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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER __________
THINKPATH INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
ONTARIO 52-209027
- ------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
201 WESTCREEK BOULEVARD
BRAMPTON, ONTARIO L6T 5S6
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 460-3040
-------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES |X| NO |_|
AS OF NOVEMBER 22, 2004 THERE WERE 9,662,365,979 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
THINKPATH INC.
SEPTEMBER 30, 2004 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, 2004 and
December 31, 2003....................................................
Interim Consolidated Statements of Operations for the three and nine
months ended September 30, 2004 and 2003.............................
Interim Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2004 and the year ended
December 31, 2003....................................................
Interim Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003....................................
Notes to Interim Consolidated Financial Statements...................
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations................................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........
Item 4. Controls and Procedures..............................................
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................
Item 2. Changes in Securities and Use of Proceeds ...........................
Item 3. Defaults Upon Senior Securities .....................................
Item 4. Submission of Matters to a Vote of Security Holders .................
Item 5. Other Information ...................................................
Item 6. Exhibits and Reports on Form 8-K ....................................
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
ASSETS
CURRENT ASSETS
Cash 143,685 483,443
Accounts receivable 2,160,399 1,766,061
Prepaid expenses 239,633 128,612
------------------ -----------------
2,543,717 2,378,116
PROPERTY AND EQUIPMENT 925,604 1,182,751
GOODWILL 3,748,732 3,748,732
INVESTMENT IN NON-RELATED COMPANIES 45,669 45,669
OTHER ASSET 58,765 53,321
------------------ -----------------
7,322,487 7,408,589
================== =================
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
LIABILITIES
CURRENT LIABILITIES
Receivable Discount Facility 615,835 1,128,444
Accounts payable 1,660,527 2,650,783
Current portion of long-term debt 123,541 279,800
Current portion of notes payable 853,491 859,936
12% Convertible Debenture 226,078 215,558
------------------ -----------------
3,479,472 5,134,521
LONG-TERM DEBT 153,088 13,176
------------------ -----------------
3,632,560 5,147,697
================== =================
COMMITMENTS AND CONTINGENCIES (NOTE 20)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 47,682,489 43,576,292
DEFICIT (42,667,061) (39,999,711)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,325,501) (1,315,689)
------------------ -----------------
3,689,927 2,260,892
------------------ -----------------
7,322,487 7,408,589
================== =================
The accompanying notes are an integral part of
these interim consolidated financial statements
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
REVENUE 3,125,899 2,649,681 9,507,784 7,611,673
COST OF SERVICES 1,981,507 1,770,861 6,089,123 5,154,467
-------------- -------------- -------------- --------------
GROSS PROFIT 1,144,392 878,820 3,418,661 2,457,206
-------------- -------------- -------------- --------------
EXPENSES
Administrative 583,840 563,406 1,736,566 1,757,448
Selling 385,902 279,048 1,045,053 782,065
Depreciation and amortization 118,683 143,155 399,699 519,791
-------------- -------------- -------------- --------------
1,088,425 985,609 3,181,318 3,059,304
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES 55,967 (106,789) 237,343 (602,098)
Interest Charges 1,064,652 1,700,638 2,842,147 6,777,521
-------------- -------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,008,685) (1,807,427) (2,604,804) (7,379,619)
Income Taxes 15,906 1,343 20,382 13,366
-------------- -------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (1,024,591) (1,808,770) (2,625,186) (7,392,985)
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS
(INCLUDING GAIN ON DISPOSAL) (15,141) (49,062) (42,164) 234,295
-------------- -------------- -------------- --------------
NET LOSS (1,039,732) (1,857,832) (2,667,350) (7,158,690)
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK OUTSTANDING
BASIC AND DILUTED 5,601,027,960 448,877,336 4,200,637,587 290,295,250
============== ============== ============== ==============
LOSS FROM CONTINUING OPERATIONS
PER WEIGHTED AVERAGE COMMON
STOCK BASIC AND DILUTED (0.00) (0.00) (0.00) (0.02)
============== ============== ============== ==============
The accompanying notes are an integral part of
these interim consolidated financial statements
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND THE YEAR ENDED
DECEMBER 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED
COMMON STOCK CAPITAL OTHER
NUMBER OF STOCK COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNTS DEFICIT LOSS LOSS
------------------------------------------------------------------------------
Balance as of December 31, 2002 66,258,043 33,367,034 (30,966,083) (1,077,521)
============================================= =============
Net loss for the year -- -- (9,033,628) (9,033,628)
-------------
Other comprehensive loss, net of tax:
Foreign currency translation (238,168) (238,168)
-------------
Comprehensive loss (9,271,796)
=============
Conversion of 12% senior secured
convertible debenture 2,368,413,224 901,891 --
Interest on 12% senior secured
convertible debenture 153,405,397 142,875 --
Debt settled through the issuance of
common stock 16,997,854 449,333 --
Common stock and warrants issued for
services 10,980,000 226,500 --
Warrants issued for cash 121,184,669 1,241,514 --
Beneficial conversion on issuance of
convertible debt -- 7,247,145 --
--------------------------------------------- -------------
Balance as of December 31, 2003 2,737,239,187 43,576,292 (39,999,711) (1,315,689)
============================================= =============
Net loss for the period -- -- (2,667,350) (2,667,350)
-------------
Other comprehensive loss, net of tax:
Foreign currency translation (9,812) (9,812)
-------------
Comprehensive loss (2,677,162)
=============
Conversion of 12% senior secured
convertible debenture 4,223,054,463 293,376 --
Interest on 12% senior secured
convertible debenture 180,460,870 29,380 --
Common stock and warrants issued for
services 250,197,488 175,336 --
Warrants issued for cash 377,053,570 1,100,225 --
Beneficial conversion on issuance of
convertible debt -- 2,507,880 --
--------------------------------------------- -------------
Balance as of September 30, 2004 7,768,005,578 47,682,489 (42,667,061) (1,325,501)
============================================= =============
The accompanying notes are an integral part of
these interim consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
2004 2003
---- ----
$ $
Cash flows from operating activities
Net loss (2,667,350) (7,158,690)
---------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 432,363 557,147
Amortization of beneficial conversion (included in interest) 2,507,880 6,179,406
Interest on 12% senior secured convertible debentures 29,380 56,893
Decrease (increase) in accounts receivable (369,870) 872,350
Decrease (increase) in prepaid expenses (109,203) 32,189
Decrease in accounts payable (1,014,369) (1,057,702)
Decrease in long-term receivable -- 57,775
Decrease in deferred revenue -- (163,593)
Common stock and warrants issued for services 175,336 226,500
Accounts payable settled with common stock -- 449,333
Debt forgiveness -- (30,565)
Gain on disposal of IT Recruitment division -- (190,627)
---------- ----------
Net cash used in operating activities (1,015,833) (169,584)
---------- ----------
Cash flows from investing activities
Purchase of property and equipment (173,598) (92,295)
Proceeds on disposal of IT Recruitment division -- 146,406
---------- ----------
Net cash provided by (used in) investing activities (173,598) 54,111
---------- ----------
Cash flows from financing activities
Repayment of notes payable (6,444) (31,453)
Repayment of long-term debt (572,711) (1,532,119)
Proceeds from issuance of capital stock 229,121 --
Proceeds from issuance of debentures and warrants 1,175,000 1,650,000
---------- ----------
Net cash provided by financing activities 824,966 86,428
---------- ----------
Effect of foreign currency exchange rate changes 24,707 (17,356)
---------- ----------
Net decrease in cash (339,758) (46,401)
Cash
Beginning of period 483,443 114,018
---------- ----------
End of period 143,685 67,617
========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 304,887 598,121
========== ==========
Income taxes paid 15,906 13,366
========== ==========
SUPPLEMENTAL NON-CASH ITEMS:
Common shares issued for liabilities -- 449,333
========== ==========
The accompanying notes are an integral part of
these interim consolidated financial statements.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS AND GOING CONCERN
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the Company's ability to continue
as a going concern for a reasonable period of time. These conditions and
events include significant operating losses, working capital deficiencies,
and violation of certain loan covenants. At September 30, 2004, the
Company had a working capital deficiency of $935,755, a deficit of
$42,667,061 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, 2004, the balance on the receivable discount facility was
$615,835. The Company is currently within margin of its receivable
discount facility with Morrison Financial Services Limited based on 75% of
qualifying accounts receivable.
