff and the decrease in commissions, as a result of the
reduction in sales. In addition, in 2003 we continued to eliminate certain
advertising and promotional expenses.
There were no financing expenses for the three months ended September
30, 2003 compared to $470,000 for the three months ended September 30, 2002. The
expenses in 2002 included approximately $150,000 paid to various financial
brokers as due diligence fees and commissions and $320,000 worth of shares
issued to a lender in consideration of securitizing an overdraft position with
Bank One.
For the three months ended September 30, 2003, depreciation and
amortization expenses decreased by $110,000, or 44%, to $140,000 from $250,000
for the three months ended September 30, 2002.
In accordance with the requirements of SFAS 144, at September 30, 2002
we recorded an impairment of goodwill of $57,808 based on our evaluation of
carrying value and projected cash flows.
0perating Loss from Continuing Operations. For the three months ended
September 30, 2003, losses from continuing operations decreased by $1,650,000 or
94% to a loss of $110,000 as compared to a loss of $1,760,000 for the three
months ended September 30, 2002.
Interest Charges. For the three months ended September 30, 2003,
interest charges increased by $1,360,000, or 400%, to $1,700,000 from $340,000
for the three months ended September 30, 2002. This increase is largely
attributable to the interest expense on the beneficial conversion feature on the
convertible debentures issued in December 2002 and the first nine months of
2003, in the amount of $1,580,000.
Loss from Continuing Operations before Income Tax. Loss from continuing
operations before income tax for the three months ended September 30, 2003
decreased by $290,000 or 14% to a loss of $1,810,000 as compared to a loss of
$2,100,000 for the three months ended September 30, 2002.
8
Income Taxes. Income tax expense for the three months ended September
30, 2003 decreased by $5,000 to an expense of $1,000 as compared to $6,000 for
the three months ended September 30, 2002.
Income (Loss) from Continuing Operations. Loss from continuing
operations for the three months ended September 30, 2003 decreased by $300,000
or 14% to a loss of $1,810,000 compared to a loss of $2,110,000 for the three
months ended September 30, 2002
Income (Loss) from Discontinued Operations. Operations of the
technology, training and IT recruitment divisions have been reported as
discontinued for the three months ended September 30, 2003 and 2002.
Effective March 8, 2002, we sold our technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. Net proceeds after
broker fees were $1,350,000 of which we received $800,000 in cash and $550,000
worth of unrestricted common shares on closing. The shares were sold on March
11, 2002 for value of $524,673. As part of the transaction, Cognicase assumed
all of the staff in our technology division, including the employees of
TidalBeach Inc. We will not have future revenues from either the Njoyn or
SecondWave products.
There was no technology revenue for the three months ended September
30, 2003 and 2002. The operating loss from the technology division for the three
months ended September 30, 2003 was $12,000 and $17,000 for the same period in
2002. On disposal, Njoyn had approximately $950,000 in assets consisting
primarily of deferred development charges and approximately $30,000 in
liabilities consisting primarily of capital lease obligations. The gain on
disposal of $400,229 has been reflected in the loss from discontinued operations
at September 30, 2002. No income taxes have been reflected on this disposition
as the sale of the shares gives rise to a capital loss, the benefit of which is
more likely than not to be realized.
Effective May 1, 2002, we signed an agreement with triOS Training
Centres Limited, an Ontario company, for the sale of certain assets of the
Toronto training division, Thinkpath Training for a nominal amount of cash and
the assumption of all prepaid training liabilities. As part of the transaction,
triOS assumed the Toronto training staff and is subletting the classroom
facilities.
On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the sale of certain assets of
the New York training division, Thinkpath Training for a nominal amount of cash
and the assumption of all prepaid training liabilities. As part of the
transaction, Thinkpath Training LLC assumed the New York training staff, some
assets and is subletting the classroom facilities.
As a result of these two transactions, we will not have future
revenues from either training division. There was no training revenue for the
three months ended September 30, 2003 and $280,000 for the same period in 2002.
The operating loss from the training division for the three months ended
September 30, 2003 was $30,000 and $120,000 for the same period in 2002.
Effective June 27, 2003, we signed an agreement with Brainhunter.com
Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT
recruitment division for a nominal amount of cash and the assumption of all
employee liabilities. The gain on disposal of $190,627 has been reflected in the
Income (loss) from discontinued operations in 2003. As a result of this
transaction, we will not have future revenues from the IT recruitment division
and therefore the operations have been reported as discontinued.