As at November 19, 2004, management's plans to mitigate and alleviate
these adverse conditions and events include:
a) Ongoing restructuring of debt obligations and settlement of
outstanding legal claims.
b) Focus on growth in the engineering division, including design
services and technical publications.
c) Expansion of the engineering service offerings in Ontario,
Canada.
Although there can be no assurances, it is anticipated that continued cash
flow improvements will be sufficient to cover current operating costs and
will permit payments to certain vendors and interest payments on debt.
Despite its negative working capital and deficit, the Company believes
that its management has developed a business plan that if successfully
implemented could substantially improve the Company's operational results
and financial condition. However, the Company can give no assurances that
its current cash flows from operations, if any, borrowings available under
its 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.
b) Change of Name
On June 6, 2001, the Company changed its name from Thinkpath.com Inc. to
Thinkpath Inc.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
c) Principal Business Activities
Thinkpath Inc. is an engineering services company which, along with its
wholly-owned subsidiaries, Thinkpath US Inc. (formerly Cad Cam Inc.),
Thinkpath Michigan Inc. (formerly Cad Cam of Michigan Inc.), Thinkpath
Technical Services Inc. (formerly Cad Cam Technical Services Inc.),
provides engineering, design, technical publications and staffing,
services to enhance the resource performance of clients. In addition, the
Company owns the following companies which are currently inactive:
Systemsearch Consulting Services Inc., International Career Specialists
Ltd., Microtech Professionals Inc., E-Wink Inc. (80%), Thinkpath Training
Inc. (formerly ObjectArts Inc.), Thinkpath Training US Inc. (formerly
ObjectArts US Inc.) and TidalBeach Inc. In 2002, the Company sold Njoyn
Software Incorporated, a wholly-owned subsidiary.
d) Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Company
and its controlled subsidiaries. The earnings of the subsidiaries are
included from the date of acquisition for acquisitions accounted for using
the purchase method. For subsidiaries 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 amounts of the Company's other financial instruments
approximate fair values because of the short maturity of these instruments
or the current nature of interest rates borne by these instruments.
g) Long-Term Financial Instruments
The fair value of each of the Company's long-term financial assets and
debt instruments is based on the amount of future cash flows associated
with each instrument discounted using an estimate of what the Company's
current borrowing rate for similar instruments of comparable maturity
would be.
h) Property and Equipment
Property and equipment are recorded at cost and are amortized over the
estimated useful lives of the assets principally using the declining
balance method.
The Company's policy is to record leases, which transfer substantially all
benefits and risks incidental to ownership of property, as acquisition of
property and equipment and to record the occurrences of corresponding
obligations as long-term liabilities. Obligations under capital leases are
reduced by rental payments net of imputed interest.
i) Net Income (Loss) and Diluted Net Income (Loss) Per Weighted Average
Common Stock
Net income (Loss) per common stock is computed by dividing net income
(loss) for the year by the weighted average number of common stock
outstanding during the year.
Diluted net income (loss) per common stock is computed by dividing net
income for the year by the weighted average number of common stock
outstanding during the year, assuming that all convertible preferred
stock, stock options and warrants as described in note 13 were converted
or exercised. Stock conversions, stock options and warrants which are
anti-dilutive are not included in the calculation of diluted net income
(loss) per weighted average common stock.
j) 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 clearly defined milestones 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 16), the Company
provided the services of information technology consultants on a contract
basis and revenue was recognized as services were performed.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
3) Prior to the sale of the IT recruitment division (Note 16), 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 16), 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 16), 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 16), 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.
k) Goodwill
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under
the new rules, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment.
Separable intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives. The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company began applying the new
accounting rules effective January 1, 2002.
Thinkpath completed SFAS No.142 impairment test and concluded that there
was no impairment of recorded goodwill, as the fair value of its reporting
units exceeded their carrying amount.
l) Income Taxes
The Company accounts for income tax under the provision of SFAS No. 109,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statement or tax returns.
Deferred income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all significant
temporary differences between the tax and financial statement bases of
assets and liabilities.
Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected as adjustments to tax expense in the period of
enactment. Deferred tax assets may be reduced, if deemed necessary based
on a judgmental assessment of available evidence, by a valuation allowance
for the amount of any tax benefits which are more likely, based on current
circumstances, not expected to be realized.
m) Foreign Currency
The Company is a foreign private issuer and maintains its books and
records in Canadian dollars (the functional currency). The financial
statements are converted to US dollars as the Company has elected to
report in US dollars consistent with Regulation S-X, Rule 3-20. The
translation method used is the current rate method which is the method
mandated by FAS 52 where the functional currency is the foreign currency.
Under the current method all assets and liabilities are translated at the
current rate, stockholders' equity accounts are translated at historical
rates and revenues and expenses are translated at average rates for the
year.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
Due to the fact that items in the financial statements are being
translated at different rates according to their nature, a translation
adjustment is created. This translation adjustment has been included in
accumulated other comprehensive income. Gains and losses on foreign
currency transactions are included in financial expenses.
n) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. These
estimates are reviewed periodically and as adjustments become necessary,
they are reported in earnings in the period in which they become known.
o) Long-Lived Assets
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. SFAS No. 121 requires that long-lived assets
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Management used its best estimate of the undiscounted
cash flows to evaluate the carrying amount and have reflected the
impairment.
In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 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.
p) Comprehensive Income
In 1999, the Company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income". This standard requires companies to disclose
comprehensive income in their financial statements. In addition to items
included in net income, comprehensive income includes items currently
charged or credited directly to stockholders' equity, such as the changes
in unrealized appreciation (depreciation) of securities and foreign
currency translation adjustments.
q) Accounting for Stock-Based Compensation
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued. It introduced the use of a fair value-based method of
accounting for stock-based compensation. It encourages, but does not
require, companies to recognize stock-based compensation expenses to
employees based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the existing
accounting rules continued in Accounting Principles Board Option No. 25,
Accounting for stock issued to employees. However, SFAS No. 123 requires
companies that choose not to adopt the new fair value accounting rules to
disclose pro forma net income and earnings per share under the new method.
SFAS No. 123 is effective for financial statements for fiscal years
beginning after December 31, 1995. The Company has adopted the disclosure
provisions of SFAS No. 123. SFAS No. 123 was amended by SFAS No. 148 which
requires more prominent disclosure of stock based compensation.
r) 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 had 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.
s) Investments in Non-Related Companies
The Company records its investments in companies in which it holds a 20%
or more interest and in which the Company can exercise significant
influence over the investee's operating and financial policies on the
equity basis.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
t) Recent Pronouncements
In April 2002, 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, 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, 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
was effective for the December 31, 2002 financial statements. The interim
reporting disclosure requirements was effective for the March 31, 2003
financial statements.
In November 2002, 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, FASB 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.
In April 2003, FASB 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
In May 2003, FASB 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.
u) Advertising Costs
Advertising costs are expensed as incurred.
3. STOCK OPTION PLANS
OPTIONS WEIGHTED
AVERAGE
EXERCISE
PRICE
a) Options outstanding at December 31, 2002 1,110,492
Options forfeited during the year (13,000) 3.19
---------
Options outstanding at December 31, 2003 1,097,492
Options forfeited during the period (6,000) 3.19
Options expired during the period (431,992) 3.19
---------
Options outstanding at September 30, 2004 659,500
=========
Options exercisable December 31, 2003 1,097,492 1.90
Options available for future grant
December 31, 2003 20,013,000
Options exercisable September 30, 2004 659,500 1.53
Options available for future grant
September 30, 2004 20,450,992
b) Range of Exercise Prices at September 30, 2004
Outstanding Weighted Options Options Weighted
Options Average Outstanding exercisable Average
Remaining Average Exercise
Life Exercise Price Price
$2.78 - $3.25 224,500 0.50 year $3.15 224,500 $3.15
$1 and under 435,000 1.58 years $0.70 435,000 $0.70
c) Pro-forma net income
At September 30, 2004, the Company has five stock-based employee
compensation plans, which are described more fully in Note 13(d). The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No.25, Accounting for Stock Issued to Employees,
and related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123 Accounting for
Stock-Based Compensation, to stock-based employee compensation. SFAS
No.123 was amended by SFAS No. 148 which requires more prominent
disclosure of stock based compensation.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
Three Months Ended Sept 30, Nine Months Ended Sept 30,
2004 2003 2004 2003
---- ---- ---- ----
Net loss as reported (1,039,732) (1,857,832) (2,667,350) (7,158,690)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards net
of related tax effects -- (20,858) (1,895) (85,114)
---------- ---------- ---------- ----------
Pro forma net loss (1,039,732) (1,878,690) (2,669,245) (7,243,804)
========== ========== ========== ==========
Loss per share:
Basic and diluted loss per
share, as reported (0.00) (0.00) (0.00) (0.02)
========== ========== ========== ==========
Pro forma loss per share (0.00) (0.00) (0.00) (0.02)
========== ========== ========== ==========
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
Expected dividends -----------
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 nine months ended September 30, 2004.
There were no option grants in the year ended December 31, 2003.
4. ACCOUNTS RECEIVABLE
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Accounts receivable 2,344,472 1,952,908
Less: Allowance for doubtful accounts (184,073) (186,847)
------------------ -----------------
2,160,399 1,766,061
================== =================
Allowance for doubtful accounts
Balance, beginning of period 188,217 236,793
Provision 1,500 44,359
Recoveries (5,644) (94,305)
------------------ -----------------
Balance, end of period 184,073 186,847
================== =================
5. PROPERTY AND EQUIPMENT
September 30, 2004 December 31, 2003
-------------------------------------- -----------------
ACCUMULATED
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 507,425 372,334 135,091 162,544
Computer equipment and software 5,388,579 4,602,078 786,501 1,014,540
Leasehold improvements 92,516 88,504 4,012 5,667
---------- ---------- ---------- ----------
5,988,520 5,062,916 925,604 1,182,751
========== ========== ========== ==========
Assets under capital lease 477,369 475,869 1,500 25,464
========== ========== ========== ==========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
Amortization of property and equipment for the nine months ended September
30, 2004 amounted to $300,756 including amortization of assets under
capital lease of $27,181.
Amortization of property and equipment for the year ended December 31,
2003 amounted to $541,309 including amortization of assets under capital
lease of $67,875.
6. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Conexys 1 1
Digital Cement 45,668 45,668
------ ------
Total 45,669 45,669
====== ======
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.
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.
During 2003, the Company collected a long-term receivable in the amount of
$53,924, owed by Digital Cement.
7. GOODWILL
Goodwill is the excess of cost over the value of assets acquired over
liabilities assumed in the purchase of the subsidiaries. Goodwill has been
allocated to reporting units as follows:
September 30, 2004 December 31, 2003
-------------------------------------------------- -----------------
ACCUMULATED
ACCUMULATED IMPAIRMENT
COST AMORTIZATION LOSSES NET NET
$ $ $ $
IT Recruitment
(Systemsearch Consulting
Services) 448,634 303,337 145,297 -- --
Technical Publications &
Engineering (CadCam Inc.) 5,518,858 535,164 1,234,962 3,748,732 3,748,732
--------- --------- --------- --------- ---------
5,967,492 838,501 1,380,259 3,748,732 3,748,732
========= ========= ========= ========= =========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. This statement requires the Company to evaluate
the carrying value of goodwill and intangible assets based on assumptions
and estimates of fair value and future cash flow information. These
assumptions reflect management's best estimates and may differ from actual
results. If different assumptions and estimates are used, carrying values
could be adversely impacted, resulting in write downs that could adversely
affect the Company's earnings.
At December 31, 2003, the Company performed its annual impairment test for
goodwill and determined that no adjustment to the carrying value of
goodwill was needed.
On an ongoing basis, absent any impairment indicators, the Company expects
to perform a goodwill impairment test as of the end of the fourth quarter
of every year.
8. OTHER ASSET
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Cash surrender value of life insurance 58,765 53,321
------ ------
Total 58,765 53,321
====== ======
Amortization of other assets amounted to nil for the nine months ended
September 30, 2004 and the year ended December 31, 2003.
9. RECEIVABLE DISCOUNT FACILITY
i) September 30, 2004
At September 30, 2004, the Company had a receivable discount facility in
the amount of $615,835 with Morrison Financial Services Limited which
allowed the Company to borrow up to 75% of the value of qualified accounts
receivables to a maximum of $1,500,000, bearing interest at 30% per annum.
ii) December 31, 2003
At December 31, 2003, the Company had a receivable discount facility in
the amount of $1,130,000 with Morrison Financial Services Limited which
allowed the Company to borrow up to 75% of the value of qualified accounts
receivables to a maximum of $3,000,000, bearing interest at 30% per annum.
10. 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 June 30, 2003 and 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 June 18, 2004, 1,142,857 of these
warrants were repriced from $.00075 to $.00025 per share.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
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. On April 7, 2004, all of these
warrants were repriced from $.0175 to $.0004 per share.
The proceeds of $900,000 received by the Company in 2002 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 year ended December 31, 2003, the Company sold an additional
$2,075,000 in convertible debentures along with 770,033,457 warrants. The
debentures will become due twelve months from the date of issuance. The
investors will have the right to acquire up to $2,075,000 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 April 7, 2004, 11,999,999 of
these warrants were repriced from $.0175 to $.0004 per share. On June 18,
2004, 279,324,980 of these warrants were repriced from $.00075 to $.00025
per share.
The proceeds of $2,075,000 received by the Company in 2003 were allocated
between the warrants and the debenture without warrants on a pro rata
basis. Paid in capital has been credited by the value of the warrants in
the amount of $1,150,625.
At December 31, 2003, the value of the beneficial conversion feature on
all issued convertible debentures was determined to be $6,865,928 which
was credited to paid in capital and charged to earnings as interest
expense.
On January 8, 2004, the Company sold an additional $25,000 in convertible
debentures along with 1,428,571 warrants pursuant to the share purchase
agreement (the "12% Senior Secured Convertible Debenture Agreement") dated
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
$25,000 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 April 7, 2004 all of these
warrants were repriced from $.0175 to $0.0004 per share
On March 25, 2004, the Company entered into a new share purchase agreement
with Bristol Investment Fund, Ltd. for the issuance and sale by the
Company of debentures of up to $1,000,000. The first debenture of $350,000
was purchased together with 924,000,000 warrants on closing. The debenture
will become due twelve months from the date of issuance. Bristol will have
the right to acquire up to $350,000 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 March 25, 2011 at a purchase price of $.000417 per share. The
Company is required to pay interest to Bristol 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 18, 2004, all of these warrants
were repriced from $.000417 to $.00025 per share.
On March 29, 2004, the Company entered into a new share purchase agreement
with Tazbaz Holdings Limited for the issuance and sale by the Company of a
$100,000 principal amount Convertible Debenture and 250,000,000 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 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 March 29, 2011 at a
purchase price of $.0004 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
On May 20 and June 18, 2004, the Company sold an additional $400,000 in
convertible debentures together with 1,682,352,942 warrants to Bristol
Investment Fund, Ltd. pursuant to the March 25, 2004 share purchase
agreement. The debentures will become due twelve months from the date of
issuance. Bristol will have the right to acquire up to $400,000 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 $.00025 per share. The Company is required
to pay interest to Bristol 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 May 24, 2004 and June 18, 2004, the Company entered into new share
purchase agreements with Tazbaz Holdings Limited for the issuance and sale
by the Company of $300,000 principal amount Convertible Debentures and
1,157,142,857 warrants to purchase shares of the Company's common stock.
The debentures will become due twelve months from the date of issuance.
Tazbaz Holdings Limited will have the right to acquire up to $300,000
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 $.00025 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 $1,175,000 received by the Company in the nine months
ended September 30, 2004 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 $871,104.
At September 30, 2004, the value of the beneficial conversion feature on
all issued convertible debentures was determined to be $2,413,143 which
was credited to paid in capital and charged to earnings as interest
expense.
11. LONG-TERM DEBT
i) September 30, 2004
Effective March 25, 2004, the Company amended its loan agreement with
Terry Lyons. The balance of accrued interest was added to the original
principal amount of $259,356 for a new principal balance of $299,768.