IT recruitment revenue for the three months ended September 30, was
$18,000 in 2003 and $3,540,000 in 2002. The operating loss from the IT
recruitment division for the three months ended September 30, was $8,000 in 2003
compared to income of $110,000 in 2002.
Net Loss Before Preferred Stock Dividends. Net loss before preferred
stock dividends for the three months ended September 30, 2003 decreased by
$280,000 or 13% to a net loss of $1,860,000 compared to a net loss of $2,140,000
for the three months ended September 30, 2002.
Net Loss Applicable to Common Stock. Net loss applicable to common
stock decreased by $280,000 or 13% to $1,860,000 for the three months ended
September 30, 2003 compared to $2,140,000 for the three months ended September
30, 2002. During the three months ended September 30, 2002 we issued preferred
stock dividends of $3,000.
9
THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Results of Operations
Revenue. Revenue for the nine months ended September 30, 2003
decreased by $2,340,000 or 24%, to $7,610,000, as compared to $9,950,000 for the
nine months ended September 30, 2002. The decrease is primarily attributable to
the reduction in sales staff as a result of our cost cutting initiatives
undertaken in 2002 and early 2003.
Cost of Sales. The cost of sales for the nine months ended September
30, 2003 decreased by $1,660,000, or 24%, to $5,150,000, as compared to
$6,810,000 for the nine months ended September 30, 2002. The decrease in cost of
sales for the nine months ended September 30, 2003 is consistent with the
decrease in revenue. The cost of sales as a percentage of revenue for the nine
months ended September 30, 2003 was 68% which is consistent with the nine months
ended September 30, 2002.
Gross Profit. Gross profit for the nine months ended September 30, 2003
decreased by $680,000, or 22%, to $2,460,000 compared to $3,140,000 for the nine
months ended September 30, 2002. The decrease in gross profit for the nine
months ended September 30, 2003 is consistent with the decrease in revenue. As a
percentage of revenue, gross profit for the nine months ended September 30, 2003
was 32% which is consistent with the nine months ended September 30, 2002.
Expenses. Expenses for the nine months ended September 30, 2003
decreased by $2,980,000, or 49%, to $3,060,000 compared to $6,040,000 for the
nine months ended September 30, 2002.
Administrative expenses decreased by $1,090,000 or 38% to $1,760,000
for the nine months ended September 30, 2003 compared to $2,850,000 for the nine
months ended September 30, 2002. General administrative expenses including
salaries and rent have decreased significantly over last year as a result of
restructuring and general cost cutting. Included in administrative expenses are
the costs of $226,500 of shares of our common stock and warrants issued to
various consultants for financing services rendered during the nine months ended
September 30, 2003.
Selling expenses for the nine months ended September 30, 2003 decreased
by $1,100,000 or 59%, to $780,000 from $1,880,000 for the nine months ended
September 30, 2002. This decrease is attributable to the considerable downsizing
in sales staff and the decrease in commissions, as a result of the reduction in
sales. In addition, in 2003 we continued to eliminate certain advertising and
promotional expenses.
There were no financing expenses for the nine months ended September 30,
2003 compared to $470,000 for the nine months ended September 30, 2002. The
expenses in 2002 included approximately $150,000 paid to various financial
brokers as due diligence fees and commissions and $320,000 worth of shares
issued to a lender in consideration of securitizing an overdraft position with
Bank One.
For the nine months ended September 30, 2003, depreciation and
amortization expenses decreased by $260,000, or 33%, to $520,000 from $780,000
for the nine months ended September 30, 2002.
In accordance with the requirements of SFAS 144, at September 30, 2002
we recorded an impairment of goodwill of $57,808 based on our evaluation of
carrying value and projected cash flows.
0perating Loss from Continuing Operations. For the nine months ended
September 30, 2003, losses from continuing operations decreased by $2,300,000 or
79% to a loss of $600,000 as compared to a loss of $2,900,000 for the nine
months ended September 30, 2002.
Interest Charges. For the nine months ended September 30, 2003,
interest charges increased by $6,000,000, or 769%, to $6,780,000 from $780,000
for the nine months ended September 30, 2002. This increase is largely
attributable to the interest expense on the beneficial conversion feature on the
convertible debentures issued in December 2002 and the first nine months of
2003, in the amount of $6,180,000.