Monthly payments of $10,000 began April 5, 2004 until the full amount of
the note, including interest is paid in full. The interest rate was
reduced from 30% per annum to US prime plus 14%.
ii) December 31, 2003
At December 31, 2003, the Company had a loan balance of $259,356 with
Terry Lyons and no principal payments had been made.
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
a) Included therein:
A loan with T. Lyons payable in monthly payments of
$10,000 beginning April 5, 2004 and bearing interest
at US prime plus 14% per annum. This loan is
subordinated to Morrison Financial Services Limited 265,231 259,356
Various capital leases with various payment
terms and interest rates 11,398 33,620
------ ------
276,629 292,976
Less: current portion 123,541 279,800
------- -------
Total $153,088 $13,176
======== =======
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
b) Future principal payments obligations as at September 30, 2004, were as
follows:
2004 32,520
2005 128,878
2006 115,231
2007 --
2008 --
--------
$276,629
========
c) Interest expense related to long-term debt was $70,475 for the nine
months ended September 30, 2004. Interest expense related to long-term
debt was $119,339 for the year ended December 31, 2003.
12. 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. Principal
payments of $4,000 were to be made monthly starting 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 note is subordinated to Morrison Financial Services Limited and to 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. As a result of the default, the
principal balance bears interest at 12% per annum until payment is made
and the note is due on demand. The entire note payable has been
reclassified as current. The Company intends to make payments as cash
becomes available.
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. Principal payments of $10,000 per month were to
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:
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 note is secured under a general security agreement but is subordinated
to Morrison Financial Services Limited and to 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. As a result of the default, Ms. Dunne-Fushi
has the option of enforcing the security she holds and therefore the
entire note payable has been reclassified as current. The Company intends
to make further payments as cash becomes available.
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Note Payable to Roger Walters 224,000 224,000
Note Payable to Denise Dunne 629,491 635,936
------- -------
853,491 859,936
Less: current portion 853,491 859,936
------- -------
Total -- --
======= =======
13. CAPITAL STOCK
a) Authorized
Unlimited Common stock, no par value
1,000,000 Preferred stock, issuable in series, rights to be
determined by the Board of Directors
b) Issued
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.
On October 2, 2003, the Company amended its Articles of Incorporation to
increase its authorized common stock from 800,000,000 to an unlimited
number of shares.
During the year ended December 31, 2003, the Company issued 16,997,854
shares of its common stock in settlement of various accounts payable and
liabilities in the amount of $449,333. This amount includes 12,427,535
shares of common stock, no par value per share, issued and registered on
January 28, 2003 to Declan A. French, the Company's Chief Executive
Officer, pursuant to an amendment to his employment agreement. Also
included are 2,423,744 shares of common stock, no par value per share,
issued to an employee as a signing bonus pursuant to his employment
agreement. The Company also issued 2,146,575 shares to Vantage Point
Capital, an investor relations firm, in settlement of accounts payable.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
During the year ended December 31, 2003, the Company issued 10,980,000
shares of its common stock and warrants as payment for a variety of
services in the amount of $226,500. This includes 4,000,000 shares of
common stock, no par value per share, issued to Rainery Barba pursuant to
a consulting agreement with the Company dated February 7, 2003 for
provision of legal and advisory services for a period of one year. Also
included, are 4,200,000 shares of common stock, no par value per share
issued to Dailyfinancial.com Inc. pursuant to a consulting agreement with
the Company dated February 7, 2003 for the provision of corporate
consulting services in connection with mergers and acquisitions, corporate
finance and other financial services. The Company also issued 2,780,000
shares and warrants to various parties in consideration of financial
services rendered.
During the year ended December 31, 2003 the Company issued 121,184,669
shares of its common stock to the 12% Senior Secured Convertible Debenture
Holders on the exercise of warrants.
During the year ended December 31, 2003, the Company issued 2,521,818,621
shares of its common stock upon the conversion of 12% Senior Secured
Convertible Debentures in the amount of $2,309,712.
During the nine months ended September 30, 2004, the Company issued
250,197,488 shares of common stock, no par value per share, in
consideration of consulting services in the amount of $175,336. This
includes 250,000,000 shares of common stock, no par value per share,
issued to Jeffrey Flannery pursuant to a consulting agreement with the
Company dated May 26, 2004 for the provision of marketing and business
development consulting services for a period of one year.
During the nine months ended September 30, 2004, the Company issued
4,403,515,333 shares of its common stock upon the conversion of 12% Senior
Secured Convertible Debentures in the amount of $776,400.
c) 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 which were 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: (a) repriced warrants to purchase up to
100,000 shares of its common stock, which warrants weres issued to a
certain investor in the April 2000 private placement offering of Series B
8% Cumulative Preferred Stock, so that such warrants are 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(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 is 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, 2003, 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, 2003, 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 June 30, 2003 and 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 June 18, 2004, 1,142,857 of these warrants were repriced
from $.00075 to $.00025 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. On April 7, 2004, all of these
warrants were repriced from $.0175 to $.0004 per share.
During the year ended December 31, 2003, the Company issued 770,033,457
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 $.00075 per
share. On June 30, 2003, 45,714,286 of these warrants were repriced from
$.0175 to $.00875 per share. On October 14, 2003, 314,576,307 of these
warrants were repriced from $.00137 to $.00075 per share. On April 7,
2004, 11,999,999 of these warrants were repriced from $.0175 to $.0004 per
share. On June 18, 2004, 279,324,980 of these warrants were repriced from
$.00075 to $.00025 per share.
On January 8, 2004, the Company sold issued 1,428,571 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 April 7, 2004 all of these warrants
were repriced from $.0175 to $0.0004 per share
On March 25, 2004, the Company issued 924,000,000 warrants to Bristol
Investment Fund, Ltd. which are exercisable at any time and in any amount
until March 25, 2011 at a purchase price of $.000417 per share. On June
18, 2004, all of these warrants were repriced from $.000417 to $.00025 per
share.
On March 25, 2004 the Company issued 250,000,000 warrants to Tazbaz
Holdings Limited, which are exercisable at any time and in any amount
until March 29, 2011 at a purchase price of $0.0004 per share.
On May 20 and June 18, 2004, the Company issued 1,682,352,942 warrants to
Bristol Investment Fund, Ltd. which are exercisable at any time and in any
amount for a period of seven years from closing at a purchase price of
$.00025 per share.
On May 24, 2004 and June 18, 2004, the Company issued 1,157,142,857
warrants to Tazbaz Holdings Limited which are exercisable at any time and
in any amount for a period of seven years from closing at a purchase price
of $.00025 per share.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
d) Stock Options
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. In October 2003, the
directors of the Company adopted and the stockholders approved the
adoption of the Company's 2003 Stock Option Plan which provides for the
issuance of 20,000,000 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.
14. DEFERRED INCOME TAXES AND INCOME TAXES
a) Deferred Income Taxes
The components of the future tax liability classified by source of
temporary differences that gave rise to the benefit are as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Tax values of depreciable assets in excess of
accounting values 498,000 --
Losses available to offset future income taxes 3,260,400 4,046,200
Share issue costs 115,154 115,154
---------- -------
3,873,554 4,161,354
Less: Valuation allowance (3,873,554) (4,161,354)
---------- ----------
-- --
========== ==========
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:
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Amount calculated at Federal and Provincial
statutory rates (1,058,787) (3,704,770)
---------- ----------
Increase resulting from:
Permanent and other differences 1,366,985 2,978,164
Valuation allowance (287.816) 756,326
---------- ----------
1,080,519 3,734,490
---------- ----------
Current income taxes 21,732 29,720
========== ==========
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. The Company has not reflected the benefit
of utilizing non-capital losses totaling approximately $8,200,000 or a
capital loss totaling $750,000 in the future as a deferred tax asset as at
September 30, 2004. As at the completion of the September 30, 2004
financial statements, management believed it was more likely than not that
the results of future operations would not generate sufficient taxable
income to realize the deferred tax assets.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
15. COMPREHENSIVE LOSS
Nine Months Ended
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Net loss (2,667,350) (9,033,628)
Other comprehensive loss
Foreign currency translation adjustments (9,812) (238,168)
------- ---------
Comprehensive loss (2,677,162) (9,271,796)
=========== ===========
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.
16. DISCONTINUED OPERATIONS
Effective March 8, 2002, the Company sold its technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. As part of
the transaction, Cognicase assumed all of the staff in the Company's
technology division, including the employees of TidalBeach Inc. The
Company will not have future revenues from either its Njoyn or Secondwave
products and therefore the technology operations have been reported as
discontinued. There was no technology revenue for the three months ended
September 30, 2004 and 2003. The net loss for the three months ended
September 30 was $1,200 in 2004 and $12,000 in 2003. There was no
technology revenue for the six months ended September 30, 2004 and 2003.
The net loss for the nine months ended September 30, was $3,900 in 2004
and $24,000 in 2003.
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.
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,
2004 and 2003. The net loss from the training division for the three
months ended September 30, 2004 was $14,000 compared to $30,000 in 2003.
There was no training revenue for the nine months ended September 30, 2004
and $162,000 in 2003. The net loss from the training division for the nine
months ended September 30, 2004 was $39,000 compared to net income of
$64,000 in 2003.
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. As a result of this
transaction, the Company will not have future revenues from its IT
recruitment division and therefore the operations have been reported as
discontinued.
There was no IT recruitment revenue for the three months ended September
30, 2004 and $18,000 in 2003. Net income from the IT recruitment division
for the three months ended September, 2004 was nil compared to a net loss
of $8,000 in 2003. There was no IT recruitment revenue for the nine months
ended September 30, 2004 and $1,440,000 in 2003. Net income from the IT
recruitment division for the nine months ended September 30, 2004 was nil
and $3,000 in 2003.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(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 months and
nine months ended September 30:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2004 2003 2004 2003
$ $ $ $
Revenues -- 17,666 -- 1,606,533
-------- -------- -------- ---------
Income (loss) from operations
before income taxes (14,091) (48,762) (40,814) 44,593
Provision for Income Taxes 1,050 300 1,350 925
Gain on disposal of IT Recruitment
Division -- -- -- 190,627
-------- -------- -------- ---------
Income (loss) from discontinued
operations (15,141) (49,062) (42,164) 234,295
======== ======== ======== =========
17. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company issued common shares and warrants for the following:
Nine Months Ended
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Services rendered 175,336 226,500
Accounts payable -- 449,333
------- -------
175,336 675,833
======= =======
18. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
Canada 216,620 224,222 561,796 387,742
United States of America 2,909,279 2,425,459 8,945,988 7,223,931
--------- --------- --------- ---------
3,125,899 2,649,681 9,507,784 7,611,673
========= ========= ========= =========
b) Net Income (Loss) by Geographic Area
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
Canada (1,401,376) (1,995,967) (3,794,145) (7,536,146)
United States of America 361,644 138,135 1,126,795 377,456
---------- ---------- ---------- ----------
(1,039,732) (1,857,832) (2,667,350) (7,158,690)
========== ========== ========== ==========
c) Identifiable Assets by Geographic Area
September 30, 2004 December 31, 2003
------------------ -----------------
$ $
Canada 1,157,716 1,369,904
United States of America 6,164,771 6,038,685
--------- ---------
7,322,487 7,408,589
========= =========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
d) Revenue and Gross Profit by Operating Segment
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
Revenue
Tech Pubs and Engineering 3,080,571 2,544,152 9,328,681 7,271,146
IT Documentation 45,318 105,529 179,103 340,527
---------- ---------- ---------- ----------
3,125,899 2,649,681 9,507,784 7,611,673
========== ========== ========== ==========
Gross Profit
Tech Pubs and Engineering 1,134,944 854,889 3,381,567 2,386,039
IT Documentation 9,448 23,931 37,094 71,167
---------- ---------- ---------- ----------
1,144,392 878,820 3,418,661 2,457,206
========== ========== ========== ==========
e) Revenues from Major Customers
The consolidated entity had the following revenues from major customers:
For the three and nine months ended September 30, 2004, one customer had
sales of $1,008,468 and $2,965,921 representing approximately 33% and 31%
of total revenue.
For the year ended December 31, 2003, one customer had sales of
$1,568,232, representing approximately 15% of total revenue.
f) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
19. 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.
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
$ $ $ $
NUMERATOR
Net loss from continuing operations (1,024,591) (1,808,770) (2,625,186) (7,392,985)
Income (loss) from discontinued
operations (15,141) (49,062) (42,164) 234,295
------------- ----------- ------------- -----------
Net loss (1,039,732) (1,857,832) (2,667,350) (7,158,690)
============= =========== ============= ===========
DENOMINATOR
Weighted Average common stock
outstanding 5,601,027,960 448,877,336 4,200,637,587 290,295,250
============= =========== ============= ===========
Basic and diluted loss per common
share from continuing operations (0.00) (0.00) (0.00) (0.03)
============= =========== ============= ===========
Basic and diluted loss per common
share after discontinued operations (0.00) (0.00) (0.00) (0.02)
============= =========== ============= ===========
Average common stock outstanding 5,601,027,960 448,877,336 4,200,637,587 290,295,250
Average common stock issuable -- -- -- --
-- -- -- --
Average common stock outstanding
assuming dilution 5,601,027,960 448,877,336 4,200,637,587 290,295,250
============= =========== ============= ===========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
The outstanding options and warrants as detailed in note 13 were not
included in the computation of the diluted earnings per common share as
the effect would be anti-dilutive.
The earnings per share calculation (basic and diluted) does not include
any common stock for common stock payable, as the effect would be
anti-dilutive.
As of November 19, 2004, the Company has issued a total of 7,028,133,955
shares of its common stock to the convertible debenture holders upon the
conversion of $3,291,400 of debentures and accrued interest.
20. 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, 2004, for the next five years are as follows:
2004 $110,480
2005 345,303
2006 119,715
2007 119,715
2008 39,905
Thereafter --
--------
$735,118
========
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 was closed in the fourth quarter of
2002. The Company has not made any payments on this lease since the
premises were abandoned. The Company does not intend to make any further
payments and the lessor has not tried to enforce payment. The Company may
be liable for a lease balance of $44,597which 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.
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. At September 30, 2004, an amount of $31,120
related to the above settlement is included in accounts payable.
On March 17, 2004, Johnston & Associates, LLC, a South Carolina
corporation, filed a statement against the Company with the Superior Court
of Justice of Ontario, Canada, Court File No. C-294-04, demanding payment
of $60,000 pursuant to a consulting agreement entered into April 2002. The
Company intends to defend this claim vigorously.
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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
21. SUBSEQUENT EVENTS
Subsequent to September 30, 2004, the Company has issued an additional
2,308,509,800 shares of its common stock to the convertible debenture
holders upon the conversion of $104,900 of debentures and accrued
interest.
On October 14, 2004, the Company signed a letter of intent with TBM
Technologies Inc., an Ontario Corporation which provides Design
Engineering services, pursuant to which the Company will purchase TBM for
approximately $250,000 payable in shares of the Company's common stock
with price protection for a period of two years from issuance. In the
event that the vendors seek to sell their shares in an open market
transaction within the two years following closing and the bid price is
less than the price of the shares on issuance, the Company will be
obligated to issue additional shares of unregistered common stock with a
value equal to the difference up to a maximum of $250,000. The transaction
will be effective November 1, 2004 and is anticipated to close on November
22, 2004.
On November 12, 2004, the Company sold an additional $875,000 in
convertible debentures with original issue discount (OID) together with
4,750,000,000 warrants to a group of investors including Bristol
Investment Fund Ltd., Alpha Capital and Tazbaz Holdings Inc. Pursuant to
the Share Purchase Agreement, the debentures will become due twelve months
from the date of issuance. The investors will have the right to acquire up
to $875,000 (equal to 125% of the aggregate subscription amount of
$700,000) worth of the Company's common stock at a price the lesser of
$.0002 or 80% of the average of the three lowest intraday prices on three
separate trading days during the twenty days 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 $.0002 per
share. The Company received $615,000 in net proceeds from the transaction.
The proceeds were used to settle debt and litigation settlement
obligations with the balance to be used for working capital.
On November 12, 2004, the Company reached a settlement with SITQ National
Inc., of the action commenced at Toronto, Ontario as Court File No.