10
Loss from Continuing Operations before Income Tax. Loss from continuing
operations before income tax for the nine months ended September 30, 2003
increased by $3,700,000 or 100% to a loss of $7,380,000 as compared to a loss of
$3,680,000 for the nine months ended September 30, 2002.
Income Taxes. Income tax expense for the nine months ended September
30, 2003 increased by $33,000 to an expense of $13,000 as compared to a recovery
of $20,000 for the nine months ended September 30, 2002.
Loss from Continuing Operations. Loss from continuing operations for
the nine months ended September 30, 2003 increased by $3,730,000 or 102% to a
loss of $7,390,000 compared to a loss of $3,660,000 for the nine months ended
September 30, 2002
Income (Loss) from Discontinued Operations. Operations of the
technology, training and IT recruitment divisions have been reported as
discontinued for the nine months ended September 30, 2003 and 2002.
There was no technology revenue for the nine months ended September
30, 2003 and $40,000 for the same period in 2002. The operating loss from the
technology division for the nine months ended September 30, 2003 was $20,000 and
$140,000 for the same period in 2002.
Training revenue for the nine months ended September 30, 2003 was
$160,000 and $1,160,000 for the same period in 2002. The operating income from
the training division for the nine months ended September 30, 2003 was $60,000
compared to a loss of $80,000 for the same period in 2002.
IT recruitment revenue for the nine months ended September 30, was
$1,440,000 in 2003 and $10,380,000 in 2002. The operating income from the IT
recruitment division for the nine months ended September 30, was $3,000 in 2003
and $240,000 in 2002.
Net Loss Before Preferred Stock Dividends. Net loss before preferred
stock dividends for the nine months ended September 30, 2003 increased by
$4,010,000 or 127% to a net loss of $7,160,000 compared to a net loss of
$3,150,000 for the nine months ended September 30, 2002.
Net Loss Applicable to Common Stock. Net loss applicable to common
stock increased by $3,950,000 or 123% to $7,160,000 for the nine months ended
September 30, 2003 compared to $3,210,000 for the nine months ended September
30, 2002. During the nine months ended September 30, 2002 we issued preferred
stock dividends of $60,000.
LIQUIDITY AND CAPITAL RESOURCES
With insufficient working capital from operations, our primary sources
of cash are a receivable discount facility with Morrison Financial Services
Limited and proceeds from the sale of equity securities. Our primary capital
requirements include debt service and working capital needs.
Our facility with Morrison Financial Services Limited is a receivable
discount facility whereby we are able to borrow up to 75% of qualifying
receivables at 30% interest per annum. At September 30, 2003, the balance on the
receivable discount facility was approximately $1,160,000 based on 75% of
qualifying accounts receivable.
During the three months ended September 30, 2003, we sold $200,000 in
convertible debentures along with 123,588,850 warrants pursuant to a financing
arrangement entered into on December 5, 2002. The debentures will become due
twelve months from the date of issuance. The investors will have the right to
acquire up to $200,000 worth of our common stock at a price the lesser of $.0175
or 50% of the average of the six lowest prices on six separate trading days
during the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of seven years from
closing at purchase prices ranging from $.0175 to $.00075 per share. We are
required to pay interest to the debenture holder on the aggregate unconverted
and outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of common
stock.
11
The proceeds of $200,000 were allocated between the warrants and the
debenture without warrants on a pro rata basis. Paid in capital has been
credited by the value of the warrants in the amount of $116,100. At September
30, 2003, the value of the beneficial conversion feature on all issued
convertible debentures was determined to be $1,336,102 which was credited to
paid in capital and charged to earnings as interest expense.
At September 30, 2003, we had cash of $70,000 and a working capital
deficiency of $2,380,000. At September 30, 2003, we had a cash flow deficiency
from operations of $230,000. At September 30, 2002, we had negative cash or cash
equivalents and a working capital deficiency of $4,490,000. At September 30,
2002, we had a cash flow deficiency from operations of $1,150,000.
At September 30, 2003, we had cash flow from investing activities of
$60,000 related to proceeds on the disposal of the IT recruitment division of
$150,000 which was offset by the purchase of capital assets of $90,000. At
September 30, 2002, we had cash flow from investing activities of $1,100,000
primarily related to the proceeds on the disposal of Njoyn of $1,320,000 which
was partially offset by the purchase of capital assets of $220,000.