03-CV-256327CM3 against the Company by SITQ, in which SITQ claimed damages
for breach of Lease for arrears of Rent, Additional Rent and other amounts
payable pursuant to the Lease. In consideration of a monetary payment by
the Company of approximately $261,000 and execution of a Mutual Full and
Final Release, SITQ dismissed the aforementioned action and forgave the
Company the balance of the rent arrears, future rents and damages of
approximately $3,750,000.
On November 12, 2004, the Company reached a settlement with Denise
Dunne-Fushi with respect to the note payable to Dunne-Fushi by the Company
in the amount of $629,491. In consideration of a monetary payment by the
Company of $202,000 and execution of a Full and Final Release, Dunne-Fushi
released the Company of all rights and debt held by her and forgave the
balance of the note payable of approximately $427,491.
On November 12, 2004, the Company reached a settlement with Roger Walters
with respect to the note payable to Walters by the Company in the amount
of $224,000 plus accrued interest. In consideration of a monetary payment
by the Company of $33,600 and execution of a Full and Final Release,
Walters released the Company of all rights and debt held by him and
forgave the balance of the note payable and accrued interest of
approximately $237,400.
22. 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT SEPTEMBER 30, 2004
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
23. COMPARATIVE FIGURES
Certain figures in the September 30, 2003 financial statements have been
reclassified to conform with the basis of presentation used at September
30, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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, Cummins Engine, 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, 2004, 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.
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 provide the services of engineering staff on a project basis. The
services provided are defined by guidelines to be accomplished by clearly
defined milestones 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.
Prior to the sale of our IT recruitment division, we provided the services
of information technology consultants on a contract basis and revenue was
recognized as services were performed. We also placed information technology
professionals on a permanent basis and revenue was recognized upon candidates'
acceptance of employment. If we received non-refundable upfront fees for
"retained searches", the revenue was recognized upon the candidates' acceptance
of employment.
Prior to the sale of our training division, we provided advanced training
and certification in a variety of technologies and revenue was recognized on
delivery.
Prior to the sale of our technology division, we 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 our 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 us. 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 that 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.
Prior to the sale of our technology division, we also signed contracts for
the customization or development of SecondWave, an internet development software
in accordance with specifications of our 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 were required.
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.
At December 31, 2003, we performed our annual impairment test for goodwill
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 $87,489 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 fourth quarter of each
year.
FOREIGN CURRENCY TRANSLATION
The books and records of our Canadian operations are recorded in Canadian
dollars. The financial statements are converted to US dollars as we have elected
to report in US dollars consistent with Regulation S-X, Rule 3-20. The
translation method used is the current rate method which is the method mandated
by FAS 52 where the functional currency is the foreign currency. Under the
current method all assets and liabilities are translated at the current rate,
stockholders' equity accounts are translated at historical rates and revenues
and expenses are translated at average rates for the year.
Due to the fact that items in the financial statements are being
translated at different rates according to their nature, a translation
adjustment is created. This translation adjustment has been included in
accumulated other comprehensive income.
There can be no assurance that we would have been able to exchange
currency on the rates used in these calculations. We do not engage in exchange
rate-hedging transactions. A material change in exchange rates between United
States and Canadian dollars could have a material effect on our reported
results.
THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
REVENUE
For the three months ended September 30, 2004, we derived 93% of our
revenue in the United States compared to 92% for the three months ended
September 30, 2003.
For the three months ended September 30, 2004, our primary source of
revenue was engineering services including engineering design and build,
technical publications and documentation and on-site engineering support.
Engineering services represented 99% of total revenue compared to 96% for the
three months ended September 30, 2003. Revenue from engineering services for the
three months ended September 30, 2004 increased by $540,000 or 21% to $3,080,000
compared to $2,540,000 for the three months ended September 30, 2003. The
increase in revenue from engineering services is largely attributable to the
significant increase in sales to a major defense customer located in the United
States pursuant to contracts won in the fourth quarter 2003 and the first
quarter 2004. This customer represented approximately 32% of total revenue for
the three months ended September 30, 2004 compared to 15% for the same period
last year.
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, Cummins Engines, Magna, ABB and Hill-Rom Company.
For the three months ended September 30, 2004, information technology
documentation services represented approximately 1% of our revenue compared to
4% for the three months ended September 30, 2003. Revenue from information
technology documentation services for the three months ended September 30, 2004
decreased by $60,000 or 57% to $45,000 compared to $105,000 for the three months
ended September 30, 2003.
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 in 2002 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 37% for the three months ended September 30, 2004
compared to 34% for the three months ended September 30, 2003. Gross profit for
the three months ended September 30, 2004 increased by $280,000 or 33% to
$1,130,000 compared to $850,000 for the three months ended September 30, 2003.
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 lower margins earned on
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,
2004 was 21% compared to 23% for the three months ended September 30, 2003.
Gross profit for the three months ended September 30, 2004 decreased by $15,000
or 63% to $9,000 compared to $24,000 for the three months ended September 30,
2003.
THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
REVENUE
For the nine months ended September 30, 2004, we derived 94% of our
revenue in the United States compared to 95% for the nine months ended September
30, 2003. 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 2003, a division was created to focus on building engineering services in
Ontario in lieu of IT recruitment services, which had traditionally dominated
our
sales in Canada. During the nine months ended September 30, 2004, this division
closed several small contracts that resulted in revenues of $560,000 compared to
$390,000 for the same period last year.
For the nine months ended September 30, 2004, our primary source of
revenue was engineering services including engineering design and build,
technical publications and documentation and on-site engineering support.
Engineering services represented 98% of total revenue compared to 96% for the
nine months ended September 30, 2003. Revenue from engineering services for the
nine months ended September 30, 2004 increased by $2,060,000 or 28% to
$9,330,000 compared to $7,270,000 for the nine months ended September 30, 2003.
The increase in revenue from engineering services is largely attributable to the
significant increase in sales to a major defense customer located in the United
States pursuant to contracts won in the fourth quarter 2003 and the first
quarter 2004. This customer represented approximately 31% of total revenue for
the nine months ended September 30, 2004 compared to 12% for the same period
last year.
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 nine months ended September 30, 2004, information technology
documentation services represented approximately 2% of our revenue compared to
4% for the nine months ended September 30, 2003. Revenue from information
technology documentation services for the nine months ended September 30, 2004
decreased by $160,000 or 47% to $180,000 compared to $340,000 for the nine
months ended September 30, 2003.
The 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 in 2002 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 36% for the nine months ended September 30, 2004
compared to 33% for the nine months ended September 30, 2003. Gross profit for
the nine months ended September 30, 2004 increased by $990,000 or 41% to
$3,380,000 compared to $2,390,000 for the nine months ended September 30, 2003.
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
lower margins earned on 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 nine months ended September 30, 2004
was 21% which is consistent with the nine months ended September 30, 2003.
RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS--PERCENTAGES
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SPET 30, ENDED SEPT 30,
-------------- ---------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUE 100% 100% 100% 100%
---- ---- ---- ----
COST OF SERVICES 63% 67% 64% 68%
---- ---- ---- ----
GROSS PROFIT 37% 33% 36% 32%
---- ---- ---- ----
EXPENSES
Administrative 19% 21% 18% 23%
Selling 12% 11% 11% 10%
Depreciation and amortization 4% 5% 4% 7%
---- ---- ---- ----
Income (loss) from continuing
operations before interest charges 2% (4)% 3% (8)%
Interest charges 34% 64% 30% 89%
---- ---- ---- ----
Loss from continuing operations
before income taxes (32)% (68)% (27)% (97)%
Income taxes --% --% --% --%
---- ---- ---- ----
Loss from continuing operations (32)% (68)% (27)% (97)%
Income (loss) from discontinued
operations --% (2)% --% 3%
Net Loss (32)% (70)% (27)% (94)%
---- ---- ---- ----
THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Revenue. Revenue for the three months ended September 30, 2004 increased
by $480,000 or 18%, to $3,130,000, as compared to $2,650,000 for the three
months ended September 30, 2003. The increase is primarily attributable to new
contracts with existing defense, automotive, and aerospace customers that were
awarded in the fourth quarter of 2003.
Cost of Services. The cost of services for the three months ended
September 30, 2004 increased by $210,000, or 12%, to $1,980,000, as compared to
$1,770,000 for the three months ended September 30, 2003. The increase in cost
of services is consistent with the increase in revenue. However, the cost of
services as a percentage of revenue decreased from 67% for the three months
ended September 30, 2003 to 63% for the three months ended September 30, 2004.
Gross Profit. Gross profit for the three months ended September 30, 2004
increased by $260,000, or 30%, to $1,140,000 compared to $880,000 for the three
months ended September 30, 2003. The increase in gross profit is consistent with
the increase in revenue. As a percentage of revenue, gross profit increased from
33% for the three months ended September 30, 2003 to 37% for the three months
ended September 30, 2004. The increase in gross profit is a result of the
increase in higher margin contracts in engineering design, technical
publications and documentation compared to the lower margins earned on
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.
Expenses. Expenses for the three months ended September 30, 2004 increased
by $100,000, or 10%, to $1,090,000 compared to $990,000 for the three months
ended September 30, 2003.
Administrative expenses increased by $20,000 or 4% to $580,000 for the
three months ended September 30, 2004 compared to $560,000 for the three months
ended September 30, 2003. The increase reflects the additional rent and general
office costs associated with the increased project work in the engineering
services division in the third quarter of 2004.
Selling expenses for the three months ended September 30, 2004 increased
by $110,000, or 39%, to $390,000 from $280,000 for the three months ended
September 30, 2003. The increase in selling expenses is consistent with the
increase in sales as the sales team's compensation is commissioned based. In
addition, new sales staff were hired in the third quarter of 2004.
For the three months ended September 30, 2004, depreciation and
amortization expenses decreased by $20,000, or 14%, to $120,000 from $140,000
for the three months ended September 30, 2003.
0perating Income (Loss) from Continuing Operations. For the three months
ended September 30, 2004, income from continuing operations increased by
$170,000 or 155% to income of $60,000 as compared to a loss of $110,000 for the
three months ended September 30, 2003.
Interest Charges. For the three months ended September 30, 2004, interest
charges decreased by $640,000, or 38%, to $1,060,000 from $1,700,000 for the
three months ended September 30, 2003. The beneficial conversion feature on all
issued convertible debentures was determined to be $970,000 for the three months
ended September 30, 2004 compared to $1,580,000 for the three months ended
September 30, 2003.
Loss from Continuing Operations before Income Taxes. Loss from continuing
operations before income taxes for the three months ended September 30, 2004
decreased
by $800,000 or 44% to a loss of $1,010,000 as compared to a loss of $1,810,000
for the three months ended September 30, 2003.
Income Taxes. Income taxes for the three months ended September 30, 2004
increased by $15,000 to $16,000 as compared to $1,000 for the three months ended
September 30, 2003.
Loss from Continuing Operations. Loss from continuing operations for the
three months ended September 30, 2004 decreased by $790,000 or 44% to a loss of
$1,020,000 compared to a loss of $1,810,000 for the three months ended September
30, 2003.
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, 2004 and 2003.
Effective March 8, 2002, we sold our technology division, Njoyn Software
Incorporated to Cognicase Inc., a Canadian company. As part of the transaction,
Cognicase assumed all of the staff in our technology division, including the
employees of TidalBeach Inc. We will not have future revenues from either the
Njoyn or SecondWave products.
There was no technology revenue for the three months ended September 30,
2004 and 2003. The operating loss from the technology division for the three
months ended September 30, 2004 was $2,000 and $12,000 for the same period in
2003.
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, 2004 and 2003. The operating loss from the training
division for the three months ended September 30, 2004 was $14,000 compared to
$30,000 for the same period in 2003.
Effective June 27, 2003, we signed an agreement with Brainhunter.com Ltd.,
an Ontario company, for the purchase of certain assets of the Toronto IT
recruitment division for a nominal amount of cash and the assumption of all
employee liabilities. As a result of this transaction, we will not have future
revenues from the IT recruitment division and therefore the operations have been
reported as discontinued.
There was no IT recruitment revenue for the three months ended September
30, 2004 and $18,000 for the same period in 2003. Net income from the IT
recruitment division for the three months ended September 30, 2004 was nil
compared to a net loss of $8,000 in 2003.
Net Loss. Net loss decreased by $820,000 or 44% to $1,040,000 for the
three months ended September 30, 2004 compared to $1,860,000 for the three
months ended September 30, 2003.
THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Revenue. Revenue for the nine months ended September 30, 2004 increased by
$1,900,000 or 25%, to $9,510,000, as compared to $7,610,000 for the nine months
ended September 30, 2003. The increase is primarily attributable to new
contracts with existing defense, automotive, and aerospace customers that were
awarded in the fourth quarter of 2003.
Cost of Services. The cost of services for the nine months ended September
30, 2004 increased by $940,000, or 18%, to $6,090,000, as compared to $5,150,000
for the nine months ended September 30, 2003. The increase in cost of services
is consistent with the increase in revenue. However, the cost of services as a
percentage of revenue decreased from 68% for the nine months ended September 30,
2003 to 64% for the nine months ended September 30, 2004.
Gross Profit. Gross profit for the nine months ended September 30, 2004
increased by $960,000, or 39%, to $3,420,000 compared to $2,460,000 for the nine
months ended September 30, 2003. The increase in gross profit is consistent with
the increase in revenue. As a percentage of revenue, gross profit increased from
32% for the nine months ended September 30, 2003 to 36% for the nine months
ended September 30, 2004. The increase in gross profit is a result of the
increase in higher margin contracts in engineering design, technical
publications and documentation compared to the lower margins earned on
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.
Expenses. Expenses for the nine months ended September 30, 2004 increased
by $120,000, or 4%, to $3,180,000 compared to $3,060,000 for the nine months
ended September 30, 2003.
Administrative expenses decreased by $20,000 or 1% to $1,740,000 for the
nine months ended September 30, 2004 compared to $1,760,000 for the nine months
ended September 30, 2003. The decrease reflects the reduction in administrative
expenses as a result of cost cutting in the first quarter of 2004 specifically
in the areas of salaries and general office expenses.
Selling expenses for the nine months ended September 30, 2004 increased by
$270,000, or 35%, to $1,050,000 from $780,000 for the nine months ended
September 30, 2003. The increase in selling expenses is consistent with the
increase in sales as the sales team's compensation is commissioned based. In
addition, new sales staff were hired in the second and third quarters of 2004.
For the nine months ended September 30, 2004, depreciation and
amortization expenses decreased by $120,000, or 23%, to $400,000 from $520,000
for the nine months ended September 30, 2003.
0perating Income (Loss) from Continuing Operations. For the nine months
ended September 30, 2004, income from continuing operations increased by
$840,000 or 140% to income of $240,000 as compared to a loss of $600,000 for the
nine months ended September 30, 2003.
Interest Charges. For the nine months ended September 30, 2004, interest
charges decreased by $3,940,000, or 58%, to $2,840,000 from $6,780,000 for the
nine months ended September 30, 2003. This decrease is attributable to the
higher value of the beneficial conversion feature on all issued convertible
debentures at September 30, 2003, which was determined to be $6,180,000 compared
to $2,510,000 for the nine months ended September 30, 2004.
Loss from Continuing Operations before Income Taxes. Loss from continuing
operations before income taxes for the nine months ended September 30, 2004
decreased
by $4,780,000 or 65% to a loss of $2,600,000 as compared to a loss of $7,380,000
for the nine months ended September 30, 2003.
Income Taxes. Income taxes for the nine months ended September 30, 2004
increased by $7,000 to $20,000 as compared to $13,000 for the nine months ended
September 30, 2003.
Loss from Continuing Operations. Loss from continuing operations for the
nine months ended September 30, 2004 decreased by $4,760,000 or 64% to a loss of
$2,630,000 compared to a loss of $7,390,000 for the nine months ended September
30, 2003.
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, 2004 and 2003.
There was no technology revenue for the nine months ended September 30,
2004 and 2003. The operating loss from the technology division for the nine
months ended September 30, 2004 was $4,000 and $24,000 for the same period in
2003.
There was no training revenue for the nine months ended September 30, 2004
and $162,000 for the same period in 2003. The operating loss from the training
division for the nine months ended September 30, 2004 was $39,000 compared to
net income of $64,000 for the same period in 2003.