At September 30, 2003 we had cash flow from financing activities of
$90,000 attributable primarily to proceeds of $1,650,000 from the sale of
convertible debentures which was offset by a reduction in debt of $1,530,000
related to the Morrison Financial receivable discount facility and partial
repayment of notes payable of $30,000. At September 30, 2002, we had a cash flow
deficit from financing activities of $420,000 attributable primarily to the
repayment of notes of $80,000, and long-term debt of $480,000 and reduction in
bank indebtedness of $120,000 which was offset by an increase in long term debt
of $260,000.
At September 30, 2003 we had a loan balance of $250,000 with an
individual, Terry Lyons. The loan is payable in twelve monthly payments of
$21,613 beginning November 30, 2002 and bears interest at 30% per annum. This
loan is subordinated to Morrison Financial Services Limited and one payment of
$10,000 was made in August 2003.
At September 30, 2003, we had approximately $50,000 outstanding on
various capital leases with various payment terms and interest rates. The
average balance on the terms of leases are 12 months and cover primarily the
hardware and various software applications required to support our engineering
division.
At September 30, 2003, we had a note payable of $224,000 owed to Roger
Walters, the former shareholder of CadCam Inc. Principal payments of $4,000 per
month were to begin September 1, 2002 until August 1, 2007. This loan is
non-interest bearing.
The loan is subordinated to Morrison Financial Services Limited and the
12% Senior Secured Convertible Debenture holders. We have not made any principal
payments to Mr. Walters since December 2002 and we are currently in default of
the loan agreement. In the event that we default on payment, the principal
balance will bear interest at 12% per annum until payment is made.
At September 30, 2003, we had a note payable of $640,000 owed to Denise
Dunne-Fushi, the vendor of MicroTech Professionals Inc. Principal payments of
$10,000 per month were to begin November 1, 2002 bearing 5% interest until
October 1, 2007. In addition, we are obligated to cover the monthly expense
associated with Ms. Dunne-Fushi's family health benefits until May 2004 and a
vehicle lease until August 2004.
The loan is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and the 12% Senior Secured
Convertible Debenture holders. We have not made scheduled principal payments to
Ms. Dunne-Fushi since December 2002 and are currently in default of the loan
agreement. In the event of default, Ms. Dunne-Fushi has the option of enforcing
the security she holds.
Although we believe that our current working capital and cash flows
from restructured operations will be adequate to meet our anticipated cash
requirements going forward, we have accrued liabilities and potential
settlements of outstanding claims that may require additional funds. We will
have to raise these funds through equity or debt financing. There can be no
assurance that additional financing will be available at all or that if
available, such financing will be obtainable on terms favorable to us and would
not be dilutive.
Despite our recurring losses and negative working capital, we believe
that we have developed a business plan that, if successfully implemented, could
substantially improve our operational results and financial condition. However,
we can give no assurances that our current cash flows from operations, if any,
borrowings available under our receivable discount facility, and proceeds from
the sale of securities, will be adequate to fund our expected operating and
capital needs for the next twelve months. The adequacy of our cash resources
over the next twelve months is primarily dependent on our operating results and
our ability to raise additional financing, which are subject to substantial
12
uncertainties. Cash flow from operations for the next twelve months will depend,
among other things, upon the effect of the current economic slowdown on our
sales and management's ability to implement our business plan. The failure to
return to profitability and optimize operating cash flow in the short term, and
to successfully raise additional financing, could have a material adverse effect
on our liquidity position and capital resources which may force us to curtail
our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, which, among other
factors, changed the presentation of gains and losses on the extinguishments of
debt. Any gain or loss on extinguishments of debt that does not meet the
criteria in APB Opinion 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", shall be included in operating
earnings and not presented separately as an extraordinary item. We will adopt
SFAS No. 145 at the beginning of fiscal year 2003 and do not expect the
provisions of SFAS No. 145 to have any impact on our financial position, results
of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No.146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit on Activity (including Certain Costs Incurred in a Restructuring)". We
will adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized.
In January 2003, the FASB issued SFAS No. 148, Accounting for Stock
- -Based Compensation - Transition and Disclosures. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement also amends the disclosure requirements of SFAS No. 123 to require
more prominent and frequent disclosures in the financial statements about the
effects of stock-based compensation. The transitional guidance and annual
disclosure provisions of this Statement is effective for the December 31, 2002
financial statements. The interim reporting disclosure requirements is effective
for our March 31, 2003 financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirement for most guarantees including
loan guarantees, and clarifies that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair market value of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
measurement provisions of the Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which
addresses consolidation by business enterprises of variable interest entities.
In general, a variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The objective of Interpretation No. 46
is not to restrict the use of variable interest entities but to improve
financial reporting by companies involved with variable interest entities. Until
now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
Interpretation No. 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation No. 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
entities created before January 31, 2003, in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements
apply in all financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. We do not have any variable
interest entities, and, accordingly, adoption is not expected to have a material
effect on our financial position, results of operations or cash flows.
13
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". The Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. The amendments set
forth in Statement 149 improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, this
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in Statement
133. In addition, it clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. This Statement
is effective for contracts entered into or modified after June 30, 2003 with
certain exceptions. We do not believe that the adoption of Statement No. 149
will have a material effect on our financial position, results of operations or
cash flows.
In May 2003, the Financial Accounting Standards Board issued Statement
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity". The Statement specifies that certain instruments
within its scope embody obligations of the issuer and that, therefore, the
issuer must classify them as liabilities. This Statement is effective
immediately for all financial instruments entered into or modified after May 31,
2003. For all other instruments, the Statement goes into effect at the beginning
of the first interim period beginning after June 15, 2003. For contracts that
were created or modified before May 31, 2003 and still exist at the beginning of
the first interim period beginning after June 30, 2003, entities should record
the transition to Statement No. 150 by reporting the cumulative effect of a
change in an accounting principle. Statement No. 150 prohibits entities from
restating financial statements for earlier years presented. We do not believe
that the adoption of Statement No. 150 will have a material effect on our
financial position, results of operations or cash flows.
RECENT EVENTS
Subsequent to September 30, 2003, we closed an additional $225,000 in
convertible debentures together with 313,333,333 warrants. The funds were used
for various debt settlements and working capital. The debentures will become due
twelve months from the date of issuance. The investors will have the right to
acquire up to $225,000 worth of our common stock at a price the lesser of $.0175
or 50% of the average of the six lowest prices on six separate trading days
during the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of 7 years from the
original purchase date at a purchase price of $.00075 per share. We are required
to pay interest to the debenture holder on the aggregate unconverted and
outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of common
stock.
The proceeds received were allocated between the warrants and the
debenture without warrants on a pro rata basis. Paid in capital has been
credited by the value of the warrants.
As of November 11, 2003, we have issued 1,863,916,906 shares of our
common stock upon to the convertible debenture holders upon the conversion of
$2,033,000 of debentures and accrued interest.
On October 6, 2003, we entered into a settlement agreement with the
Canadian Imperial Bank of Commerce ("CIBC") in the sum of $150,000. This
settlement was pursuant to a claim filed against Thinkpath Training Inc., one of
our subsidiary companies, with the Superior Court of Justice of Ontario, Canada,
Court File No. 41967, demanding payment of damages in the sum of $150,000
pursuant to an operating account overdraft balance. The settlement includes
payment of the overdraft, accrued interest and legal fees and will be paid in
monthly installments over fifteen months beginning October 25, 2003.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934,
as amended (the "Exchange Act")) as of a date within 45 days prior to the filing
date of this Form 10-Q filed for the nine months ended September 30, 2003 (the
"Evaluation Date"). Based on such evaluation, such officers have concluded that,
as of the Evaluation Date, our disclosure controls and procedures are effective
in alerting the officers on a timely basis to material information relating to
us (including our wholly owned subsidiaries) required to be included in our
reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in our
internal controls or in other factors that could significantly affect such
controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to the following pending legal proceedings:
On October 1, 2003, SITQ National Inc. ("SITQ'), a former landlord,
filed a statement against us and our Directors, with the Superior Court of
Justice of Ontario, Canada, Court File No. 03-CV-256327CM3, demanding payment of
rent arrears of approximately $760,000 and alleging damages for breach of lease
for future rent in the sum of $3,250,000. The lease covered premises located in
Ontario, Canada that we in April 2003. The term of the lease does not expire
until December 31, 2010. We intend to defend this claim vigorously.
We are not party to any other material litigation, pending or
otherwise.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the third quarter 2003, we sold convertible debentures
and warrants for an aggregate of $200,000. The debt is convertible into common
stock at a discount to the market. In connection with the offering, we issued an
aggregate of 123,588,850 warrants to purchase common stock. Pursuant to the
terms of the initial offering as reported in the Form 8-K that we filed with the
SEC on December 9, 2002, investors in that offering were granted the right to
purchase an additional $2,200,000 of convertible debt. As a result of the sales
made during the third quarter of 2003, convertible debentures and warrants for
an aggregate dollar amount of $450,000 remain available for purchase by the
investors as at September 30, 2003. The proceeds from the sale of convertible
debentures and warrants were used to repay debt obligations and for working
capital. The offering, which was made to non-U.S. residents only, was exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act") pursuant to Regulation S promulgated thereunder.
In addition, during the third quarter 2003, 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.
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We believe the above issuances were exempt from registration pursuant
to the exemption provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 2, 2003, we held an Annual Meeting of Shareholders at
which the shareholders: (i) elected the Board of Directors for the ensuing year;
(ii) ratified the appointment of Schwartz, Levitsky, Feldman, LLP, as our
independent chartered accountants for the ensuing year; (iii) did not ratify the
adoption of our 2003 Stock Option Plan; and, (iv) amended our Articles of
Incorporation to increase the authorized number of shares of our common stock
from 800,000,000 shares to an unlimited number of shares.
(i) The following directors were elected to the Board of Directors and
received the votes indicated:
For Withheld
----------- ----------
Declan French 513,828,523 22,747,118
John Dunne 516,784,578 19,791,063
Arthur Marcus 516,984,153 19,591,488
Lloyd MacLean 516,984,578 19,591,063
Set forth below is a biographical description of each of our directors
elected at our Annual General Meeting and Special Meeting of Shareholders held
on October 2, 2003:
Declan A. French has served as our Chairman of the Board of Directors
and Chief Executive Officer since its inception in February 1994. Prior to
founding Thinkpath, Mr. French was President and Chief Executive Officer of TEC
Partners Ltd., an information technology recruiting firm in Toronto, Canada. Mr.
French has a diploma in Psychology and Philosophy from the University of St.
Thomas in Rome, Italy.
John Dunne has served on our Board of Directors since June 1998. Mr.
Dunne has served as Chairman and Chief Executive Officer of the Great Atlantic &
Pacific Company of Canada, Ltd. since August 1997, where he also served as
President and Chief Operating Officer from September 1996 until August 1997.
From November 1995 until September 1996, Mr. Dunne was Chairman and Chief
Executive Officer of Food Basics Ltd.
Arthur S. Marcus has served our Board of Directors since April 2000.
Mr. Marcus is a partner at the New York law firm of Gersten, Savage, Kaplowitz,
Wolf and Marcus, LLP, our United States securities counsel. Mr. Marcus joined
Gersten, Savage & Kaplowitz, LLP in 1991 and became a partner in 1996. Mr.
Marcus specializes in the practice of United States Securities Law and has been
involved in approximately 50 initial public offerings and numerous mergers and
acquisitions. Mr. Marcus received a Juris Doctorate from Benjamin N. Cardozo
School of Law in 1989.
Lloyd MacLean has served on our Board of Directors since February 14,
2003. Mr. MacLean served as our Chief Financial Officer and a Director from
September 1997 until May 2000, at which time he departed to pursue other
business opportunities. Mr. MacLean is the sole officer and director of Globe
Capital Corporation. From 1996 to 1997, Mr. MacLean was Vice-President and Chief
Financial Officer of ING Direct Bank of Canada. From 1994 until 1996, he was
Vice-President and Chief Financial Officer of North American Trust, Inc., where
he also served as a Vice President from 1990 until 1994. Mr. MacLean has an MBA
from Harvard University and is a member of the Canadian Institute of Chartered
Accountants.
16
(ii) The appointment of Schwartz, Levitsky Feldman, LLP, to serve as our
independent chartered accountants for the ensuing year was approved by the votes
indicated:
For Against Withheld
519,008,303 16,342,425 1,224,913
(iii) The adoption of our 2003 Stock Option Plan was not approved by the
votes indicated:
For Against Withheld
155,455,276 25,621,596 355,498,679
(iv) The amendment of our Articles of Incorporation to increase the
authorized number of shares of our common stock from 800,000,000 shares to an
unlimited number of shares.
For Against Withheld
503,296,380 32,817,961 461,300
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31. Rule 13a-14(a)/15d-14(a) Certifications.
Exhibit 32.1 Certification by the Chief Executive Officer Relating to a Periodic
Report Containing Financial Statements.* Exhibit 32.2 Certification by the Chief
Financial Officer Relating to a Periodic Report Containing Financial
Statements.*
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended
* The Exhibit attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THINKPATH INC.
Dated: November 11, 2003 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
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