There was no IT recruitment revenue for the nine months ended September
30, 2004 and $1,440,000 for the same period in 2003. Net income from the IT
recruitment division for the nine months ended September 30, 2004 was nil and
$3,000 in 2003. The gain on disposal of the IT recruitment division of $190,627
has been reflected in the Income (loss) from discontinued operations in 2003.
Net Loss. Net loss decreased by $4,490,000 or 63% to $2,670,000 for the
nine months ended September 30, 2004 compared to $7,160,000 for the nine months
ended September 30, 2003.
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 convertible debentures. 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, 2004, the balance on the
receivable discount facility was $620,000 based on 75% of qualifying accounts
receivable.
On January 8, 2004, we sold $25,000 in convertible debentures along with
1,428,571 warrants pursuant to the share purchase agreement (the "12% Senior
Secured Convertible Debenture Agreement") dated 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 $25,000 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 for a period of seven
years from closing at a purchase price of $.0175 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. On April 7, 2004 all of these warrants were repriced from $.0175 to
$0.0004 per share.
On March 25, 2004, we entered into a new share purchase agreement with
Bristol Investment Fund, Ltd. for the issuance and sale of debentures of up to
$1,000,000. The first debenture of $350,000 was purchased together with
924,000,000 warrants on closing. The debenture will become due twelve months
from the date of issuance. Bristol will have the right to acquire up to $350,000
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 March 25, 2011 at a purchase price of $.000417 per share. We
are required to pay interest to Bristol 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 18, 2004, all of these warrants were repriced from $.000417 to
$.00025 per share.
On March 29, 2004, we entered into a new share purchase agreement with
Tazbaz Holdings Limited for the issuance and sale of a $100,000 Convertible
Debenture and 250,000,000 warrants. 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 March 29, 2011 at a purchase
price of $.0004 per share. We are 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.
On May 20, 2004 and June 18, 2004, we sold an additional $400,000 in
convertible debentures together with 1,682,352,942 warrants to Bristol
Investment Fund, Ltd. pursuant to the March 25, 2004 share purchase agreement.
The debentures will become due twelve months from the date of issuance. Bristol
will have the right to acquire up to $400,000 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 for a
period of seven years from closing at a purchase price of $.00025 per share. We
are required to pay interest to Bristol 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 May 24, 2004 and June 18, 2004, we entered into new share purchase
agreements with Tazbaz Holdings Limited for the issuance and sale of $300,000
principal amount Convertible Debentures and 1,157,142,857 warrants. The
debentures will become due twelve months from the date of issuance. Tazbaz
Holdings Limited will have the right to acquire up to $300,000 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
for a period of seven years from closing at a purchase price of $.00025 per
share. We are 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 $1,175,000 received by us in the nine months ended
September 30, 2004 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 $871,104.
At September 30, 2004, the value of the beneficial conversion feature on
all issued convertible debentures was determined to be $2,413,143 which was
credited to paid in capital and charged to earnings as interest expense.
At September 30, 2004, we had cash of $140,000 and a working capital
deficiency of $940,000. At September 30, 2004, we had a cash flow deficiency
from operations of $1,020,000, largely attributable to the increase in accounts
receivable of $370,000 and the decrease in accounts payable of $1,010,000. 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 $170,000.
At September 30, 2004, we had a cash flow deficiency from investing
activities of $170,000 related to the purchase of property and equipment. At
September 30, 2003, we had cash flow from investing activities of $50,000
largely attributable to the proceeds received on the disposal of our IT
Recruitment division of $150,000.
At September 30, 2004 we had cash flow from financing activities of
$825,000 attributable primarily to proceeds of $1,175,000 from the sale of
convertible debentures and proceeds of $230,000 from the exercise of warrants
which was offset by the repayment of debt of approximately $580,000. 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 the repayment of debt of $1,560,000.
At September 30, 2004 we had a loan balance of $265,000 with an
individual, Terry Lyons. Effective March 25, 2004, we amended our loan agreement
with Terry Lyons. The balance of accrued interest was added to the original
principal amount of $259,356 for a new principal balance of $299,768. Monthly
payments of $10,000 began April 5, 2004 and will continue until the full amount
of the note, including interest is paid in full. The interest rate was reduced
from 30% per annum to US prime plus 14%. This loan is subordinated to Morrison
Financial Services Limited.
At September 30, 2004, we had approximately $11,000 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, 2004, 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 note is
non-interest bearing and 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. As a result of the default, the principal balance bears
interest at 12% per annum until payment is made. Subsequent to September 30,
2004, this note payable was restructured as disclosed below in Recent Events.
At September 30, 2004, we had a note payable of $630,000 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 were obligated to cover the monthly expense
associated with Ms. Dunne-Fushi's family health benefits and a vehicle lease
until May 2004.
The note 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. As a result of the default, Ms. Dunne-Fushi has the option of
enforcing the security she holds. Subsequent to September 30, 2004 this note
payable was restructured as disclosed below in Recent Events.
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
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 FASB 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.
In April 2003, the FASB 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 FASB 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, 2004, we issued an additional 2,308,509,800
shares of our common stock to the convertible debenture holders upon the
conversion of $104,900 of debentures and accrued interest.
On October 14, 2004, we signed a letter of intent with TBM Technologies
Inc., an Ontario Corporation which provides Design Engineering services,
pursuant to which we will purchase TBM for approximately $250,000 payable in
shares of our common stock with price protection for a period of two years from
issuance. In the event that the vendors seek to sell their shares in an open
market transaction within the two years following closing and the bid price is
less than the price of the shares on issuance, we will be obligated to issue
additional shares of unregistered common stock with a value equal to the
difference up to a maximum of $250,000. The transaction will be effective
November 1, 2004 and is anticipated to close on November 22, 2004.
On November 12, 2004, we sold an additional $875,000 in convertible
debentures with original issue discount (OID) together with 4,750,000,000
warrants to a group of investors including Bristol Investment Fund Ltd., Alpha
Capital and Tazbaz Holdings Inc. Pursuant to the Share Purchase Agreement, the
debentures will become due twelve months from the date of issuance. The
investors will have the right to acquire up to $875,000 (equal to 125% of the
aggregate subscription amount of $700,000) worth of our common stock at a price
the lesser of $.0002 or 80% of the average of the three lowest intraday prices
on three separate trading days during the twenty days 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 $.0002 per share.
The proceeds of $615,000 received from this transaction were used to
settle debt and litigation settlement obligations with the balance to be used
for working capital.
On November 12, 2004, we reached a settlement with SITQ National Inc., of
the action commenced at Toronto, Ontario as Court File No. 03-CV-256327CM3
against us by SITQ, in which SITQ claimed damages for breach of Lease for
arrears of Rent, Additional Rent and other amounts payable pursuant to the
Lease. In consideration of a monetary payment by us of approximately $261,000
and execution of a Mutual Full and Final Release, SITQ dismissed the
aforementioned action and forgave the balance of the
rent arrears, future rents and damages of approximately $3,750,000.
On November 12, 2004, we reached a settlement with Denise Dunne-Fushi with
respect to the note payable to Dunne-Fushi by us in the amount of $629,491. In
consideration of a monetary payment by us of $202,000 and execution of a Full
and Final Release, Dunne-Fushi released us of all rights and debt held by her
and forgave the balance of the note payable of approximately $427,491.
On November 12, 2004, we reached a settlement with Roger Walters with
respect to the note payable to Walters by us in the amount of $224,000 plus
accrued interest. In consideration of a monetary payment by us of $33,600 and
execution of a Full and Final Release, Walters released us of all rights and
debt held by him and forgave the balance of the note payable and accrued
interest of approximately $237,400.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See heading "Foreign Currency Translation" in Management's Discussion and
Analysis of Financial Condition and Results Of Operations.
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 three months ended September 30, 2004 (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 March 17, 2004, Johnston & Associates, LLC, a South Carolina
corporation, filed a statement against us with the Superior Court of Justice of
Ontario, Canada, Court File No. C-294-04, demanding payment of $60,000 pursuant
to a consulting agreement entered into April 2002. 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K4
(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.
* 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.
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 22, 2004 By: /s/ Declan French By: /s/ Kelly Hankinson
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Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer