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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, 2002
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.)
55 UNIVERSITY AVENUE, SUITE 400
TORONTO, ONTARIO, CANADA M5J 2H7
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(416) 364-8800
--------------
(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 19, 2002 THERE WERE 51,709,067 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
THINKPATH INC.
SEPTEMBER 30, 2002 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, 2002,
December 31, 2001...................... ..............................
Interim Consolidated Statements of Income for the three and nine months ended
September 30, 2002 and 2001 ..........................................
Interim Consolidated Statements of Stockholders' Equity for the three and nine
months ended September 30, 2002.......................................
Interim Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001...........................................
Notes to Interim Consolidated Financial Statements.............................
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk............
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, 2002 (UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
September 30, December 31,
2002 2001
----------- ----------
$ $
ASSETS
CURRENT ASSETS
Cash 33,082 482,233
Accounts receivable 4,323,194 5,502,113
Inventory 34,126 40,057
Income taxes receivable 162,100 431,817
Prepaid expenses 326,750 345,341
---------- ----------
4,879,252 6,801,561
CAPITAL ASSETS 2,384,164 2,859,340
GOODWILL 5,071,183 5,128,991
INVESTMENT IN NON-RELATED COMPANIES 763,306 1,013,926
LONG-TERM RECEIVABLE 83,450 83,450
OTHER ASSETS 102,688 1,287,710
---------- ----------
13,284,043 17,174,978
========== ==========
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
September 30, December 31,
2002 2001
----------- -----------
$ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 4,977,686 5,039,171
Accounts payable 3,193,688 4,073,444
Deferred revenue 221,846 365,023
Current portion of long-term debt 807,049 528,285
Current portion of notes payable 168,000 150,000
----------- -----------
9,368,269 10,155,923
DEFERRED INCOME TAXES 150,380 150,380
LONG-TERM DEBT 181,202 582,432
NOTES PAYABLE 668,000 2,340,000
LIABILITIES PAYABLE IN CAPITAL STOCK 1,800,536 699,297
----------- -----------
12,168,387 13,928,032
----------- -----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK 28,114,210 26,571,481
DEFICIT (25,924,786) (22,719,044)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,073,768) (605,491)
----------- -----------
1,115,656 3,246,946
----------- -----------
13,284,043 17,174,978
=========== ===========
The accompanying notes are an integral part of
these interim consolidated financial statements.
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
(AMOUNTS EXPRESSED IN US DOLLARS)
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPT 30, 2002 SEPT 30, 2001 SEPT 30, 2002 SEPT 30, 2001
----------- ----------- ----------- -----------
$ $ $ $
REVENUE 6,703,034 8,354,260 21,485,763 28,593,398
COST OF SERVICES 5,284,868 6,252,942 16,405,302 19,706,502
----------- ----------- ----------- -----------
GROSS PROFIT 1,418,166 2,101,318 5,080,461 8,886,896
----------- ----------- ----------- -----------
EXPENSES
Administrative 1,565,698 1,430,517 3,591,830 4,226,173
Selling 788,626 1,289,867 2,755,788 4,486,245
Financing Expenses 469,741 41,178 469,741 614,703
Depreciation and amortization 286,085 501,416 891,670 1,452,634
Write down goodwill 57,808 -- 57,808 --
Restructuring costs -- (30,454) -- 403,165
----------- ----------- ----------- -----------
3,167,958 3,232,524 7,766,837 11,182,920
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS (1,749,792) (1,131,206) (2,686,376) (2,296,024)
Gain (Loss) on Investment -- (130,242) -- (130,242)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES (1,749,792) (1,261,448) (2,686,376) (2,426,266)
Interest Charges 354,138 109,599 822,609 584,092
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2,103,930) (1,371,047) (3,508,985) (3,010,358)
Income taxes 20,155 295,509 (5,145) 699,501
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,124,085) (1,666,556) (3,503,840) (3,709,859)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
(INCLUDING GAIN ON DISPOSAL OF $497,579) (16,881) 37,716 356,099 (28,311)
----------- ----------- ----------- -----------
NET INCOME (LOSS) (2,140,966) (1,628,840) (3,147,741) (3,738,170)
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,828 13,468 58,001 724,989
EARNINGS APPLICABLE TO COMMON STOCK (2,143,794) (1,642,308) (3,205,742) (4,463,159)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND FULLY DILUTED 28,704,219 15,093,564 23,717,204 14,277,356
=========== =========== =========== ===========
INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON STOCK BEFORE PREFERRED DIVIDENDS
BASIC AND FULLY DILUTED (0.08) (0.11) (0.13) (0.26)
=========== =========== =========== ===========
INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON STOCK AFTER PREFERRED DIVIDENDS
BASIC AND FULLY DILUTED (0.08) (0.11) (0.14) (0.31)
=========== =========== =========== ===========
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, 2002 AND THE YEAR ENDED DECMEBER 31,
2001 (AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED
COMMON STOCK PREFERRED STOCK CAPITAL OTHER
NUMBER OF NUMBER OF SHARES STOCK RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES A B C AMOUNTS EARNINGS INCOME (LOSS) INCOME (LOSS)
----------- ------- ------- ---- ---------- ----------- -------------- -------------
Balance as of December 31, 2001 17,731,711 -- -- 945 26,571,481 (22,719,044) (605,491)
Net loss for the period -- -- -- -- -- (499,470) (499,470)
-----------
Other comprehensive income (loss),
net of tax: (277,058)
Foreign currency translation -- -- -- -- -- -- --
Adjustment to market value -- -- -- -- -- -- -----------
(277,058) (277,058)
Other comprehensive income -----------
(776,528)
Comprehensive loss ===========
Reduction in common stock payable 1,756,655 -- -- -- 474,297 --
Dividend on preferred stock -- -- -- -- 21,617 (21,617)
Conversion of preferred stock to
common stock 541,593 -- -- (65) -- --
Beneficial conversion on
Issuance of preferred stock -- -- -- -- 2,063 (2,063)
Debt settled through the issuance
of common stock 1,253,752 -- -- -- 226,956 --
---------- ------- ------- ---- ---------- ----------- -----------
Balance as of March 31, 2002 21,283,711 -- -- 880 27,296,414 (23,242,194) (882,549)
========== ======= ======= ==== ========== =========== ===========
Net loss for the period -- -- -- -- -- (507,305) (507,305)
-----------
Other comprehensive income (loss), 61,005
net of tax: --
Foreign currency translation -- -- -- -- -- -- -----------
Adjustment to market value -- -- -- -- -- -- 61,005 61,005
-----------
Other comprehensive income (446,300)
===========
Comprehensive loss
Common stock and warrants issued
in consideration of services 3,681,818 -- -- -- 578,910 --
Dividend on preferred stock -- -- -- -- 7,842 (7,842)
Conversion of preferred stock to
common stock 3,253,534 -- -- (280) -- --
Beneficial conversion on
Issuance of preferred stock -- -- -- -- 23,651 (23,651)
Debt settled through the issuance
of common stock -- -- --
---------- ------- ------- ---- ---------- ----------- -----------
Balance as of June 30, 2002 28,219,063 -- -- 600 27,906,817 (23,780,992) (821,544)
========== ======= ======= ==== ========== =========== ===========
Net loss for the period -- -- -- -- -- (2,140,966) (2,140,966)
-----------
Other comprehensive income (loss),
net of tax: (1,604)
Foreign currency translation -- -- -- -- -- -- (250,620)
Adjustment to market value -- -- -- -- -- -- -----------
(252,224) (252,224)
Other comprehensive income -- -- -- -- -- -- -----------
(2,393,190)
Comprehensive loss -- -- -- -- -- -- ===========
Common stock and warrants issued
in consideration of services -- -- -- -- -- --
Dividend on preferred stock -- -- -- -- 2,828 (2,828)
Conversion of preferred stock to
common stock -- -- -- -- -- --
Beneficial conversion on
Issuance of preferred stock -- -- -- -- -- --
Debt settled through the issuance
of common stock 1,728,266 -- -- -- 207,392 --
---------- ------- ------- ---- ---------- ----------- -----------
Balance as of September 30, 2002 29,947,329 -- -- 600 28,117,037 (25,924,786) (1,073,768)
========== ======= ======= ==== ========== =========== ===========
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
(AMOUNTS EXPRESSED IN US DOLLARS)
2002 2001
---- ----
$ $
Cash flows from operating activities
Net income (loss) (3,147,741) (3,738,170)
---------- ----------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Amortization 987,964 1,712,937
Write down of long-term investment 250,620 --
Write down of goodwill 57,808 --
Decrease (increase) in accounts receivable 1,326,509 1,604,197
Decrease (increase) in prepaid expenses 29,062 (80,776)
Increase (decrease) in accounts payable (864,409) (186,017)
Decrease (increase) in deferred income taxes -- 611,439
Decrease (increase) in inventory 6,000 41,351
Decrease (increase) in short-term investments -- 130,242
Increase (decrease) in deferred revenue (144,225) (63,899)
Increase in income taxes payable (receivable) 269,699 84,494
Common stock and warrants issued for services 578,909 428,299
Long-term investment received for services -- (206,072)
Gain on disposal of subsidiary (497,579) --
Forgiveness of long-term debt -- (190,629)
---------- ----------
Total adjustments 2,000,358 3,885,566
---------- ----------
Net cash used in operating activities (1,147,383) 147,396
---------- ----------
Cash flows from investing activities
Purchase of capital assets (253,520) (183,803)
Disposal (purchase) of other assets 16,156 (295,476)
Increase in long-term receivable -- (188,026)
Proceeds on disposal of subsidiary 1,320,786 --
---------- ----------
Net cash used in investing activities 1,083,422 (667,305)
---------- ----------
Cash flows from financing activities
Repayment of notes payable (79,000) (211,127)
Repayment of long-term debt (479,532) (861,292)
Cash received (paid) on long-term debt 259,350 225,000
Proceeds from issuance of common stock -- 400,000
Proceeds from issuance of preferred stock -- 1,230,000
Increase (decrease) in bank indebtedness (118,197) (61,505)
---------- ----------
Net cash provided by financing activities (417,379) 721,076
---------- ----------
Effect of foreign currency exchange rate changes 32,189 (201,167)
---------- ----------
(449,151) --
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents
-Beginning of period 482,233 --
---------- ----------
-End of period 33,082 --
========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 837,303 612,978
========== ==========
Income taxes paid (recovered) (5,145) 99,501
========== ==========
SUPPLEMENTAL NON-CASH ITEM:
Preferred stock dividend 58,001 711,521
Common shares issued for liabilities 1,487,554 669,125
Reduction in notes payable 1,575,536 650,600
Deferred taxes -- 790,000
========== ==========
The accompanying notes are an integral part of
these interim consolidated financial statements.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the company's ability to continue as a
going concern for a reasonable period of time. These conditions and events
include significant operating losses, working capital deficiencies, and
violation of certain loan covenants. At September 30, 2002, the Company had a
working capital deficiency of $4,489,017, a deficit of $25,924,786 and has
suffered recurring losses from operations.
With insufficient working capital from operations, the Company's primary
sources of cash have been a revolving line of credit with Bank One and
proceeds from the sale of equity securities. At September 30, 2002, the
revolving line of credit was $4,980,000 including an overdraft of
approximately $650,000. Eligible receivables allowed for a maximum borrowing
of $4,330,000. The revolving line of credit agreement requires the Company to
meet various restrictive covenants, including a senior debt to EBITDA ratio,
debt service coverage ratio, debt to tangible net worth ratio and certain
other covenants. At September 30, 2002 and thereafter, the company did not
comply with the covenants contained in the revolving line of credit
agreement.
On July 1, 2002 and as amended on August 1, 2002, August 15, 2002, September
1, 2002, September 16, 2002, September 30, 2002, and October 15, 2002, the
company entered into a Forbearance and Modification Agreement with its senior
lender, Bank One whereby the Bank agreed to forebear from exercising its
rights and remedies against the company as a result of its violation of
certain loan covenants, until the period ending November 30, 2002. In the
event that the company defaults under the agreement including the failure to
make payment when due, the Bank is entitled to exercise any and all of its
security rights including foreclosing on collateral.
On August 13, 2002, the company received a commitment from Morrison Financial
Services Limited for a syndicated financing arrangement that will provide the
funding necessary to purchase Bank One's debt and security. The partners in
the syndicate are Maple Partners America Inc., Morrison Financial Services
Limited and MFI Export Finance Inc. Bank One has agreed to extend the
expiration of the Forbearance and Modification Agreement until November 30,
2002 to allow the syndicate to complete the financing arrangement. In
addition, Bank One has agreed to accept a $700,000 discount on the payoff of
its indebtedness. The Business Development Bank of Canada has also agreed to
sell its debt and security to the syndicated group with a discount on the
payoff of $300,000.
On October 15, 2002, the company signed a term sheet with Bristol Investment
Fund, Ltd. and a syndicate of other investors to issue Senior Secured
Convertible Debentures of up to $3,000,000 in multiple tranches. The first
tranche of $800,000 will be issued upon signing of a definitive investment
agreement and concurrently with the closing of the financing arrangement with
Morrison Financial. The funds will be directed to Bank One and certain of the
company's other creditors.
As at November 19, 2002, management's plans to mitigate and alleviate these
adverse conditions and events include:
A. Commitment from a new lender to purchase Bank One and the Business
Development Bank of Canada's debt and security.
B. Commitment from investors for a convertible debenture of up to
$3,000,000.
C. Ongoing restructuring of debt obligations and settlement of outstanding
claims.
D. Ongoing restructuring of operations relating to the closure of
non-profitable offices, termination of redundant staff and the
institution of other cost cutting measures. See Note 14. 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 partial payments to vendors and interest payments on all
debt.
E. Settlement of an outstanding insurance claim related to the loss of
assets and business for two offices impacted by the terrorist events of
September 11, 2001.
F. Focus on growth in the engineering division, including design services,
technical publications and e-learning.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
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 revolving line
of credit, 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, the bank's continued forbearance, the closing of
new financing, and settlement of its insurance claim, all of which are
subject to substantial uncertainties. Cash flows from operations for the next
twelve months will be dependent, among other things, 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 to
successfully procure forbearance from the bank 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 interim 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 interim 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 interim
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
interim consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
b) Change of Name
The company changed its name from IT Staffing Ltd. to Thinkpath.com Inc.
on February 24, 2000. On June 6, 2001, the company changed its name from
Thinkpath.com Inc. to Thinkpath Inc.
c) Principal Business Activities
Thinkpath Inc. is an information technology and engineering services
company which, along with its 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.), Thinkpath Training US Inc.(formerly ObjectArts US Inc.), MicroTech
Professionals Inc., and TidalBeach Development Inc., provides engineering,
staffing, training and technology services to enhance the resource
performance of clients.
d) Basis of interim consolidated financial statement presentation
The interim consolidated financial statements include the accounts of the
company and its controlled subsidiaries. The earnings of the subsidiaries
are included from the date of acquisition for acquisitions accounted for
using the purchase method. For subsidiaries accounted for by the pooling
of interest method their earnings have been included for all periods
reported. All significant inter-company accounts and transactions have
been eliminated.
e) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
f) Other Financial Instruments
The carrying amount of the company's other financial instruments
approximate fair value because of the short maturity of these instruments
or the current nature of interest rates borne by these instruments.
g) Long-Term Financial Instruments
The fair value of each of the company's long-term financial assets and
debt instruments is based on the amount of future cash flows associated
with each instrument discounted using an estimate of what the company's
current borrowing rate for similar instruments of comparable maturity
would be.
h) Capital Assets
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
assets 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 Fully Diluted Net Income (Loss) Per Weighted
Average Common Stock
Net income (Loss) per common stock is computed by dividing net income
(loss) for the year by the weighted average number of common stock
outstanding during the year.
Fully diluted net income (loss) per common stock is computed by dividing
net income for the year by the weighted average number of common stock
outstanding during the year, assuming that all convertible preferred
stock, stock options and warrants as described in note 13 were converted
or exercised. Stock conversions stock options and warrants which are
anti-dilutive are not included in the calculation of fully diluted net
income (loss) per weighted average common stock.
j) Inventory
Inventory is valued at the lower of cost and the net realizable value.
k) Revenue
1) The company provides the services of engineering and information
technology staff on a project basis. The services provided are defined
by guidelines to be accomplished by milestone and revenue is
recognized upon the accomplishment of the relevant milestone. As
services are rendered, the costs incurred are reflected as Work in
Progress. Revenue is recognized upon the persuasive evidence of an
agreement, delivery has occurred, the fee is fixed or determinable and
collection reasonably assured.
2) The company provides the services of information technology
consultants on a contract basis and revenue is recognized as services
are performed.
3) The company places engineering and information technology
professionals on a permanent basis and revenue is recognized upon
candidates' acceptance of employment. If the company receives
non-refundable upfront fees for "retained searches", the revenue is
recognized upon candidates' acceptance of employment.
4) The company provides advanced training and certification in a variety
of technologies and revenue is recognized on delivery.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
5) The company licenses software in the form of a Human Capital Management
System called Njoyn. The revenue associated with providing this
software consists 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 is based on the company's determination
of the fair value of the elements if they had been sold separately. The
set-up fee and customization revenue is recognized upon delivery of
access to the software with customization completed in accordance with
milestones determined by the contract. Revenue is 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 require significant
customization, without clearly defined milestones, and an inability to
estimate costs, revenue is reflected on a completed contract basis. On
March 1, 2002 the Company sold its subsidiary, Njoyn Software
Incorporated to Cognicase Inc, a Canadian company. The net proceeds
after broker fees were $1,350,000 of which $800,000 was received in
cash and $550,000 was received in unrestricted common shares. The
shares were sold on March 11, 2002 for value of $524,673.19. As part of
the transaction, Cognicase assumed the entire staff in the technology
division. As a result, the company has had no further Njoyn revenue.
6) The company also signs contracts for the customization or development
of SecondWave, a web development software in accordance with
specifications of its clients. The project plan defines milestones to
be accomplished and the costs associated. These amounts are billed as
they are accomplished and revenue is recognized as the milestones are
reached. The work in progress for costs incurred beyond the last
accomplished milestone is reflected at the period end. To date these
amounts have not been material and have not been set up at the period
ends. The contracts do not include any post-contract customer support.
Additional customer support services are provided at standard daily
rates, as services are required. After the sale of Njoyn and the
assumption of the technology division, the company has had no further
SecondWave revenue.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the SEC's view in applying
generally accepted accounting principles to selected revenue recognition
issues. The effects, if any, of applying this guidance must be adopted by
SEC registrants no later than December 31, 2000 and must be reported as a
cumulative effect adjustment as of January 1, 2000, resulting from a
change in accounting principle. Restatement of previously reported results
of the earlier quarters of fiscal 2000, if necessary, is also required.
The adoption of SAB 101 did not have a material effect on the Company's
consolidated financial statements.
l) Goodwill
Goodwill representing the cost in excess of the fair value of net assets
acquired is being amortized on a straight-line basis over a thirty-year
period. The company calculates the recoverability of goodwill on a
quarterly basis by reference to estimated undiscounted future cash flows.
Effective July 1, 2001, the Company changed its amortization period from
30 to 15 years on a prospective basis.
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets." Under the new rules,
goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized
over their useful lives. The amortization provisions of SFAS No. 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001,
the Company began applying the new accounting rules effective January 1,
2002.
The Company has assessed the financial impact SFAS No. 141 and No. 142
will have on its Consolidated Financial Statements and has determined that
there is no transitional impairment loss.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
m) Income Taxes
The company accounts for income tax under the provision of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statement
or tax returns. Deferred income taxes are provided using the liability
method. Under the liability method, deferred income taxes are recognized
for all significant temporary differences between the tax and financial
statement bases of assets and liabilities.
Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected as adjustments to tax expense in the period of
enactment. Deferred tax assets may be reduced, if deemed necessary based
on a judgmental assessment of available evidence, by a valuation
allowance for the amount of any tax benefits which are more likely, based
on current circumstances, not expected to be realized.
n) Foreign Currency
Assets and liabilities recorded in foreign currencies are translated at
the exchange rate on the balance sheet date. Translation adjustments
resulting from this process are charged or credited to other
comprehensive income. Revenue and expenses are translated at average
rates of exchange prevailing during the year. Gains and losses on foreign
currency transactions are included in financial expenses.
o) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. These
estimates are reviewed periodically and as adjustments become necessary,
they are reported in earnings in the period in which they become known.
p) Long-Lived Assets
On January 1, 1996, the company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 121 requires that long-lived assets be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Management used its best estimate of the
undiscounted cash flows to evaluate the carrying amount and have
reflected the impairment.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The Company adopted SFAS 144, effective January 1, 2002. The
adoption of SFAS 144 did not have a material impact on the Company's
results of operations or financial condition.
q) Comprehensive Income
In 1999, the company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income". This standard requires companies to disclose
comprehensive income in their financial statements. In addition to items
included in net income, comprehensive income includes items currently
charged or credited directly to stockholders' equity, such as the changes
in unrealized appreciation (depreciation) of securities and foreign
currency translation adjustments.
r) Accounting for Stock-Based Compensation
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued. It introduces 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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
s) Computer software costs
The company accounts for the cost of developing computer software for
internal use, which may be sold as a separate product, as a research and
development expense until the technological feasibility of the product has
been established. At the end of each year the company compares the
unamortized capital 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. Included in the software
developed for own use which may be sold as a separate product is the Njoyn
and Secondwave software and therefore for these products, 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.
t) Investments in Non-Related Companies
The company records its investment in companies in which it holds less
than 20% interest at fair market value. Changes in fair market value are
adjusted in comprehensive income.
u) Recent Pronouncements
In April 2002, the FASB issued SFAS No. 145, which, among other things,
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. We 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.
v) Advertising Costs
Advertising costs are expensed as incurred. For the three months ended
September 30, 2002, advertising expense was $94,232 compared to $105,593
for the three months ended September 30, 2001.
For the nine months ended September 30, 2002, advertising expense was
$243,235 compared to $353,995 for the nine months ended September 30,
2001.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
3. ACQUISITIONS
Systemsearch Consulting Services Inc. was acquired on January 2, 1997 for
$391,313. This amount was paid by the issuance of common stock and a cash
payment of $97,828. The purchase has been reflected as follows:
Consideration $ 391,313
Assumption of net liabilities 57,321
---------
Goodwill $ 448,634
=========
On December 31, 2001, the Company had written off a portion of the goodwill
related to its investment in Systemsearch Consulting Services Inc.
International Career Specialists Ltd. was acquired on January 1, 1998 for
$652,188. This amount was paid by the issuance of common stock and a cash
payment of $326,094. The purchase was reflected as follows:
Consideration $ 652,188
Assumption of net liabilities 198,409
---------
Goodwill $ 850,597
=========
On December 31, 2000, the Company had written off the goodwill related to its
investment in International Career Specialists Ltd.
The assets of Southport Consulting Company, a New Jersey corporation, were
acquired by Thinkpath Inc. in a transaction effective October 31, 1998. The
consideration for the acquisition was as follows:
Cash $ 50,000
Shares 200,000
---------
$ 250,000
=========
The assets acquired are valued as follows:
Software $ 130,000
Office furniture and equipment 20,000
Other assets 100,000
---------
$ 250,000
=========
Cad Cam Inc. and its subsidiaries Cad Cam of Michigan Inc., Cad Cam Technical
Services Inc., and Cad Cam Integrated Systems Inc. was acquired during 1999
for $6,000,000. This amount was paid as follows: $2,000,000 paid in cash and
$500,000 in common stock on the date of closing. The balance consists of
three notes payable totaling $2,500,000 and $1,000,000 in the form of common
stock to be issued with the final note payable. The documents were executed
at the end of September 1999 and the operations consolidated with the company
from October 1, 1999. The terms of the note payable were subsequently
restructured.(Note 12)
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
The assets acquired are valued as follows:
Current assets $ 2,468,029
Fixed assets 2,267,539
Other assets 817,004
Liabilities assumed (5,071,430)
Consideration (6,000,000)
-----------
Goodwill $ 5,518,858
===========
MicroTech Professionals Inc., was acquired effective April 1, 2000 for
$4,500,000.The amount was to be paid in two installments, based on certain
revenue requirements to be met by MicroTech Professionals Inc. The
requirements have been met. First Installment: 133,333 common stock issued on
closing, $1,250,000 cash paid on closing, $750,000 by a three year promissory
note bearing interest at 1/2% above prime paid semi-annually issued on
closing. Second Installment: $625,000 in common stock, $875,000 cash,
$500,000 by a three-year promissory note bearing interest at 1/2% above prime
paid semi-annually. The acquisition was accounted for by the purchase method
and the operations have been included in the consolidated operations from
April 1, 2000. Refer to note 21(a) for supplemental information. The terms of
payment were subsequently restructured. (Note 12)
The net acquired assets are valued as follows:
Current assets $ 1,769,478
Other assets 850,000
Fixed assets 104,851
Liabilities assumed (1,073,527)
Consideration including
acquisition costs (4,660,000)
-----------
Goodwill $ 3,009,198
===========
On December 31, 2001, the Company had written off the goodwill related to
its investment in MicroTech Professionals Inc.
On March 6, 2000, Thinkpath Inc. completed the acquisition of 80% of E-Wink,
Inc., a Delaware corporation, in consideration of: i) 300,000 shares of our
common stock valued at $975,000; and ii) warrants to purchase an aggregate of
500,000 shares of our common stock at a price of $3.25 per share for a period
of five years valued at $1,458,700. E-Wink was formed to match providers of
venture capital, bridge loans and private placement capital with members of
the brokerage community. The full purchase price of $2,433,700 has been
allocated to goodwill. On December 31, 2000,the company has written off the
goodwill related to its investment in E-Wink, Inc.
4. POOLING OF INTEREST
Effective January 1, 2000. Thinkpath Inc. entered into a merger and
acquisition agreement with a technical training provider, ObjectArts Inc. and
its subsidiary ObjectArts (US) Inc. ObjectArts (US) Inc., was merged with IT
Staffing New York Ltd., an inactive subsidiary of Thinkpath Inc. In exchange
for all of the outstanding shares of ObjectArts Inc., the company issued
527,260 common stock. The merger was accounted for as a pooling of interests
and the results of ObjectArts Inc. and ObjectArts (US) Inc. have been
included for all periods presented.
On November 15, 2000, Thinkpath Inc. combined with TidalBeach Inc., a
software developer, and in exchange for all of the outstanding shares of
TidalBeach Inc., issued 250,000 common stock. The combination has been
accounted for as a pooling of interests and the results of TidalBeach Inc.
have been included for all periods presented. Refer to note 20(b) for
supplemental information concerning TidalBeach Inc.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
5. ACCOUNTS RECEIVABLE
September 30, December 31,
2002 2001
$ $
Accounts receivable 4,593,586 6,079,676
Less: Allowance for doubtful accounts (270,392) (577,563)
--------- ---------
4,323,194 5,502,113
========= =========
6. CAPITAL ASSETS
September 30, December 31,
2002 2001
----------------------------------- -----------
Accumulated
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 778,489 478,985 299,504 344,693
Computer equipment
and software 6,409,180 4,455,277 1,953,903 2,322,887
Leasehold improvements 475,963 345,206 130,757 191,760
--------- --------- --------- ---------
7,663,632 5,279,468 2,384,164 2,859,340
========= ========= ========= =========
Assets under capital lease 735,890 378,114 357,776 474,485
========= ========= ========= =========
Amortization of capital assets for the three months ended September 30, 2002
was $141,935 including amortization of assets under capital lease of $28,182.
Amortization of capital assets for the nine months ended September 30, 2002
amounted to $482,464 including amortization of assets under capital lease of
$88,147.
Amortization for the year ended December 31, 2001 amounted to $1,594,709
including amortization of assets under capital lease of $146,217.
6. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
September 30, December 31,
2002 2001
Conexys $667,511 $667,511
Digital Cement 95,795 346,415
---------- ----------
Total $763,306 $1,013,926
========== ==========
i) Conexys
During the year ended December 31, 1999, $383,146 of the Conexys
investment was included as a short-term investment as the company had
intended to sell these shares on the open market. During fiscal 2000, the
company acquired additional shares of Conexys at a cost of approximately
$284,365 in consideration of services rendered and reclassified the total
investment as available for sale. Since the shares of Conexys trade on the
Bermuda Stock Exchange, the fair value was determined based on the stock
price.
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 adjusted to $346,415 with a charge of
$161,450 to comprehensive income. During the three months ended September
30, 2002, the fair value adjusted to $95,795 with a charge of $250,620 to
comprehensive income.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
iii) Lifelogix
During 2000, the company acquired a twenty percent interest in LifeLogix
in consideration of the source code for Secondwave, the software which
supports LifeLogix's human stress and emotions management systems. The
value of these shares is approximately $142,715. This investment has been
accounted for on the cost basis as the company does not have significant
influence over LifeLogix. This investment was written off in 2001.
8. GOODWILL
Goodwill is the excess of cost over the value of assets acquired over
liabilities assumed in the purchase of the subsidiaries detailed in Note 3.
Goodwill has been allocated to reporting units as follows:
September 30, December 31,
2002 2001
--------------------------------------------------- ------------
Accumulated Impairment
COST AMORTIZATION Losses NET NET
$ $ $ $ $
IT Recruitment 448,634 303,337 57,808 87,489 145,297
(Systemsearch Consulting Services)
Technical Publications & Engineering 5,518,858 535,164 -- 4,983,694 4,983,694
(CadCam Inc.)
---------- ---------- ---------- ---------- ----------
5,967,492 838,501 57,808 5,071,183 5,128,991
========== ========== ========== ========== ==========
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. This
statement requires the Company to evaluate the carrying value of our 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 writedowns that could
adversely affect the Company's earnings.
During the third quarter of 2002, the company completed its transitional
goodwill impairment test as of December 31, 2001 and determined that no
adjustment to the carrying value of goodwill was needed.
The IT recruitment unit was tested for impairment in the third quarter, after
the annual forecasting process. Due to a decrease in margins and the loss of
key sales personnel, operating profits and cash flows were lower than
expected in the first nine months of 2002. Based on that trend, the earnings
forecast for the next two years was revised. At September 30, 2002, a
goodwill impairment loss of $57,808 was recognized in the IT recruitment
reporting unit. The fair value of that reporting unit was estimated using the
expected present value of future cash flows.
On an ongoing basis, absent any impairment indicators, the company expects to
perform a goodwill impairment test as of the end of the third quarter of
every year.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
The following table presents the impact of adopting SFAS No. 142 on net loss
and net loss per share had the standard been in effect for the three and nine
months ended September 30, 2001.
Three Months Nine Months
Ended Ended
September 30, 2001 September 30, 2001
------------------ -------------------
Net loss as reported (1,628,840) (3,738,170)
Adjustments -- --
Amortization of goodwill, net of tax 214,905 494,974
------------ ------------
Adjusted net loss (1,413,935) (3,243,196)
============ ============
As reported basic and diluted net loss per share (0.11) (0.26)
Impact of amortization of goodwill, net of tax 0.02 0.03
------------ ------------
Adjusted basic net loss per share (0.09) (0.23)
============ ============
9. OTHER ASSETS
September 30, December 31,
2002 2001
$ $
Deferred development cost -- 993,765
Deferred financing costs -- --
Deferred contract(net of accumulated amortization
of $195,275) 54,725 250,000
Cash surrender value of life insurance 47,963 43,945
--------- ---------
102,688 1,287,710
========== ==========
Amortization for the three and nine months ended September 30, 2002
amounted to $153,895 and $418,951 respectively. Amortization for the year
ended December 31, 2001 amounted to $510,038.
10. BANK INDEBTEDNESS
i) September 30, 2002
At September 30, 2002, the balance of the revolving line of credit was
$4,980,000 including an overdraft of approximately $650,000. The
revolving line of credit provided for a maximum borrowing amount of
$4,330,000 at variable interest rates based on eligible accounts
receivable. The revolving line of credit agreement requires the Company
to meet various restrictive covenants, including a senior debt to
EBITDA ratio, debt service coverage ratio, debt to tangible net worth
ratio and certain other covenants. At September 30, 2002 and
thereafter, the Company was not in compliance with the covenants
contained in the revolving line of credit agreement.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
On July 1, 2002 and as amended on August 1, 2002, August 15, 2002,
September 1, 2002, September 16, 2002, September 30, 2002, October 15,
2002, and November 15, 2002, the company entered into a Forbearance and
Modification Agreement with its senior lender, Bank One whereby the
Bank agreed to forebear from exercising its rights and remedies against
the company as a result of its violation of certain loan covenants,
until the period ending November 30, 2002. Under the terms of the
agreement, the Bank is entitled to forbearance fees and payment of
related legal fees and expenses. As of November 19, 2002, the Bank has
charged the company $204,000 in forbearance fees and $18,000 in legal
fees. The interest rate on the revolving line facility was increased to
prime plus 3%. The company has continued to borrow from the revolving
line facility subject to eligible accounts receivables as monitored
weekly by the Bank. In the event that the company defaults under the
agreement including the failure to make payment when due, the Bank is
entitled to exercise any and all of its security rights including
foreclosing on collateral.
Bank One has agreed to extend the expiration of the Forbearance and
Modification Agreement until November 30, 2002 to allow the company's
new lender complete the financing arrangement required to purchase Bank
One's debt and security. In addition, Bank One has agreed to accept a
$700,000 discount on the payoff of its indebtedness.
ii) December 31, 2001
At December 31, 2001, the Company had $4,870,000 outstanding with Bank
One. The revolving line of credit provided for a maximum borrowing
amount of $4,760,000 at variable interest rates based on eligible
accounts receivable. At December 31, 2001, the Company had an overdraft
of $110,000. The Company does not have an authorized overdraft facility
with Bank One, however the bank has allowed an overdraft of up to
$500,000 on a regular basis for approximately ten weeks. At December
31, 2001 and thereafter, the Company was not in compliance with the
covenants contained in the revolving line of credit agreement.
As a result of the default on the loan covenants governing our credit
line facility, Bank One restricted our repayment of certain
subordinated loans and notes payable which affected payments to the
Business Development Bank of Canada, Roger Walters and Denise
Dunne-Fushi.
11. LONG-TERM DEBT
i) September 30, 2002
At September 30, 2002, the Company had $400,652 in subordinated debt
outstanding to the Business Development Bank of Canada. The loan
agreements require the Company to meet a certain working capital ratio.
At September 30, 2002 and thereafter, the Company was not in compliance
with the covenant contained in the loan agreements. On September 27,
2002, the company received a notice of default demanding repayment of
the loans in full and the BDC's intention to enforce its security if
repayment was not made within 10 days. On October 7, 2002, the BDC
agreed to extend the stay of the demand period and on November 4, 2002
accepted a proposal from Morrison Financial to purchase its debt and
security at a 75% discount. The purchase will close concurrently with
the syndicated financing arrangement with Morrison Financial, the
repayment of Bank One and the first tranche of the senior convertible
debenture.
In May 2002, the company secured a loan of $259,375 from an individual,
Terry Lyons which was secured by the company's IRS refund. The company
paid a placement fee of 10% to Mr. Lyons. Although the company received
its IRS refund in July 2002, Mr. Lyons agreed to an extension of the
loan until October 31, 2003. The loan is payable in twelve monthly
payments of $21,613 beginning November 30, 2002 and bears interest at
30% per annum.
ii) December 31, 2001
At December 31, 2001, the Company had $419,079 in subordinated debt
outstanding to the Business Development Bank of Canada. At December 31,
2001 and thereafter, the Company was not in compliance with the
covenant contained in the loan agreements. The Business Development
Bank of Canada agreed to postpone principal repayment of its
subordinated loans until March 2002.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
September 30, December 31,
2002 2001
$ $
a) Included therein:
Several loans with Business Development Bank of
Canada ("BDC") secured by a general security
agreement at various interest rates and royalties. 400,652 419,079
A loan with T. Lyons payable in 12 monthly
payments of $21,613 beginning November 30, 2002 259,350 --
and bearing interest at 30% per annum.
A loan with Bank One that was payable in 19 remaining monthly payments of
$13,889 with interest at 6% at December 31, 2001. In March 2002, this
loan was paid in full. -- 263,889
Various capital leases with various payment terms
and interest rates 328,249 427,749
---------- ----------
988,251 1,110,717
Less: current portion 807,049 528,285
---------- ----------
$ 181,202 $ 582,432
========== ==========
b) Future principal payments obligations as at September 30, 2002, were as
follows:
2002 $ 454,979
2003 397,386
2004 127,332
2005 8,554
2006 --
----------
988,251
==========
c) Interest expense with respect to the long-term debt for the three months
ended September 30, 2002 amounted to $52,835. Interest expense related to
long-term debt was $142,236 for the nine months ended September 30, 2002
and $99,651 for the year ended December 31, 2001.
d) Pursuant to the BDC loan agreement, BDC had the option to acquire 22,122
common stock for an aggregate consideration of $1. The fair market value
of these options at the time of issuance was $62,393 ($2.82 per option).
The imputed discount on these options has been amortized over the term of
the loan as interest and was fully amortized prior to January 1, 1999. The
options were exercised in July 2001.
12. NOTES PAYABLE
On August 1, 2002, the company restructured its note payable to Roger
Walters, reducing the principal from $675,000 to $240,000 in consideration of
the issuance of 1,000,000 shares of its common stock. The company agreed to
issue and register the shares upon obtaining shareholder approval of an
amendment to its Articles of Incorporation increasing its authorized capital
stock. Principal payments of $4,000 will be made monthly and started
September 1, 2002 until August 1, 2007. This loan is non-interest bearing.
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.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
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 3,000,000 shares of its common stock. The
company agreed to issue and register the shares upon obtaining shareholder
approval of an amendment to its Articles of Incorporation increasing its
authorized capital stock. Principal payments of $10,000 per month will begin
November 1, 2002 bearing 5% interest until October 1, 2007. In addition, the
company agreed to cover the monthly expense associated with Ms. Dunne-Fushi's
family health benefits and vehicle lease for a period of four years.
September 30, December 31,
2002 2001
$ $
Note Payable to Roger Walters 236,000 750,000
Note Payable to Denise Dunne 600,000 1,740,000
---------- ----------
836,000 2,490,000
Less: current portion 168,000 150,000
---------- ----------
$ 668,000 $2,340,000
========== ==========
c) Capital repayments as at September 30, 2002
2002 32,000
2003 168,000
2004 168,000
2005 168,000
2006 168,000
2007 132,000
----------
$ 836,000
==========
13. CAPITAL STOCK
a) Authorized
100,000,000 Common stock, no par value (30,000,000 at December 31, 2001)
1,000,000 Preferred stock, issuable in series,
rights to be determined by the Board of Directors
b) Issued
On June 8, 1999, the company was successful in its Initial Public
Offering. 1,100,000 common stock were issued at an issuance price of $5.00
per share. Net proceeds received, after all costs, was $3,442,683. The
company trades on Nasdaq under the trading symbol "THTH". As part of the
Initial Public Offering, the underwriters exercised the over- allotment,
resulting in 107,000 common stock being issued for net proceeds of
$465,000. Deferred costs of $1,351,365, which were incurred as part of the
completion of the Initial Public Offering, have been applied against the
proceeds raised by the offering, and are included in the net proceeds.
On June 30, 1999, 163,767 common stock were issued in conjunction with the
acquisition of Cad Cam Inc., with a carrying value of $500,000.
During 2000, the company effected two acquisitions accounted for as
pooling of interest and therefore the capital stock of the company
outstanding at January 1, 1999 and December 31, 1999 have been restated to
reflect the aggregate capital stock and shareholder equity amounts as
follows: # $
Original Balance as of December 31, 1998 1,717,875 1,448,368
Issuance of Shares for pooling of interest 777,260 344,576
--------- ---------
Revised Balance as of December 31, 1998 2,495,135 1,792,944
========= =========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
As part of the acquisition of ObjectArts Inc., the company issued 196,800
common shares for a total consideration of $837,151 on the conversion of
debt to common shares.
On April 25, 2000, 133,333 common stock were issued for the purchase of
MicroTech Professionals Inc., for a total consideration of $500,000.
During 2000, 300,000 common stock were issued as partial consideration for
the purchase of shares of E-Wink Inc. for a value of $975,000.
On August 22, 2000, 1,063,851 shares of common stock and 560,627 warrants
were issued in a private placement for net proceeds of $2,333,715 (gross
proceeds of $2,681,600).
During 2000, 3,533,111 common stock were issued for services rendered
totaling $3,160,288. An amount of $110,000 has been included in the
acquisition of MicroTech and the balance of $3,050,288 has been included
in financing expenses as of December 31, 2000.
During 2000, 1,694,343 common stock were issued on the conversion of
Preferred Stock.
The company has issued 1,800,000 common shares of the company in
consideration of services rendered related to the acquisition of various
subsidiaries. These shares are included in common stock issued in
consideration of services in the amount of $1,125,000 and have been
included in Acquisition costs and financing expenses for December 31,
2000.
On September 13, 2000, the Company. entered into an agreement with
Burlington Capital Markets Inc. to aid the company in further
acquisitions. A total of 425,000 common shares has been reflected as
issued for an aggregate cost of $717,250. This amount has been expensed
in the year ended December 31, 2000 and is included in Acquisition costs
and financing expenses.
During January 2001, the Company agreed to issue 250,000 warrants to
acquire shares of the company at $1.50 and to re-price a total of 330,693
options to an exercise price of $1.00. In consideration of the foregoing,
a total of 275,000 shares were issued for an amount of $275,000 in cash.
The terms of the warrants are indicated in note 13(e). The value of the
repricing of the warrants and the new warrants issued have been treated
as the part of the allocation of the proceeds on the issuance of the
common stock.
On June 6, 2001, the Company amended its Articles of Incorporation to
increase its authorized common stock from 15,000,000 to 30,000,000.
During the year December 31, 2001, the Company issued 400,000 shares of
its common stock in consideration of $203,000 in cash.
During the year ended December 31, 2001, the Company issued 30,632 shares
of its common stock in consideration of legal services, 300,000 shares of
its common stock in consideration of investment banking services, 596,667
shares to reduce common stock payable of $709,005, and 93,883 shares in
settlement of accounts payable.
During the three months ended March 31, 2002, the Company issued 588,235
shares of its common stock as payment of an executive bonus, 1,756,655
shares to reduce common stock payable of $474,297, and 665,517 shares in
settlement of accounts payable.
During the three months ended June 30, 2002, the Company issued 250,000
shares of its common stock in consideration of public relations services,
and 181,818 shares of its common stock in consideration of marketing and
communications services.
On May 24, 2002, the company entered into a loan agreement with Tazbaz
Holdings Inc., an Ontario Corporation. Pursuant to the agreement, Tazbaz
securitized an overdraft position of the company with Bank One in the
amount of $650,000 in consideration of an aggregate of 5,000,000 shares
of its common stock to be issued upon an amendment to the company's
Articles of Incorporation permitting an increase in the company's
authorized capital stock.
On June 24, 2002, the company entered into consulting agreements with
each of Mark Young and George Georgiou pursuant to which Messrs. Young
and Georgiou shall perform consulting services with respect to corporate
and debt restructuring. In consideration for such services the company
issued 2,250,000 and 1,000,000 shares of its common stock to Messrs.
Young and Georgiou, respectively. Pursuant to the agreement the company
registered such shares of common stock under an S-8 registration
statement.
During the three months ended September 30, 2002, the Company issued
158,635 shares of its common stock in consideration of legal services and
1,569,631 shares in settlement of accrued liabilities.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
On October 16, 2002, the Company amended its Articles of Incorporation to
increase its authorized common stock from 30,000,000 to 100,000,000.
c) Liabilities payable in common stock
During the year ended December 31, 2001, the company issued 316,667
shares to reduce a note payable of $625,000 to Denise Dunne related to
the purchase of MicroTech Professionals Inc. The company also issued
280,000 shares in relation to a settlement with an Njoyn employee. The
balance at December 31, 2001, represents $474,297 to Roger Walters in
settlement of a note payable, and $225,000 to Denise Dunne also in
settlement of a note payable.
During the three months ended March 31, 2002, the company issued
1,756,655 shares to reduce a note payable of $474,297 to Roger Walters
related to the purchase of CadCam Inc. The balance at June 30, 2002
represents $225,000 to Denise Dunne in settlement of a note payable.
During the three months ended September 30, 2002, the company converted
$435,000 of its note payable to Roger Walters for consideration of
1,000,000 shares and $1,140,536 of its note payable to Denise Dunne for
consideration of 3,000,000 shares. The shares were issued in October
2002. The balance at September 30, 2002 represents $435,000 to Roger
Walters and $1,365,536 to Denise Dunne.
d) Preferred Stock
On December 30, 1999, 15,000 shares of series A, 8% cumulative,
convertible, preferred stock, no par value were issued in a private
placement for gross proceeds of $1,500,000. The preferred stock are
convertible into common stock at the option of the holders under certain
conditions, at any time after the effective date of the registration
statement. The conversion price will be based on the trading price at
December 30, 1999 or 80% of the average of the ten trading days
immediately preceding the conversion of the respective shares of Series
A, preferred stock. The stockholders of the Series A, 8% cumulative,
convertible stock are entitled to receive preferential cumulative
quarterly dividends in cash or shares at a rate of 8% simple interest per
annum on the stated value per share. The intrinsic value of the
conversion price at date of issue was reflected as a dividend of
$138,000.
At any time after the effective date of the registration statement,
Thinkpath Inc. has the option to redeem any or all of the shares of
Series A, 8% cumulative, convertible, preferred stock by paying to the
holders a sum of money equal to 135% of the stated value of the aggregate
of the shares being redeemed if the conversion price is less than $2.00.
Thinkpath Inc. holds the option to cause the investors in the December
30, 1999 placement offering to purchase an additional $500,000 worth of
Series A, 8% cumulative, convertible, preferred stock upon the same terms
as described above. This right was exercised in July, 2000.
On April 16, 2000, 2,500 shares of Series A, 8% cumulative, convertible,
preferred stock, no par value were issued in a private placement for
gross proceeds of $250,000. The proceeds have been reduced by any issue
expenses.
On April 16, 2000, 1,500 shares of Series B, 8% cumulative, convertible,
preferred stock, no par value were issued in a private placement for
gross proceeds of $1,500,000. The proceeds have been reduced by any issue
expenses.
On July 7, 2000, 5000 shares of series A, 8% cumulative, convertible,
preferred stock, no par value were issued in a private placement for
gross proceeds of $500,000. The proceeds have been reduced by any issue
expenses.
The preferred stock are convertible into common stock at the option of
the holders under certain conditions, at any time after the effective
date of the registration statement. As of December 31, 2000, 1,050 Series
A preferred stock and 750 Series B preferred stock were not yet converted
into common stock.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
Pursuant to a share purchase agreement dated April 18, 2001, the Company
issued 1,105 shares of Series C 7% Cumulative Convertible Preferred Stock
(Series C Preferred Stock). Each share of Series C Preferred Stock has a
stated value of $1,000 per share. The shares of Series C Preferred Stock
are convertible into shares of the Company's common stock at the option
of the holders, at any time after issuance until such shares of Series C
Preferred Stock are manditorily converted or redeemed by the Company,
under certain conditions. The Company is required to register 200% of the
shares of common stock issuable upon the conversion of the 1,105 shares
of Series C Preferred Stock. In addition, upon the effective date of such
registration statement, the Company is obligated to issue to the holders
of Series C Preferred Stock an aggregate of 500 shares of Series C
Preferred Stock in consideration for $500,000, under certain conditions.
The holders of the shares of Series C Preferred Stock are entitled to
receive preferential dividends in cash, on a quarterly basis commencing
on June 30, 2001, out of any of the Company's funds legally available at
the time of declaration of dividends before any other dividend
distribution will be paid or declared and set apart for payment on any
shares of the Company's common stock, or other class of stock presently
authorized, at the rate of 7% simple interest per annum on the stated
value per share plus any accrued but unpaid dividends, when as and if
declared. The Company has the option to pay such dividends in shares of
the Company's common stock to be paid (based on an assumed value of
$1,000 per share) in full shares only, with a cash payment equal to any
fractional shares.
The number of shares of the Company's common stock into which the Series
C Preferred stock shall be convertible into that number of shares of
common stock equal to (i) the sum of (A) the stated value per share and
(B) at the holder's election, accrued and unpaid dividends on such share,
divided by (ii) the Conversion Price". The "Conversion Price" shall be
the lesser of (x) 87.5% of the average of the 5 lowest daily volume
weighted average prices of the Company's common stock during the period
of 60 consecutive trading days immediately prior the date of the
conversion notice; or (y) 90% of the average of the daily volume weighted
average prices during the period of the 5 trading days prior to the
applicable closing date ($.4798 with respect to the 1,105 shares of
Series C 7% Preferred Stock issued and outstanding). The Conversion Price
is subject to certain floor and time limitations. At any time prior to
October 24, 2001, the Company may, in its sole discretion, redeem in
whole or in part, the then issued and outstanding shares of Series C
Preferred Stock at a price equal to $1,150 per share, plus all accrued
and unpaid dividends, and after October 24, 2001 at a price equal to
$1,200 per share, plus all accrued and unpaid dividends.
During the year ended December 31, 2001, the Company issued 3,864,634
common stock on the conversion of 1,050 Series A preferred stock, 750
Series B preferred stock and 285 Series C preferred stock. The Company
paid dividends of $723,607 on the conversions.
During the three months ended March 31, 2002, the Company issued 541,593
common stock on the conversion of 65 Series C preferred stock. The
Company paid dividends of $21,617 on the conversions.
During the three months ended June 30, 2002, the Company issued 3,253,534
shares of its common stock on the conversion of 280 Series C preferred
stock. The Company paid dividends of $84,506 on the conversions.
During the three months ended June 30, 2002, the company received four
conversion notices for an aggregate of 435 shares of Series C Preferred
Stock requiring the issuance of approximately 5,421,386 shares of its
common stock. The company is unable to honor these conversions until it
files an amendment to its Articles of Incorporation increasing its
authorized capital stock, which amendment is subject to shareholder
approval. The company has reflected the dividend on each of these
conversions for a total of $51,687.
On June 25, 2002, the company received letters from two of the holders of
the Series C Preferred Stock demanding payment of an aggregate of
$253,250 in liquidated damages as a result of a default of certain
registration rights. The company believes that it has reached an oral
agreement whereby such holders would forgo any liquidated damages.
The proceeds received on the issue of Class C preferred shares have been
allocated between the value of detachable warrants issued and the
preferred shares outstanding on the basis of their relative fair values.
Paid in capital has been credited by the value of the warrants and
retained earnings charged for the amount of preferred dividends
effectively paid. The conversion benefit existing at the time of issue of
the preferred Class C shares has been computed and this amount has been
credited to paid in capital for the Class C preferred shares and charged
to retained earnings as dividends on the Class C preferred shares.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
e) Warrants
On December 30, 1999, 475,000 warrants were issued in conjunction with the
private placement of the Series A, preferred stock. They are exercisable
at any time and in any amount until December 30, 2004 at a purchase price
of $3.24 per share. These warrants have been valued at $1,091,606 based on
the Black Scholes model utilizing a volatility rate of 100% and a
risk-less interest rate of 6.33%. This amount has been treated as a
cumulative effect adjustment to retained earnings. For purposes of
earnings per share, this amount has been included with preferred share
dividend in the 2000 financial statements.
In connection with the Initial Public Offering, the underwriters received
110,000 warrants. They are exercisable at a purchase price of $8.25 per
share until June 1, 2004.
On April 16, 2000, we issued 50,000 warrants in connection with a private
placement of Series A stock and 300,000 warrants on the issue of Class B
preferred shares. The warrants were issued with a strike price of $3.71
and expire April 16, 2005. These warrants have been valued at $939,981
based on the Black Scholes model utilizing a volatility rate of 100% and a
risk-less interest rate of 6.18%. This amount has been treated as a
preferred share dividend in the 2000 financial statements.
In connection with the private placement of Series B preferred stock
225,000 warrants were issued. They are exercisable at a purchase price of
$3.58. These warrants have been valued at $533,537 based on the Black
Scholes model utilizing a volatility rate of 100% and a risk-less interest
rate of 6.13%. This amount has been treated as a preferred share dividend
in the 2000 financial statements.
In 2000, in connection with the purchase of the investment in E-Wink
500,000 warrants were issued. They are exercisable at a purchase price of
$3.25 and expire March 6, 2005. These warrants have been valued at
$1,458,700 based on the Black Scholes model utilizing a volatility rate of
100% and a risk-less interest rate of 6.50%. This amount has been treated
as part of the cost of the E-Wink investment.
In 2000, in connection with the private placement of August 22, 2000,
560,627 warrants were issued. They are exercisable at a purchase price of
$2.46 and expire August 22, 2005. These warrants have been valued at
$1,295,049 based on the Black Scholes model utilizing a volatility rate of
100% and a risk-less interest rate of 6.13%. This amount has been treated
as an allocation of the proceeds on the common stock issuance.
On January 26, 2001, the Company: (i) repriced warrants to purchase up to
100,000 shares of its common stock, which warrant was issued to a certain
investor in our April 2000 private placement offering of Series B 8%
Cumulative Preferred Stock, so that such warrant is exercisable at any
time until April 16, 2005 at a new purchase price of $1.00 per share; (b)
repriced warrants to purchase an aggregate of up to 280,693 shares of its
common stock, which warrants were issued to the placement agent, certain
financial advisors, and the placement agent's counsel in our August 2000
private placement offering of units, so that such warrants are exercisable
at any time until August 22, 2005 at a new purchase price of $1.00 per
share; and (c) issued warrants to purchase up to 250,000 shares of its
common stock exercisable at any time and in any amount until January 26,
2006 at a purchase price of $1.50 per share. In February 2001, 150,000 of
such warrants were exercised by KSH Investment Group, the placement agent
in the Company's August 2000 private placement offering. The exercise
prices of the revised and newly issued warrants are equal to, or in excess
of, the market price of our common stock on the date of such revision or
issuance.
Following verbal agreements in December 2000, on January 24, 2001, the
company signed an agreement with The Del Mar Consulting Group, a
California corporation, to represent it in investors' communications and
public relations with existing shareholders, brokers, dealers and other
investment professionals. The company issued a non-refundable retainer of
400,000 shares to Del Mar and are required to pay $4,000 per month for
on-going consulting services. In addition, Del Mar has a warrant to
purchase 400,000 shares of common stock at $1.00 per share and 100,000
shares at $2.00 which expires January 24, 2005 and which are exercisable
commencing August 1, 2001. As the agreement to issue the non- refundable
retainer was reached in December 2000, the 400,000 shares with a value of
$268,000 has been included in the shares issued for services rendered and
has been included in financing expenses for December 31, 2000. The
commitment to issue the non-refundable deposit was effected in December
2000. The value of the warrants of $216,348 has been included in paid in
capital in January 2001 and the expense was reflected over the six month
period ending August 1, 2001. In April 2001, the warrants were cancelled
and new warrants were issued which are exercisable at $0.55. 200,000 of
the warrants are exercisable commencing April 2001 and the balance are
exercisable commencing August 1, 2001. The value of the change in the
warrants of $29,702 has been included in the paid in capital in April 2001
and the additional expense was amortized in the period ending August 1,
2001.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
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 three months ended June 30, 2002, the company issued 200,000
warrants. The warrants were issued to Johnston & Associates, LLC, a
Washington company, to provide strategic governmental relations
counseling and marketing representation before the Department of Defense,
Congress and targeted companies in connection with marketing the services
of the Company's engineering operations related to specific government
contracts. The warrants were issued at the fair market value on the date
of grant and will vest at 50% per year. In addition, Johnston &
Associates will be compensated at a rate of $10,000 per month for twelve
months from April 2002 until March 31, 2003.
f) Stock Options
The company had outstanding stock options issued in conjunction with its
long-term financing agreements for 22,122 common stock which were
exercised in July 2001, the cost of which has been expensed prior to
January 1, 1999, and additional options issued to a previous employee of
the company for 200,000 shares exercisable at $2.10, of which 18,508 were
exercised during 2000. The balance of 181,492 are outstanding.
During 1999, 250,500 options to purchase shares of the company were
issued to related parties. The options are exercisable at $3.19.
In connection with the acquisition of Cad Cam Inc. 100,000 options to
purchase shares of the company were delivered in quarterly installments
of 25,000 options each, starting January 1, 2000. The exercise amounts
ranged from $2.12 to $3.25. The exercise price was amended to $1.00 and
these options will be exercisable between April 4, 2001 to 2004. The cost
of re-pricing of these options totaling $100,000 has been recorded in
Acquisition costs and financing expenses for the year ended December 31,
2000.
In July 1999, the directors of the company adopted and the stockholders
approved the adoption of the company's 1998 Stock Option Plan. In May
2000, the directors approved the adoption of the 2000 Stock Option Plan.
In June 2001, the directors approved the adoption of the 2001 Stock
Option Plan. Each of the plans provides for the issuance of 435,000
options. In October 2002, the directors of the company adopted and the
stockholders approved the adoption of the company's 2002 Stock Option
Plan which provides for the issuance of 6,500,000 options.
The plans are administrated by the Compensation Committee or the Board of
Directors, which determine among other things, those individuals who
shall receive options, the time period during which the options may be
partially or fully exercised, the number of common stock to be issued
upon the exercise of the options and the option exercise price.
The plans are effective for a period of ten years and options may be
granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise to the company.
Options granted under the plans generally require a three-year vesting
period, and shall be at an exercise price that may not be less than the
fair market value of the common stock on the date of the grant. Options
are non-transferable and if a participant ceases affiliation with the
company by reason of death, permanent disability or retirement at or
after age 65, the option remains exercisable for one year from such
occurrence but not beyond the option's expiration date. Other types of
termination allow the participant 90 days to exercise the option, except
for termination for cause, which results in immediate termination of the
option.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the company become available again for issuance
under the plans, subject to applicable securities regulation.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
The plans may be terminated or amended at any time by the Board of
Directors, except that the number of common stock reserved for issuance
upon the exercise of options granted under the plans may not be increased
without the consent of the stockholders of the company.
Included in the options granted in 2000 were 260,000 options issued to
related parties in December 2000. The options are exercisable at $0.70 and
expire December 2005.
14. RESTRUCTURING COSTS
At the end of December 31, 2001 the Company had a restructuring reserve
balance of $79,118 as a result of certain of the Company's actions to
better align its cost structure with expected revenue growth rates. The
restructuring activities related to the closure of one training location
in London, Ontario resulting in costs to sever 3 employees with long-term
contracts until December 2002 and the lease commitment for the premises in
London Ontario. These long-term contracts do not require the employees to
provide services until the date of involuntary termination. Other
employees at the London location, without contracts, were terminated
during March 2001 and April 2001. In addition, in February 2001, the
company began to close down one of its research and development (R&D)
offices in Toronto. The company continued to terminate employees until
April 2001.
The remaining accrual will be relieved throughout fiscal 2002 as severance
payments are completed. Details of the restructuring costs and reserve
balance is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance
non/cash March 31, 2002 Costs September 30, 2002
Severance packages
London-Training Cash 37,646 -- (37,646) --
Toronto-R&D Cash -- -- -- --
Lease cancellations
London-Training Cash -- -- -- --
Toronto-R&D Cash -- -- -- --
------- ------- ------- -------
Commitments 37,646 -- (37,646) --
======= ======= ======= =======
15. DEFERRED INCOME TAXES AND INCOME TAXES
a) Deferred Income Taxes
The components of the future tax liability classified by source of
temporary differences that gave rise to the benefit are as follows:
September 30,
2002
$
Accounting amortization in excess of tax
amortization 9,875
Losses available to offset future income
taxes 3,910,483
Share issue costs 532,405
Adjustment cash to accrual method (496,879)
Investment tax credit --
---------
3,955,884
Less: Valuation allowance 4,106,264
---------
(150,380)
=========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
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,
2002
$
Amount calculated at Federal and
Provincial statutory rates (1,269,260)
----------
Increase (decrease) resulting from:
Permanent differences 288,805
Valuation allowance 975,310
----------
1,264,115
----------
Current income taxes (5,145)
==========
Issue expenses totaling approximately $1,300,000 may be claimed at the
rate of 20% per year until 2005. To the extent that these expenses create
a loss, the loss is available to be carried forward for seven years from
the year the loss is incurred. As the US subsidiaries have been acquired
by a non-US entity, the taxable income will be increased by approximately
$1,900,000 over the next three years as the company is required to change
its taxation method from the cash basis to the accrual basis. The company
has not reflected the benefit of utilizing non-capital losses totaling
approximately $10,000,000 in the future as a deferred tax asset as at
September 30, 2002. As at the completion of the September 30, 2002
financial statements, management believed it was more likely than not that
the results of future operations would not generate sufficient taxable
income to realize the deferred tax assets.
16. OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended September 30, 2002:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments (1,604) -- (1,604)
Adjustment to market value (250,620) -- (250,620)
--------- ------- ---------
Other comprehensive income (loss) (252,224) -- (252,224)
========= ======== =========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
Comprehensive income (loss) for the three months ended June 30, 2002:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments 61,005 -- 61,005
Adjustment to market value -- -- --
--------- ------- ---------
Other comprehensive income (loss) 61,005 -- 61,005
========= ======== =========
Comprehensive income (loss) for the three months ended March 31, 2002:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments (277,058) -- (277,058)
Adjustment to market value -- -- --
--------- ------- ---------
Other comprehensive income (loss) (277,058) -- (277,058)
========= ======== =========
Comprehensive income (loss) for the year ended December 31, 2001:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments 209,506 - 209,506
Adjustment to market value (230,643) 69,193 (161,450)
--------- ------- ---------
Other comprehensive income (loss) (21,137) 69,193 48,056
========= ======== =========
The foreign currency translation adjustments are not currently adjusted for
income taxes since the company is situated in Canada and the adjustments
relate to the translation of the financial statements from Canadian dollars
into United States dollars done only for the convenience of the reader.
17. DISCONTINUED OPERATIONS
Effective March 1, 2002, the Company sold its technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. Net proceeds
after broker fees were $1,320,000 of which the company received $800,000 in
cash and $550,000 worth of unrestricted common shares on closing. The shares
were sold on March 11, 2002 for value of $524,673. As part of the
transaction, Cognicase assumed all of the staff in the Company's technology
division. The company will not have future revenues from either its Njoyn or
Secondwave products and therefore the technology operations have been
reported as discontinued. Technology revenue for the nine months ended
September 30, 2002 was $40,000 compared to $630,000 for the nine months ended
September 30, 2001. The operating loss from the technology division for the
three months ended September 30, 2002 was $17,000 compared to income of
$37,000 for the nine months ended September 30, 2001. The operating loss from
the technology division for the nine months ended September 30, 2002 was
$140,000 compared to a loss of $30,000 for the nine months ended September
30, 2001. On disposal, Njoyn had approximately $950,000 in assets consisting
primarily of deferred development charges and approximately $30,000 in
liabilities consisting primarily of capital lease obligations. The gain on
disposal of $497,579 has been reflected in the Income (loss) from
discontinued operations. No income taxes have been reflected on this
disposition as the sale of the shares gives rise to a capital loss, the
benefit of which, is more likely than not to be realized.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
18. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
$ $ $ $
Canada 3,557,058 4,041,929 10,283,684 12,214,153
United States of America 3,145,976 4,312,331 11,202,079 16,379,245
---------- ---------- ---------- ----------
6,703,034 8,354,260 21,485,763 28,593,398
========== ========== ========== ==========
b) Net Income (Loss) by Geographic Area
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
$ $ $ $
Canada (1,384,584) (818,003) (1,948,450) (2,724,992)
United States of America (756,382) (810,837) (1,199,291) (1,013,178)
---------- ---------- ---------- ----------
(2,140,966) (1,628,840) (3,147,741) (3,738,170)
========== ========== ========== ==========
c) Identifiable Assets by Geographic Area
Nine Months Ended Year Ended
September 30, 2002 December 31, 2001
-------------------- --------------------
$ $
Canada 5,036,291 4,995,715
United States of America 8,247,752 12,179,263
---------- ----------
13,284,043 17,174,978
========== ==========
d) Revenue and Gross Profit by Operating Segment
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
$ $ $ $
Revenue
IT Recruitment 3,587,881 4,208,683 10,471,735 12,979,100
Tech Pubs and Engineering 2,497,900 3,001,612 8,607,860 10,200,817
IT Documentation 340,719 629,771 1,246,580 2,848,940
Training 276,534 514,194 1,159,588 2,564,541
---------- ---------- ---------- ----------
6,703,034 8,354,260 21,485,763 28,593,398
========== ========== ========== ==========
Gross Profit
IT Recruitment 420,404 919,223 1,476,289 3,511,179
Tech Pubs and Engineering 766,382 797,608 2,702,811 2,814,622
IT Documentation 77,586 156,646 313,622 1,158,589
Training 153,794 227,841 587,739 1,402,506
---------- ---------- ---------- ----------
1,418,166 2,101,318 5,080,461 8,886,896
========== ========== ========== ==========
e) Revenues from Major Customers
The consolidated entity had the following revenues from major
customers:
For the three months ended September 30, 2002 one customer had sales of
$2,550,000, representing approximately 38% of total revenues.
For the nine months ended September 30, 2002, one customer had sales of
$6,890,000, representing approximately 32% of total revenues.
For the year ended December 31, 2001, one customer had sales of
$6,800,000 which representing approximately 18% of total revenues.
f) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
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 Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Average common stock outstanding 28,704,219 15,093,564 23,717,204 14,277,356
Average common stock issuable -- -- -- --
---------- ---------- ---------- ----------
Average common stock outstanding
assuming dilution 28,704,219 15,093,564 23,717,204 14,277,356
========== ========== ========== ==========
The outstanding options and warrants were not included in the computation of
the fully diluted earnings per common share as the effect would be
anti-dilutive.
The earnings per share calculation (basic and fully diluted) does not include
any common stock for common stock payable as the effect would be
anti-dilutive.
20. STOCK OPTION PLANS
a) Options outstanding
OPTIONS WEIGHTED
AVERAGE
EXERCISE
PRICE
Options outstanding at December 31, 2000 1,419,617 2.21
Options granted to key employees and directors 35,000 .68
Options granted to consultant 50,000 .70
Options exercised during the year (22,125) .01
Options forfeited during the year (257,500) 3.21
Options expired during the year -
---------
Options outstanding at December 31, 2001 1,224,992
=========
Options granted to key employees and directors -
Options granted to consultant -
Options exercised during the period -
Options forfeited during the period (27,500) 3.22
Options expired during the period -
---------
Options outstanding at March 31, 2002 1,197,492
=========
Options granted to key employees and directors -
Options granted to consultant -
Options exercised during the period -
Options forfeited during the period (45,000) 3.22
Options expired during the period -
---------
Options outstanding at June 30, 2002 1,152,492
=========
Options granted to key employees and directors -
Options granted to consultant -
Options exercised during the period -
Options forfeited during the period (24,500) 3.22
Options expired during the period -
---------
Options outstanding at September 30, 2002 1,127,992
=========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
Options exercisable December 31, 2000 714,117 1.95
Options exercisable December 31, 2001 1,059,659 1.75
Options available for future grant December 31, 1999 184,500
Options available for future grant December 31, 2000 --
Options available for future grant December 31, 2001 261,500
During the three months ended September 30, 2002, 24,500 options
exercisable at between $3.19 and $3.25 have been forfeited by employees
following their termination and the expiry of their option periods to
November 14, 2002.
During the three months ended June 30, 2002, 45,000 options exercisable
at between $3.19 and $3.25 have been forfeited by employees following
their termination and the expiry of their option periods to August 16,
2002.
During the three months ended March 31, 2002, 27,500 options
exercisable at between $3.19 and $3.25 have been forfeited by employees
following their termination and the expiry of their option periods to
April 16, 2002.
b) Range of Exercise Prices at December 31, 2001
Outstanding Weighted Options Options Weighted
Options Average Outstanding exercisable Average
Remaining Average Exercise
Life Exercise Price Price
$2.10 - $3.25 679,992 2.73 years $2.88 514,659 $2.80
$1 and under 545,000 3.06 years $0.75 545,000 $0.75
c) Pro-forma net income
The company applies Accounting Principles Board Opinion No. 25,
"Accounting of Stock Issued to Employees" and related interpretation in
accounting for its stock option plans. Accordingly, no compensation
cost has been recognized for such plans. Had compensation cost been
determined, based on the fair value at the grant dates for options
granted during 2001, 2000 and 1999, consistent with the method of SFAS
No.123, "Accounting for Stock-Based Compensation," the Company's pro
forma net earnings and pro forma earnings per share for the years ended
December 31, 2001 and 2000 would have been as follows:
2001 AS 2001
REPORTED PRO FORMA
-------- ---------
Net loss (9,683,442) (10,128,562)
Net loss after preferred
share dividends (10,412,182) (10,857,302)
Basic and fully diluted
Loss per share (0.65) (0.68)
loss per share after
preferred dividends (0.70) (0.73)
d) Black Scholes Assumptions
The fair value of each option grant used for purposes of estimating the
pro forma amounts summarized above is estimated on the date of grant
using the Black-Scholes option price model with the weighted average
assumptions shown in the following table:
2001 GRANTS
-----------
Risk free interest rates 4.76%
Volatility factors 100%
Weighted average expected life 4.90 years
Weighted average fair value per share .74
Expected dividends --
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
21. SUPPLEMENTAL INFORMATION
a) MicroTech Professionals Inc. acquisition
The following represents that results of operations as though MicroTech
had been acquired as of January 1, 2000 and as of January 1, 1999.
December 31, 2000 December 31, 1999
Revenue 45,788,302 32,173,548
Net income (8,483,765) 402,430
Earnings per share (2.17) .08
Earnings per share - fully diluted (2.17) .07
b) TidalBeach Inc. pooling of interests
The results of operations include the following amounts for the period
prior to the combination of TidalBeach Inc. on November 15, 2000
Revenue $ 657,715
Net income $ 158,039
There are no inter-company transactions and no adjustments have been
required to adopt the same accounting practices or combine the net
income of the combining companies
Reconciliation of revenue and net income (loss) previously reported
December 31, 1999 Previously ObjectArts TidalBeach Restated
Reported
Revenue 19,822,861 6,599,496 610,078 27,032,435
Net income(loss) 228,720 (251,128) 17,085 (5,323)
22. 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, 2002 for the next five years are as
follows:
2002 $ 204,418
2003 306,328
2004 273,270
2005 272,820
2006 270,570
Thereafter 1,082,280
---------
$2,409,686
==========
b) 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 OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
23. SUBSEQUENT EVENTS
On July 1, 2002 and as amended on August 1, 2002, August 15, 2002,
September 1, 2002, September 16, 2002, September 30, 2002, October 15,
2002, and November 15, 2002, the company entered into a Forbearance and
Modification Agreement with its senior lender, Bank One whereby the Bank
agreed to forebear from exercising its rights and remedies against the
company as a result of its violation of certain loan covenants, until the
period ending November 30, 2002. In the event that the company defaults
under the agreement including the failure to make payment when due, the
Bank is entitled to exercise any and all of its security rights including
foreclosing on collateral.
On August 13, 2002, the company received a commitment from Morrison
Financial Services Limited for a syndicated financing arrangement that
will provide the funding necessary to purchase Bank One's debt and
security. The partners in the syndicate are Maple Partners America Inc.,
Morrison Financial Services Limited and MFI Export Finance Inc. Bank One
has agreed to extend the expiration of the Forbearance and Modification
Agreement until November 30, 2002 to allow the syndicate to complete the
financing arrangement. In addition, Bank One has agreed to accept a
$700,000 discount on the payoff of its indebtedness. The Business
Development Bank of Canada has also agreed to sell its debt and security
to the syndicated group with a discount on the payoff of $300,000.
On October 4, 2002, the company's securities were delisted from The Nasdaq
SmallCap Market, for failure to comply with the minimum bid price or net
tangible assets requirements for continued listing, as set forth in
Nasdaq's Marketplace Rule 4310(c)(4). The company also failed to meet the
initial inclusion requirements under Nasdaq's Marketplace Rule
4310(c)(2)(A) including minimum stockholders' equity of $5 million, market
capitalization of $50 million or net income of $750,000 (excluding
extraordinary or non-recurring items) in the most recently completed
fiscal year or in two of the last three most recently completed fiscal
years.
On October 16, 2002, the company held its Annual General Meeting and
Special Meeting of Shareholders where the following resolutions were
passed: the election of the Board of Directors including Declan French,
Kelly Hankinson, John Dunne, Arthur Marcus and Katherine Seto Evans; the
appointment of Schwartz Levitsky Feldman LLP as the company's independent
auditors for the ensuing year; the adoption of the company's 2002 Stock
Option Plan; and, the amendment of the company's Articles of Incorporation
to increase its authorized capital stock from 30,000,000 to 100,000,000.
On October 15, 2002, the company signed a term sheet with Bristol
Investment Fund, Ltd. and a syndicate of other investors to issue Senior
Secured Convertible Debentures of up to $3,000,000 in multiple tranches.
The first tranche of $800,000 will be issued upon signing of a definitive
investment agreement and concurrently with the closing of the financing
arrangement with Morrison Financial. The funds will be directed to Bank
One and certain of the company's other creditors.
On October 21, 2002, the company entered into a settlement agreement with
Michael Carrazza, a former director, in the sum of $330,000 to be paid
$50,000 on October 31, 2002 and $17,500 per month thereafter until paid in
full, bearing interest at 9% per annum. This settlement was pursuant to a
motion for summary judgment filed by Carrazza, which was granted in his
favor in the sum of $264,602. In November 1998, the Company completed the
acquisition of certain assets of Southport Consulting Co. from Carrazza,
for an aggregate of $250,000 in cash and shares of the company's common
stock. Carrazza instituted an action against the company in the Supreme
Court of the State of New York, County of New York, Index No. 600553/01,
alleging breach of contract and unjust enrichment and seeking at least
$250,000 in damages. Specifically, Mr. Carrazza claimed that the company
failed to deliver cash or stock to Mr. Carrazza under an asset purchase
agreement, and that he was entitled to recovery of his attorneys' fees.
The company filed a counterclaim against Mr. Carrazza, seeking $162,000 in
damages, plus punitive damages and attorneys' fees, on the ground that Mr.
Carrazza, as then president and sole stockholder of Southport Consulting
Co., fraudulently induced the company into executing the asset purchase
agreement by misrepresenting the value of the assets being purchased.
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 our 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 will assume the New York
training staff, some assets and sublet the classroom facilities.
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
24. FINANCIAL INSTRUMENTS
a) Credit Risk Management
The company is exposed to credit risk on the accounts receivable from its
customers. In order to reduce its credit risk, the company has adopted
credit policies which include the analysis of the financial position of
its customers and the regular review of their credit limits. In some
cases, the company requires bank letters of credit or subscribes to
credit insurance.
b) Concentration of Credit Risk
The company 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, North American Government, and
major corporations.
c) Interest Risk
The long-term debt bears interest rates that approximate the interest
rates of similar loans. Consequently, the long-term debt risk exposure is
minimal.
d) Fair Value of Financial Instruments
The carrying value of the accounts receivable, bank indebtedness, and
accounts payable on acquisition of subsidiary company approximates the
fair value because of the short-term maturities on these items.
The carrying amount of the long-term assets approximates the fair value
of these assets.
The fair value of the company's long-term debt is estimated on the quoted
market prices for the same or similar debt instruments. The fair value of
the long-term debt approximates the carrying value.
24. COMPARATIVE FIGURES
Certain figures in the September 30, 2001 financial statements have been
reclassified to conform with the basis of presentation used in September
30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto and the other historical
financial information of Thinkpath Inc. contained elsewhere in this Form 10-Q.
The statements contained in this Form 10-Q that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended
including statements regarding Thinkpath Inc.'s expectations, intentions,
beliefs or strategies regarding the future. Forward-looking statements include
Thinkpath Inc.'s statements regarding liquidity, anticipated cash needs and
availability and anticipated expense levels. All forward-looking statements
included in this Form 10-Q are based on information available to Thinkpath Inc.
on the date hereof, and Thinkpath Inc. assumes no obligation to update any such
forward-looking statement. It is important to note that Thinkpath Inc.'s actual
results could differ materially from those in such forward-looking statements.
All dollar amounts stated throughout this Form 10-Q are in United States dollars
unless otherwise indicated. Unless otherwise indicated, all reference to
"Thinkpath," "us," "our," and "we," refer to Thinkpath Inc. and its
subsidiaries.
OVERVIEW
We are a global provider of technological solutions and services in
engineering knowledge management including design, drafting, technical
publishing, e-learning and staffing. Our customers include Department of Defense
contractors, aerospace, automotive and financial services companies, Canadian
and American governmental entities and large multinational companies, including
Lockheed Martin, General Dynamics, General Electric, General Motors, Ford
Motors, Goldman Sachs, CIBC and EDS Canada Inc.
CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the Securities and Exchange Commission issued
FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, which encourages additional disclosure with respect to a company's
critical accounting policies, the judgments and uncertainties that affect a
company's application of those policies, and the likelihood that materially
different amounts would be reported under different conditions and using
different assumptions.
Management is required to make certain estimates and assumptions during
the preparation of the consolidated financial statements in accordance with
GAAP. These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates. Certain 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, 2002, all of our investments in non-related companies
totaling $763,306 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 have developed proprietary technology in two areas: human capital
management and Web development. Njoyn is a Web-based human capital management
system that automates and manages the hiring process. The revenue associated
with providing this software is allocated to an initial set-up fee,
customization and training fees as agreed with the customer and an ongoing
monthly per user fee. The allocation of revenue to the various elements is based
on our determination of the fair value of the elements as if they had been sold
separately. The set-up fee and customization revenue is recognized upon delivery
of access to the software with customization completed in accordance with
milestones determined by the contract. Revenue for the training is recorded as
the services are rendered and the ongoing monthly fee is recorded each calendar
month. There is no additional fee charged to customers for hosting.
Effective March 1, 2002, we sold our technology division, Njoyn
Software Incorporated to Cognicase Inc, a Canadian company. As part of the
transaction, Cognicase assumed all of the (eight employees) staff in our
technology division and is contracting the services of our Chief Information
Officer for a period of six months. There was no revenue from Njoyn for the
three months ended September 30, 2002 and it represented less than 1% for the
three months ended September 30, 2001. Revenue from Njoyn represented less than
1% of total revenue for the nine months ended September 30, 2002, and 2001. As a
result of the sale to Cognicase, we will not have future revenues from Njoyn and
the operations have been reported as discontinued.
Our other proprietary technology, SecondWave, is a Web development
product that allows companies to create, manage and automate their own dynamic,
adaptive Web sites. The software learns from each visitor's behavior and targets
his or her needs and interests with customized content and communications. We
enter into contracts for the customization or development of SecondWave in
accordance with the specifications of our customers. The project plan defines
milestones to be accomplished and the costs associated with this project. These
amounts are billed as they are accomplished and revenue is recognized as the
milestones are reached. The work in progress for costs incurred beyond the last
accomplished milestone is reflected at the period end. To date these amounts
have not been material and have not been set up at the period ends. The
contracts do not include any post-contract customer support. Additional customer
support services are provided at standard daily rates, as services are required.
There was no revenue from SecondWave for the three months ended
September 30, 2002. Revenue from SecondWave represented less than 2% of total
revenue for the three months ended September 30, 2001. Revenue from SecondWave
represented less than 1% of total revenue for the nine months ended September
30, 2002 and 2% for the nine months ended September 30,2001. As part of the sale
of Njoyn, Cognicase Inc. assumed all of our technology staff. As a result, we do
not anticipate future revenues from SecondWave Inc. and the operations have been
reported as discontinued.
Carrying Value Goodwill and Intangible Assets
Prior to January 1, 2002, our goodwill and intangible assets were
accounted for in accordance with Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. This statement required us to evaluate the carrying
value of our goodwill and intangible assets upon the presence of indicators of
impairment. Impairment losses were recorded when estimates of undiscounted
future cash flows were less than the value of the underlying asset. The
determination of future cash flows or fair value was based upon assumptions and
estimates of forecasted financial information that may differ from actual
results. If different assumptions and estimates were used, carrying values could
be adversely impacted, resulting in write downs that would adversely affect our
earnings. In addition, we amortized our goodwill balances on a straight-line
basis over 30 years. The evaluation of the useful life of goodwill required our
judgment, and had we chosen a shorter time period over which to amortize
goodwill, amortization expense would have increased, adversely impacting our
operations.
Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. This
statement requires us to evaluate the carrying value of our 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.
During the third quarter of 2002, we completed our transitional
goodwill impairment test as of December 31, 2001 and determined that no
adjustment to the carrying value of goodwill was needed.
The IT recruitment unit was tested for impairment in the third quarter,
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.
On an ongoing basis, absent any impairment indicators, we expect to
perform a goodwill impairment test as of the end of the third quarter during the
fourth quarter of each year.
Had the standard been in effect for the three months ended September
30, 2001, our net loss would decrease by $215,000 from a loss of $1,630,000 to a
loss of $1,415,000 and our net loss per share would decrease by $0.02 from a net
loss per share of $0.11 to a net loss per share of $0.09. Had the standard been
in effect for the nine months ended September 30, 2002, our net loss would
decrease by $500,000 from a loss of $3,740,000 to a loss of $3,240,000 and our
net loss per share would decrease by $0.03 to a net loss per share of $0.26 to a
net loss per share of $0.23.
The books and records of our Canadian operations are recorded in
Canadian dollars. For purposes of financial statement presentation, we convert
balance sheet data to United States dollars using the exchange rate in effect at
the balance sheet date. Income and expense accounts are translated using an
average exchange rate prevailing during the relevant reporting period. There can
be no assurance that we would have been able to exchange currency on the rates
used in these calculations. We do not engage in exchange rate-hedging
transactions. A material change in exchange rates between United States and
Canadian dollars could have a material effect on our reported results.
THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue
For the three months ended September 30, 2002, we derived 47% of our
revenue in the United States compared to 52% for the three months ended
September 30, 2001. The decrease in the total revenue derived in the United
States is a result of the increase in IT Recruitment sales in Canada and the
decrease in Technical Training and IT Documentation sales in the United States.
For the three months ended September 30, 2002, our primary source of
revenue was recruitment, representing 54% of total revenue compared to 50% for
the three months ended September 30, 2002. Recruitment revenue for the three
months ended September 30, 2002 decreased by $620,000 or 15% to $3,590,000
compared to $4,210,000 for the three months ended September 30, 2001. The
decrease in recruitment revenue is a result of cutbacks and reduced hiring in
the telecommunications, network and financial services industries.
In April 2002, we closed one of our IT recruitment offices,
Systemsearch Consulting Services Inc., and transferred the existing contracts to
our Toronto head office. As a result of the closing, eight of our employees were
terminated. The prior owner of Systemsearch, John Wilson, was also terminated.
Mr. Wilson is subletting the space from us in consideration of certain assets
including furniture and equipment.
We perform permanent, contract and executive searches for IT and
engineering professionals. Most searches are performed on a contingency basis
with fees due upon candidate acceptance of permanent employment or on a
time-and-materials basis for contracts. Retained searches are also offered, and
are paid by a non-refundable portion of one fee prior to performing any
services, with the balance due upon candidates' acceptance. The revenue for
retained searches is recognized upon a candidate's acceptance of employment.
Selected recruitment customers include Fujitsu, Bank of Montreal, EDS
Canada Inc., Goldman Sachs, and Sprint Canada. In the case of contract services,
we provide our customers with independent contractors or "contract workers" who
usually work under the supervision of the customer's management. Generally, we
enter into a time-and-materials contract with our customer whereby the customer
pays us an agreed upon hourly rate for the contract worker. We pay the contract
worker pursuant to a separate consulting agreement. The contract worker
generally receives between 75% and 80% of the amount paid to us by the customer;
however, such payment is usually not based on any formula and may vary for
different engagements. We seek to gain "preferred supplier status" with our
larger customers to secure a larger percentage of those customers' businesses.
While such status is likely to result in increased revenue and gross profit, it
is likely to reduce gross margin percentage because we are likely to accept a
lower hourly rate from our customers and there can be no assurance that we will
be able to reduce the hourly rate paid to our consultants. In the case of
permanent placement services, we identify and provide candidates to fill
permanent positions for our customers.
For the three months ended September 30, 2002, 37% of our revenue came
from engineering services including technical publications, engineering design
and e-learning compared to 36% for the three months ended September 30, 2001.
Revenue from engineering services for the three months ended September 30, 2002
decreased by $500,000 or 17% to $2,500,000 compared to $3,000,000 for the three
months ended September 30, 2001. Although the majority of our revenue continues
to be derived from IT Recruitment, our focus is on growing the engineering
services division. In particular, we are focused on expanding into the defense,
aerospace and automotive industries and leveraging off existing engineering
customers to secure new technical publication and e-learning business.
The decrease in engineering sales is a result of the postponement and
cancellation of several large contracts, combined with a general decline in
sales activity as a result of a reduced sales force.
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: technical publications, design, e-learning and Web
development. 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 and Cummins
Engines.
For the three months ended September 30, 2002, information technology
documentation services represented approximately 5% of our revenue compared to
8% for the three months ended September 30, 2001. Revenue from information
technology documentation services for the three months ended September 30, 2002
decreased by $290,000 or 46% to $340,000 compared to $630,000 for the three
months ended September 30, 2001.
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 have
recently expanded the marketing of our documentation services to other regions
and to existing recruitment and engineering services customers. In addition, we
have reduced our operating expenses for this division to support the current
levels of revenue.
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.
For the three months ended September 30, 2002, technical training
represented approximately 4% of our revenue compared to 6% for the three months
ended September 30, 2001. Revenue from technical training for the three months
ended September 30, 2002 decreased by $230,000 or 45% to $280,000 compared to
$510,000 for the three months ended September 30, 2001.
In May 2002, we entered into a series of agreements with triOS Training
Centres Limited, an Ontario company, for the purchase of certain assets of our
Toronto training division, Thinkpath Training. As part of the transaction, triOS
assumed the Toronto training staff (six employees) and is subletting our
classroom facilities. As a result of the sale of this office, our annual revenue
will decline by approximately $1,000,000. There was no revenue from this office
for the three months ended September 30, 2002. Revenue from this office
represented approximately 3% for the three months ended September 30, 2001.
Subsequent to September 30, 2002, we entered into a series of
agreements with Thinkpath Training LLC, a New York company, for the purchase of
certain assets of our New York training division, Thinkpath Training US, for a
nominal amount of cash and the assumption of all prepaid training liabilities.
As part of the transaction, Thinkpath Training LLC will assume the New York
training staff, some assets and sublet the classroom facilities. As a result of
the sale of this office, our annual revenue will decline by approximately
$1,000,000. Revenue from this office for the three months ended September 30,
2002 was $270,000 or 4% of total revenue. Revenue from this office for the three
months ended September 30, 2001 was $310,000 or 4% of total revenue.
Our training services include advanced training and certification in
Microsoft, Java and Linux technologies, as well as Microsoft applications such
as Outlook and Access. Training services include training requirements analysis,
skills assessment, instructor-led classroom training for small groups (10 - 16
students), mentoring, e-learning, and self-paced learning materials. We offer
both public and private classes. Selected training customers include Microsoft,
Chase Manhattan Bank, Goldman Sachs, City of New York and Consumers Gas. Revenue
is recognized on delivery of services.
Gross Profit
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of contract recruitment include contractor fees and
benefits. Gross profit for information technology recruitment services for the
three months ended September 30, 2002 declined to 12% from 22% for the three
months ended September 30, 2001. The decline in gross profit is a result of our
focus on contract sales and our preferred vendor status with large clients for
information technology contract recruitment services. It is often necessary to
lower billing rates and markups to be successful in the bid process. One client,
with an average gross profit margin of 12%, represents 71% of the total revenue
for the recruitment division and 38% of the company's total revenues for the
three months ended September 30, 2002. Revenue from permanent placements has
declined considerably from last year, which has also contributed to the decline
in gross profit. We do not attribute any direct costs to permanent placement
services, therefore the gross profit on such services is 100% of revenue.
The direct costs of technical publications and engineering services
include wages, benefits, software training and project expenses. The average
gross profit for this division was 31% for the three months ended September 30,
2002 compared to 27% for the three months ended September 30, 2001. The increase
in gross profit for technical publications and engineering services is a result
of the increase in higher margin contracts in technical publications and
e-learning compared to the traditional engineering services. In addition, we are
engaging in more time-and-materials based contracts versus fixed cost 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 three months ended September 30, 2002 was 23% compared to 25% for
the three months ended September 30, 2001. The decline in gross profit in the
current period is a result of the decrease in higher margin permanent placements
and increase in lower margin contract placements of documentation specialists.
The direct costs of training include courseware and trainer salaries,
benefits and travel. The average gross profit was 56% for the three months ended
September 30, 2002 compared to 44% for the three months ended September 30,
2001. The increase in gross profit is a result of tighter expense controls on
trainer travel costs and the lower utilization of contract trainers.
THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue
For the nine months ended September 30, 2002, we derived 52% of our
revenue in the United States compared to 57% for the nine months ended September
30, 2001. The decrease in the total revenue derived from the United States is a
result of the increase in IT Recruitment sales in Canada and the decrease in
Technical Training and IT Documentation sales in the United States.
For the nine months ended September 30, 2002, our primary source of
revenue was recruitment, representing 49% of total revenue compared to 45% for
the nine months ended September 30, 2001. Recruitment revenue for the nine
months ended September 30, 2002 decreased by $2,510,000 or 19% to $10,470,000
compared to $12,980,000 for the nine months ended September 30, 2001. The
decrease in recruitment revenue is a result of cutbacks and reduced hiring in
the telecommunications, network and financial services industries.
For the nine months ended September 30, 2002, 40% of our revenue came
from engineering services including technical publications, engineering design
and e-learning compared to 36% for the nine months ended September 30, 2001.
Revenue from engineering services for the nine months ended September 30, 2002
decreased by $1,590,000 or 16% to $8,610,000 compared to $10,200,000 for the
nine months ended September 30, 2001. The decrease in engineering sales is a
result of the postponement and cancellation of several large contracts as well
as reduced sales activity in response to the reduction of the sales force for
this division.
For the nine months ended September 30, 2002, information technology
documentation services represented approximately 6% of our revenue compared to
10% for the nine months ended September 30, 2001. Revenue from information
technology documentation services for the nine months ended September 30, 2002
decreased by $1,600,000 or 56% to $1,250,000 compared to $2,850,000 for the nine
months ended September 30, 2001.
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 have
recently expanded the marketing of our documentation services to other regions
and to existing recruitment and engineering services customers. In addition, we
have reduced our operating expenses for this division to support the current
levels of revenue.
For the nine months ended September 30, 2002, technical training
represented approximately 5% of our revenue compared to 9% for the nine months
ended September 30, 2001. Revenue from technical training for the nine months
ended September 30, 2002 decreased by $1,410,000 or 55% to $1,160,000 compared
to $2,570,000 for the nine months ended September 30, 2001.
As a result of the sale of certain assets of the Toronto office of the
technical training division in May 2002, revenue from this office for the nine
months ended September 30, 2002 was only $180,000 or 1% of total revenue
compared to $900,000 or 3% of total revenue for the nine months ended September
30, 2001. Subsequent to September 30, 2002, certain assets of the New York
office of the technical training division were sold. Revenue from this office
for the nine months ended September 30, 2002 was $980,000 or 5% of total revenue
compared to $1,640,000 or 6% of total revenue for the nine months ended
September 30, 2001.
Gross Profit
Gross profit for information technology recruitment services for the
nine months ended September 30, 2002 declined to 14% from 27% for the nine
months ended September 30, 2001. The decline in gross profit is a result of our
focus on contract sales and our preferred vendor status with large clients for
information technology contract recruitment services. It is often necessary to
lower billing rates and markups to be successful in the bid process. One client,
with an average gross profit margin of 12% represented 66% of the total revenue
for the recruitment division and 32% of the company's total revenues for the
nine months ended September 30, 2002. Revenue from permanent placements has
declined considerably from last year, which has also contributed to the decline
in gross profit in this division.
The average gross profit for the engineering division was 31% for the
nine months ended September 30, 2002 compared to 28% for the nine months ended
September 30, 2001. The increase in gross profit for technical publications and
engineering services is a result of the increase in higher margin contracts in
technical publications and e-learning compared to the traditional engineering
services. In addition, we are engaging in more time-and-materials based
contracts versus fixed cost which prevents against project and costs overruns.
The average gross profit for the information technology division for
the nine months ended September 30, 2002 was 25% compared to 41% for the nine
months ended September 30, 2001. The decline in gross profit in the current
period is a result of the decrease in higher margin permanent placements and
increase in lower margin contract placements of documentation specialists.
The average gross profit for the technical training division was 51%
for the nine months ended September 30, 2002 compared to 55% for the nine months
ended September 30, 2001. The increase in gross profit is a result of tighter
expense controls over trainer travel costs and the decreased utilization of
contract trainers.
RESULTS OF OPERATIONS
The following table presents our statements of operations reflected as
a percentage of our total revenue.
STATEMENTS OF OPERATIONS--PERCENTAGES
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUE 100 % 100 % 100 % 100 %
- ------- ---- ---- ---- ----
COST OF SALES 79 % 75 % 76 % 69 %
---- ---- ---- ----
GROSS PROFIT 21 % 25 % 24 % 31 %
---- ---- ---- ----
EXPENSES
Administrative 23 % 17 % 17 % 15 %
Selling 12 % 15 % 13 % 16 %
Financing Expenses 7 % -- % 2 % 2 %
Depreciation and amortization 4 % 6 % 4 % 5 %
Write down of goodwill 1 % -- % -- % -- %
Restructuring -- % -- % -- % 1 %
---- ---- ---- ----
Income (loss) from continuing operations (26)% (14)% (13)% (8)%
Gain (loss) on Investment -- % (1)% -- % -- %
Income (loss) from continuing operations
before interest charges (26)% (15)% (13)% (8)%
Interest charges 5 % 1 % 3 % 3 %
---- ---- ---- ----
Income (loss) from continuing operations (31)% (16)% (16)% (11)%
Income taxes 1 % 4 % -- % 2 %
---- ---- ---- ----
Income (loss) from continuing operations (32)% (20)% (16)% (13)%
Income (loss) from discontinued operations -- % 1 % 1 % -- %
Net Income (loss) (32)% (19)% (15)% (13)%
---- ---- ---- ----
THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue. Revenue for the three months ended September 30, 2002
decreased by $1,650,000 or 20%, to $6,700,000, as compared to $8,350,000 for the
three months ended September 30, 2001. The decrease is primarily attributable to
the decline in revenues from each division including 15% for IT recruitment, 17%
for technical publications and engineering, 46% for IT documentation and 45% for
technical training.
Cost of Sales. The cost of sales for the three months ended September
30, 2002 decreased by $960,000, or 15%, to $5,290,000, as compared to $6,250,000
for the three months ended September 30, 2001. The cost of sales as a percentage
of revenue increased to 79% compared to 75% for the three months ended September
30, 2001. The increase in cost as a percentage of sales corresponds with the
increase in lower margin IT recruitment sales.
Gross Profit. Gross profit for the three months ended September 30,
2002 decreased by $680,000, or 32%, to $1,420,000 compared to $2,100,000 for the
three months ended September 30, 2001. This decrease was attributable to the
overall decrease in revenue and the increase in cost of sales during the three
months ended September 30, 2002. As a percentage of revenue, gross profit
decreased from 25% for the three months ended September 30, 2001 to 21% for the
three months ended September 30, 2002. This decrease in gross profit is a direct
result of the increase in direct costs associated with IT recruitment sales.
Expenses. Expenses for the three months ended September 30, 2002
decreased by only $60,000, or 2%, to $3,230,000 compared to $3,170,000 for the
three months ended September 30, 2001.
Administrative expenses increased by $140,000 or 9% to $1,570,000
compared to $1,430,000 for the three months ended September 30, 2001. General
administrative expenses including salaries and rent have decreased significantly
over last year as a result of restructuring and general cost cutting. The
increase is attributable to the expensing of approximately $500,000 for
3,250,000 shares of our common stock issued to Young and Georgiou for corporate
and debt restructuring services rendered during the period.
Selling expenses for the three months ended September 30, 2002
decreased by $500,000, or 39%, to $790,000 from $1,290,000 for the three months
ended September 30, 2001. This decrease is attributable to the decrease in sales
salaries and commissions, as a result of the reduction in sales and the
elimination of certain advertising and promotional expenses.
For the three months ended September 30, 2002, financing expenses
increased 1075% to $470,000 from $40,000 for the three months ended September
30, 2001. This increase is attributable to the expensing of approximately
$150,000 in fees to various financial brokers including Morrison Financial. In
addition, we expensed approximately $320,000 for shares issued to Tazbaz
Holdings in consideration of a loan agreement whereby Tazbaz securitized our
overdraft position with Bank One in the amount of $650,000.
For the three months ended September 30, 2002, depreciation and
amortization expenses decreased by $210,000, or 42%, to $290,000 from $500,000
for the three months ended September 30, 2001. This decrease is primarily
attributable to our adoption of Statements of Financial Accounting Standards No.
141, Business Combinations, No. 142, Goodwill and Other Intangible Assets and
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under
these statements, goodwill will no longer be amortized. Amortization of goodwill
for the three months ended September 30, 2001 amounted to $215,000.
In accordance with the requirements of SFAS 144, at September 30, 2002
we recorded an impairment of goodwill of $57,808 based on our evaluation of
carrying value and projected cash flows. In accordance with SFAS 121, there was
no write down for the same period last year.
For the three months ended September 30, 2002, there were no
restructuring charges related to the termination of personnel and the closure of
non-productive branch offices. For the three months ended September 30, 2001, we
reduced our restructuring charges by $30,000 as a result of an over accrual in
the prior period related to the closure of our London training office and
termination of personnel.
Income (Loss) from Continuing Operations. For the three months ended
September 30, 2002, losses from continuing operations increased by $620,000 or
55% to a loss of $1,750,000 as compared to a loss of $1,130,000 for the three
months ended September 30, 2001. The increase is largely attributable to the
decline in gross profit as a result of the concentration of IT recruitment
sales, and the expensing of financing costs of approximately $470,000 and shares
issued to consultants for restructuring services of approximately $500,000.
Interest Charges. For the three months ended September 30, 2002,
interest charges increased by $240,000, or 218%, to $350,000 from $110,000 for
the three months ended September 30, 2001. This increase is largely attributable
to the default interest rate and forbearance fees charged by Bank One under the
Forbearance Agreement entered into on July 1, 2002.
Income (Loss) from Continuing Operations before Income Tax. Loss from
continuing operations before income tax for the three months ended September 30,
2002 increased by $730,000 or 53% to a loss of $2,100,000 as compared to a loss
of $1,370,000 for the three months ended September 30, 2001.
Income Taxes. Income tax expense for the three months ended September
30, 2002 decreased by $280,000 or 93% to $20,000 compared to an expense of
$300,000 for the three months ended September 30, 2001. The expense in 2001 was
a write down of the deferred income tax asset.
Income (Loss) from Continuing Operations. Loss from continuing
operations for the three months ended September 30, 2002 increased by $450,000,
or 27%, to a loss of $2,120,000 compared to a loss of $1,670,000 for the three
months ended September 30, 2001.
Income (Loss) from Discontinued Operations. Operations of the
technology division for the three months ended September 30, 2002 have been
reported as discontinued and include no revenue, cost of sales of $2,000,
depreciation expense of $10,000 and interest expense of $5,000. The net loss for
the three months ended September 30, 2002 was $17,000.
Operations of the technology division for the three months ended
September 30, 2001 have been reported as discontinued and include revenues of
$160,000, cost of sales of $9,000, a credit in administrative expenses of
$40,000, selling expenses of $20,000, depreciation expense of $90,000,
restructuring costs of $30,000 and interest expense of $10,000. Net income for
the three months ended September 30, 2001 was $40,000.
Net Loss. Net loss for the three months ended September 30, 2002
decreased by $510,000 to a net loss of $2,140,000 compared to a net loss of
$1,630,000 for the three months ended September 30, 2001.
THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue. Revenue for the nine months ended September 30, 2002 decreased
by $7,100,000, or 25%, to $21,490,000, as compared to $28,590,000 for the nine
months ended September 30, 2001. The decrease is primarily attributable to the
decline in revenues from each division including 19% for IT recruitment, 16% for
technical publications and engineering, 56% for IT documentation and 55% for
technical training.
Cost of Sales. The cost of sales for the nine months ended September
30, 2002 decreased by $3,300,000, or 17%, to $16,410,000, as compared to
$19,710,000 for the nine months ended September 30, 2001. The cost of sales as a
percentage of revenue increased to 76% compared to 69% for the nine months ended
September 30, 2001. The increase in cost as a percentage of sales corresponds
with the increase in lower margin IT recruitment sales.
Gross Profit. Gross profit for the nine months ended September 30, 2002
decreased by $3,810,000, or 43%, to $5,080,000 compared to $8,890,000 for the
nine months ended September 30, 2001. This decrease was attributable to the
overall decrease in revenue and the increase in cost of sales during the nine
months ended September 30, 2002. As a percentage of revenue, gross profit
decreased from 31% for the nine months ended September 30, 2001 to 24% for the
nine months ended September 30, 2002. This decrease in gross profit is a direct
result of the increase in direct costs associated with IT recruitment sales.
Expenses. Expenses for the nine months ended September 30, 2002
decreased by only $3,410,000 or 31%, to $7,770,000 compared to $11,180,000 for
the nine months ended September 30, 2001.
Administrative expenses decreased by $640,000 or 15% to $3,590,000
compared to $4,230,000 for the nine months ended September 30, 2001 This
decrease is related to the significant reduction in administrative salaries and
overhead as a result of restructuring and general cost cutting.
Selling expenses for the nine months ended September 30, 2002
decreased by $1,730,000, or 39%, to $2,760,000 from $4,490,000 for the nine
months ended September 30, 2001. This decrease is attributable to the decrease
in sales salaries and commissions, as a result of the reduction in sales and the
elimination of certain advertising and promotional expenses.
For the nine months ended September 30, 2002, financing expenses
decreased $150,000, or 24% to $470,000 from $620,000 for the nine months ended
September 30, 2001.
For the nine months ended September 30, 2002, depreciation and
amortization expenses decreased by $560,000, or 39%, to $890,000 from $1,450,000
for the nine months ended September 30, 2001. This decrease is primarily
attributable to our adoption of Statements of Financial Accounting Standards No.
141, Business Combinations, No. 142, Goodwill and Other Intangible Assets and
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under
these statements, goodwill will no longer be amortized. Amortization of goodwill
for the nine months ended September 30, 2001 amounted to $500,000.
In accordance with the requirements of SFAS 144, at September 30, 2002
we recorded an impairment of goodwill of $57,808 based on our evaluation of
carrying value and projected cash flows. In accordance with SFAS 121, there was
no write down for the same period last year.
For the nine months ended September 30, 2002, there were no
restructuring charges related to the termination of personnel and the closure of
non-productive branch offices. For the nine months ended September 30, 2001, we
recorded restructuring charges of $400,000 related to the closure of our London
training office and termination of personnel.
Income (Loss) from Continuing Operations. For the nine months ended
September 30, 2002, losses from continuing operations increased by $390,000 or
17% to a loss of $2,690,000 as compared to a loss of $2,300,000 for the nine
months ended September 30, 2001. The increase is largely attributable to the
decline in gross profit as a result of the concentration of IT recruitment
sales, and the expensing of financing costs of approximately $470,000 and shares
issued to consultants for restructuring services of approximately $500,000.
Interest Charges. For the nine months ended September 30, 2002,
interest charges increased by $240,000 or 41% to $820,000 from $580,000 for the
nine months ended September 30, 2001. This increase is largely attributable to
the default interest rate and forbearance fees charged by Bank One under the
Forbearance Agreement which was entered into on July 1, 2002.
Income (Loss) from Continuing Operations before Income Tax. Loss from
continuing operations before income tax for the nine months ended September 30,
2002 increased by $500,000 or 17%, to a loss of $3,510,000 as compared to a loss
of $3,010,000 for the nine months ended September 30, 2001.
Income Taxes. Income tax expense for the nine months ended September
30, 2002 decreased by $705,000 to a recovery of $5,000 compared to an expense of
$700,000 for the nine months ended September 30, 2001. The expense in 2001 was a
write down of the deferred income tax asset.
Income (Loss) from Continuing Operations. Loss from continuing
operations for the nine months ended September 30, 2002 decreased by $210,000,
or 6%, to a loss of $3,500,000 compared to a loss of $3,710,000 for the nine
months ended September 30, 2001.
Income (Loss) from Discontinued Operations. Operations of the
technology division for the nine months ended September 30, 2002 have been
reported as discontinued and include revenue of $42,000, cost of sales of
$23,000, administrative expenses of $43,000, selling expenses of $6,000,
depreciation expense of $96,000 and interest expense of $15,000. The net loss
for the nine months ended September 30, 2002 was $140,000. The gain on disposal
of $500,000 has been reflected in the Income (loss) from discontinued
operations.
Operations of the technology division for the nine months ended
September 30, 2001 have been reported as discontinued and include revenues of
$635,000, cost of sales of $32,000 administrative expenses of $72,000, selling
expenses of $90,000, depreciation expense of $260,000, restructuring costs of
$180,000 and interest expense of $29,000. The net loss for the nine months ended
September 30, 2001 was $28,000.
Net Loss. Net loss for the nine months ended September 30, 2002
decreased by $590,000 or 16%, to a net loss of $3,150,000 compared to a net loss
of $3,740,000 for the nine months ended September 30, 2001.
Liquidity and Capital Resources
We have incurred substantial losses during the last 21 months. Due to
these factors, we had taken additional cost cutting steps in the first nine
months of 2002 to reduce our expenses. Specifically, we sold certain
non-performing divisions and assets of such divisions and reduced our staff by
approximately 35 employees.
In March 2002, we sold our technology division, Njoyn Software
Incorporated to Cognicase Inc., a Canadian company. Our net proceeds after
broker fees were $1,320,000 of which we received $800,000 in cash and $550,000
worth of unrestricted common shares on closing. The shares were sold on March
11, 2002 for value of $ 524,673. As part of the transaction, Cognicase assumed
all of the staff in our technology division (eight employees) and is contracting
the services of our CIO for a period of six months. The proceeds were used to
pay down bank indebtedness with Bank One of $500,000 and a term loan with Bank
One for $260,000. We also used the proceeds to pay past due rent, professional
fees and contractor fees. We believe the sale of Njoyn and the corresponding
reduction in technology expenses will have a significant impact on our cash flow
for the balance of 2002, as the operations had recurring losses since inception.
In April 2002, we closed one of our IT recruitment offices,
Systemsearch Consulting Services Inc., and transferred the existing contracts to
our Toronto head office. As a result of the closing, eight of our employees were
terminated. The prior owner of Systemsearch, John Wilson, was also terminated.
Mr. Wilson is subletting the space from us in consideration of certain assets
including furniture and equipment.
In May 2002, we entered into a series of agreements with triOS Training
Centres Limited, an Ontario company, for the purchase of certain assets of our
Toronto training division, Thinkpath Training. As part of the transaction, triOS
assumed the Toronto training staff (six employees) and is subletting our
classroom facilities. As a result of the sale of this office, our annual revenue
will decline by approximately $1,000,000. Revenue from this office represented
less than 1% of the total revenue for the nine months ended September 30, 2002
and approximately 3% for the nine months ended September 30, 2001. Subsequent to
September 30, 2002, we entered into a series of agreements with Thinkpath
Training LLC, a New York company, for the purchase of certain assets of our New
York training division, Thinkpath Training US, for a nominal amount of cash and
the assumption of all prepaid training liabilities. As part of the transaction,
Thinkpath Training LLC will assume the New York training staff, some assets and
sublet the classroom facilities. As a result of the sale of this office, our
annual revenue will decline by approximately $1,000,000. Revenue from this
office represented 5% of the total revenue for the nine months ended September
30, 2002 and approximately 6% for the nine months ended September 30, 2001.
We expect the reduction of our staff during the nine months ended
September 30, 2002 will save approximately $1,600,000 on an annualized basis.
Despite the steps that we have taken, to the extent we experience a shortfall in
required revenue or are unable to bill and collect our receivables and unbilled
work-in-progress in a timely manner, it could have a material adverse impact on
our ability to continue as a going-concern and meet our intended business
objectives. Also, a continued slowdown in the economy or the postponement of
large engineering contracts could adversely affect our working capital and/or
operating cash flow.
With insufficient working capital from operations, our primary sources
of cash have been a revolving line of credit with Bank One and proceeds from the
sale of equity securities. Our primary capital requirements include debt
service, capital expenditures and working capital needs.
At September 30, 2002, we had negative cash or cash equivalents and a
working capital deficiency of $4,490,000. At September 30, 2002, we had a cash
flow deficiency from operations of $1,150,000 due primarily to the decrease in
accounts payable of $870,000 and the decrease in deferred revenue of $140,000
which was partially offset by the decrease in accounts receivable of $1,330,000
and the gain on the disposal of Njoyn of $500,000. At September 30, 2001, we had
negative cash or cash equivalents and a working capital deficiency of
$1,850,000. At September 30, 2001, we had a cash flow from operations of
$150,000.
At September 30, 2002, we had cash flow from investing activities of
$1,080,000 attributable primarily to the proceeds on the disposal of Njoyn of
$1,320,000, which was offset by the purchase of capital assets of approximately
$250,000 and the disposal of other assets of $10,000. At September 30, 2001, we
had a cash flow deficit from investing activities of $670,000 attributable to
the purchase of capital assets of $180,000, purchase of other assets of $300,000
and increase in long-term receivable of $190,000.
At September 30, 2002, we had a cash flow deficit from financing
activities of $420,000 attributable primarily to long-term debt repayment of
$480,000, the repayment of Roger Walters' note payable of $80,000 and a decrease
in bank indebtedness of $120,000 which was offset by an increase in debt of
$260,000 related to the Terry Lyons loan received in May 2002. At September 30,
2001, we had cash flow from financing activities of $720,000 attributable
primarily to proceeds from the issuance of common stock of $400,000, proceeds
from the issuance of preferred stock of $1,230,000, and an increase in long-term
debt of $220,000. Cash was used in the repayment of notes payable of $210,000,
long-term debt of $860,000 and bank indebtedness of $60,000.
At September 30, 2002, the balance of our revolving line of credit with
Bank One was $4,980,000 including an overdraft of approximately $650,000.
Eligible receivables allowed for a maximum borrowing amount of $4,330,000. The
revolving line of credit agreement requires us to meet various restrictive
covenants, including a senior debt to EBITDA ratio, debt service coverage ratio,
debt to tangible net worth ratio and certain other covenants. At September 30,
2002 and thereafter, we were not in compliance with the covenants contained in
the revolving line of credit agreement.
On July 1, 2002 and as amended on August 1, 2002, August 15, 2002,
September 1, 2002, September 16, 2002, September 30, 2002, October 15, 2002, and
November 15, 2002, we entered into a Forbearance and Modification Agreement with
our senior lender, Bank One whereby the Bank agreed to forebear from exercising
its rights and remedies against us as a result of its violation of certain loan
covenants, until the period ending November 30, 2002. Under the terms of the
agreement, the Bank is entitled to forbearance fees and payment of related legal
fees and expenses. As of November 19, 2002, the Bank has charged us $204,000 in
forbearance fees and $18,000 in legal fees. The interest rate on the revolving
line facility was increased to prime plus 3%. We have continued to borrow from
the revolving line facility subject to eligible accounts receivables as
monitored weekly by the Bank. In the event that we default under the agreement
including the failure to make payment when due, the Bank is entitled to exercise
any and all of its security rights including foreclosing on collateral.
Bank One has agreed to extend the expiration of the Forbearance and
Modification Agreement until November 30, 2002 to allow our new lender to
complete the financing arrangement required to purchase Bank One's debt and
security. In addition, Bank One has agreed to accept a $700,000 discount on the
payoff of its indebtedness.
On August 13, 2002, we received a commitment from Morrison Financial
Services Limited for a syndicated financing arrangement that will provide the
funding necessary to purchase Bank One's debt and security. The partners in the
syndicate are Maple Partners America Inc., Morrison Financial Services Limited
and MFI Export Finance Inc. Bank One has agreed to extend the expiration of the
Forbearance and Modification Agreement until November 30, 2002 to allow the
syndicate to complete the financing arrangement.
At September 30, 2002, we had $400,652 in subordinated debt outstanding
to the Business Development Bank of Canada. The loan agreements require us to
meet a certain working capital ratio. At September 30, 2002 and thereafter, we
were not in compliance with the covenant contained in the loan agreements.
On September 27, 2002, we received a notice of default demanding repayment of
the loans in full and the BDC's intention to enforce its security if repayment
was not made within 10 days. On October 7, 2002, the BDC agreed to extend the
stay of the demand period and on November 4, 2002 accepted a proposal from
Morrison Financial to purchase its debt and security at a 75% discount. The
purchase will close concurrently with the syndicated financing arrangement with
Morrison Financial, the repayment of Bank One and the first tranche of the
senior convertible debenture.
In May 2002, we secured a loan of $259,375 from an individual, Terry
Lyons which was secured by our IRS refund. We paid a placement fee of 10% to Mr.
Lyons. Although we received our IRS refund in July 2002, Mr. Lyons agreed to an
extension of the loan until October 31, 2003. The loan is payable in twelve
monthly payments of $21,613 beginning November 30, 2002 and bears interest at
30% per annum.
At September 30, 2002, we had approximately $328,249 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 training and
engineering divisions.
At September 30, 2002, we had a note payable of $236,000 owed to Roger
Walters, the sole shareholder of CadCam Inc. On August 1, 2002, we restructured
our 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 our common
stock. We agreed to issue and register the shares upon obtaining shareholder
approval of an amendment to our Articles of Incorporation increasing our
authorized capital stock. Principal payments of $4,000 will be made monthly and
started September 1, 2002 until August 1, 2007. We 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, we 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.
At September 30, 2002, we had a note payable of $600,000 owed to Denise
Dunne-Fushi, the vendor of MicroTech Professionals Inc. On August 1, 2002, we
restructured our note payable to Denise Dunne-Fushi, reducing the principal from
$1,740,000 to $600,000 in consideration of the issuance of 3,000,000 shares of
our common stock. We agreed to issue and register the shares upon obtaining
shareholder approval of an amendment to its Articles of Incorporation increasing
our authorized capital stock. Principal payments of $10,000 per month will begin
November 1, 2002 until October 1, 2007 and bear interest of 5% per annum. In
addition, we agreed to cover the monthly expense associated with Ms.
Dunne-Fushi's family health benefits and vehicle lease for a period of four
years.
As a result of the terrorist attacks of September 11, 2001, we lost our
IT recruitment office in the World Trade Center and our training office located
at 195 Broadway was inaccessible for approximately four weeks. The recruitment
office represents approximately $2,000,000 in annual information technology
recruitment revenue. We have experienced a significant decline in revenue from
this office from $1,800,000 per annum to $500,000 per annum. We lost
approximately $75,000 of fixed assets, including furniture, computer hardware
and office equipment. We have filed an interim statement of loss with our
insurance company and to date have received insurance payments of $75,000 with
respect to the claims submitted for this office.
Our training office in New York represents approximately $1,000,000 in
annual technical training revenue. Many of our primary customers have since
relocated to other cities and have indicated their postponement of employee
training until the later part of 2002. The estimated loss of revenue from this
office is now between $100,000 and $200,000 per month. In addition, many of the
office's computer assets were malfunctioning as a result of debris and smoke. As
a result of the decline in revenue, we terminated four of twelve employees from
this office in October 2001 and an additional two employees in March 2002. At
this time we do not know what the total loss of revenue will be for our training
operations in New York, or the final amount of our insurance claim. We have
filed an interim statement of loss with our insurance company and to date have
received approximately $250,000 for business interruption which have been
treated as an extraordinary item on the income statement. We have filed
additional business interruption claims, which have not yet been settled. In
accordance with EITF 01-10 "Accounting for the Impact of the Terrorist Attacks
of September 11, 2001," we have determined our losses directly resulting from
the September 11th events amount to approximately $25,000 net of insurance
recoveries. On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the purchase of certain assets
of this office for a nominal amount of cash and the assumption of all prepaid
training liabilities. As part of the transaction, Thinkpath Training LLC will
assume the New York training staff, some assets and sublet the classroom
facilities.
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 line of credit, 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
secure alternate financing, and settlement of our insurance claim, all of which
are subject to substantial uncertainties. Cash flow from operations for the next
twelve months will be dependent, among other things, upon the effect of the
current economic slowdown on our sales, the impact of the restructuring plan 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 secure alternate 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 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.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of".
Effective January 1, 2002, we adopted SFAS No. 142. This statement
requires us to evaluate the carrying value of our 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.
In April 2002, the FASB issued SFAS No. 145, which, among other things,
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. We 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.
Recent Events
On July 1, 2002 and as amended on August 1, 2002, August 15, 2002,
September 1, 2002, September 16, 2002, September 30, 2002, October 15, 2002, and
November 15, 2002, we entered into a Forbearance and Modification Agreement with
our senior lender, Bank One whereby the Bank agreed to forebear from exercising
its rights and remedies against us as a result of our violation of certain loan
covenants, until the period ending November 30, 2002. In the event that we
default under the agreement including the failure to make payment when due, the
Bank is entitled to exercise any and all of its security rights including
foreclosing on collateral.
On August 13, 2002, we received a commitment from Morrison Financial
Services Limited for a syndicated financing arrangement that will provide the
funding necessary to purchase Bank One's debt and security. The partners in the
syndicate are Maple Partners America Inc., Morrison Financial Services Limited
and MFI Export Finance Inc. Bank One has agreed to extend the expiration of the
Forbearance and Modification Agreement until November 30, 2002 to allow the
syndicate to complete the financing arrangement. In addition, Bank One has
agreed to accept a $700,000 discount on the payoff of its indebtedness. The
Business Development Bank of Canada has also agreed to sell its debt and
security to the syndicated group with a discount on the payoff of $300,000.
On October 4, 2002, our securities were delisted from The Nasdaq
SmallCap Market, for failure to comply with the minimum bid price or net
tangible assets requirements for continued listing, as set forth in Nasdaq's
Marketplace Rule 4310(c)(4). We also failed to meet the initial inclusion
requirements under Nasdaq's Marketplace Rule 4310(c)(2)(A) including minimum
stockholders' equity of $5 million, market capitalization of $50 million or net
income of $750,000 (excluding extraordinary or non-recurring items) in the most
recently completed fiscal year or in two of the last three most recently
completed fiscal years.
On October 16, 2002, we held our Annual General Meeting and Special
Meeting of Shareholders where the following resolutions were passed: the
election of the Board of Directors including Declan French, Kelly Hankinson,
John Dunne, Arthur Marcus and Katherine Seto Evans; the appointment of Schwartz
Levitsky Feldman LLP as our independent auditors for the ensuing year; the
adoption of our 2002 Stock Option Plan; and, the amendment of our Articles of
Incorporation to increase our authorized capital stock from 30,000,000 to
100,000,000.
On October 15, 2002, we signed a term sheet with Bristol Investment
Fund, Ltd. and a syndicate of other investors to issue Senior Secured
Convertible Debentures of up to $3,000,000 in multiple tranches. The first
tranche of $800,000 will be issued upon signing of a definitive investment
agreement and concurrently with the closing of the financing arrangement with
Morrison Financial. The funds will be directed to Bank One and certain of our
other creditors.
On October 21, 2002, we entered into a settlement agreement with
Michael Carrazza, a former director, in the sum of $330,000 to be paid $50,000
on October 31, 2002 and $17,500 per month thereafter until paid in full, bearing
interest at 9% per annum. This settlement was pursuant to a motion for summary
judgment filed by Carrazza, which was granted in his favor in the sum of
$264,602. In November 1998, we completed the acquisition of certain assets of
Southport Consulting Co. from Carrazza, for an aggregate of $250,000 in cash and
shares of our common stock. Carrazza instituted an action against us in the
Supreme Court of the State of New York, County of New York, Index No. 600553/01,
alleging breach of contract and unjust enrichment and seeking at least $250,000
in damages. Specifically, Mr. Carrazza claimed that we failed to deliver cash or
stock to Mr. Carrazza under an asset purchase agreement, and that he was
entitled to recovery of his attorneys' fees. We filed a counterclaim against Mr.
Carrazza, seeking $162,000 in damages, plus punitive damages and attorneys'
fees, on the ground that Mr. Carrazza, as then president and sole stockholder of
Southport Consulting Co., fraudulently induced us into executing the asset
purchase agreement by misrepresenting the value of the assets being purchased.
On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the purchase of certain assets
of our 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 will assume the New York training staff,
some assets and sublet the classroom facilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer
have evaluated the Company's disclosure controls and procedures (as such term is
defined in Rule 13a-14 (c) under the Exchange Act) as of a date within 90 days
of the date of filing of this Form 10-Q. Based upon such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that such controls and procedures are effective to ensure that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is gathered, analyzed and disclosed with adequate timeliness. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation described above.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to the following pending legal proceedings:
Christopher Killarney, a former employee, filed a statement of
claim against us on June 14, 2002, with the Superior Court of Justice of
Ontario, Canada, Court File No. 02-CV-229385CMS, alleging wrongful dismissal and
breach of contract. Mr. Killarney is seeking between approximately $120,000 and
$650,000 in damages. 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 IN SENIOR SECURITIES
We are in breach of the loan covenants governing our credit line
facility with Bank One; including a senior debt to EBITDA ratio, debt service
coverage ratio, debt to tangible net worth ratio and certain other covenants. At
September 30, 2002, we had $4,900,000 outstanding with Bank One.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 2002, we held an Annual General Meeting and Special
Meeting of Shareholders at which the shareholders: (i) elected the Board of
Directors for the ensuing year; (ii) ratified the appointment of Schwartz,
Levitsky, Feldman, llp, as our independent chartered accountants for the ensuing
year; (iii) ratified the adoption of our 2002 Stock Option Plan; and, (iv)
amended our Articles of Incorporation to increase the authorized number of
shares of our common stock from 30,000,000 to 100,000,000 shares.
(i) The following directors were elected to the Board of Directors and
received the votes indicated:
For Withheld
Declan French 24,416,848 756,001
Kelly Hankinson 24,856,972 315,877
John Dunne 24,957,017 215,832
Arthur Marcus 24,961,092 211,757
Katherine Seto Evans 24,955,687 217,162
Set forth below is a biographical description of each of our directors
elected at our Annual General Meeting and Special Meeting of Shareholders held
on October 16, 2002:
Declan A. French has served as our Chairman of the Board of Directors
and Chief Executive Officer since its inception in February 1994. Prior to
founding Thinkpath, Mr. French was President and Chief Executive Officer of TEC
Partners Ltd., an information technology recruiting firm in Toronto, Canada. Mr.
French has a diploma in Psychology and Philosophy from the University of St.
Thomas in Rome, Italy.
Kelly Hankinson has served as our Chief Financial Officer since May
2000, as a member of our Board of Directors since June 2000 and as Secretary and
Treasurer since March 2001. Ms. Hankinson served as our Vice President, Finance
and Administration and Group Controller from February 1994 to May 2000. Ms.
Hankinson has a Masters Degree and a Bachelors Degree from York University.
John Dunne has served on our Board of Directors since June 1998. Mr.
Dunne has served as Chairman and Chief Executive Officer of the Great Atlantic &
Pacific Company of Canada, Ltd. since August 1997, where he also served as
President and Chief Operating Officer from September 1996 until August 1997.
From November 1995 until September 1996, Mr. Dunne was Chairman and Chief
Executive Officer of Food Basics Ltd.
Arthur S. Marcus has served our Board of Directors since April 2000.
Mr. Marcus is a partner at the New York law firm of Gersten, Savage, Kaplowitz,
Wolf and Marcus, LLP, our United States securities counsel. Mr. Marcus joined
Gersten, Savage & Kaplowitz, LLP in 1991 and became a partner in 1996. Mr.
Marcus specializes in the practice of United States Securities Law and has been
involved in approximately 50 initial public offerings and numerous mergers and
acquisitions. Mr. Marcus received a Juris Doctorate from Benjamin N. Cardozo
School of Law in 1989.
Katherine Seto Evans, director nominee, is an independent consultant
with extensive and diversified experience in financial management, human
resource leadership and organizational administration. From 1974 to 2001, Ms.
Evans was a partner at Schwartz, Levitsky, Feldman, llp, our independent
auditors. From 2001 to present, Ms. Evans has been an independent consultant to
various companies. During this period she has consulted with us and has assisted
us with various financial and accounting projects. Ms. Evans became a Certified
Public Accountant in 1999 and a Chartered Accountant in 1978. Ms. Evans received
a Bachelors Degree in Science from McGill University in 1972.
(ii) The appointment of Schwartz, Levitsky Feldman, llp, to serve as
our independent chartered accountants for the ensuing year was approved by the
votes indicated:
For Against Withheld
25,177,514 199,262 138,975
(iii) The adoption of our 2002 Stock Option Plan was approved by the
votes indicated:
For Against Abstain Withheld
11,161,695 1,554,095 107,500 12,681,461
The 2002 Stock Option Plan will be administered by our Compensation
Committee, which will 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 shares of our common stock issuable upon the
exercise of the options and the option exercise price
The 2002 Stock Option Plan is effective for a period for ten years,
expiring in 2012. Options to acquire 6,500,000 shares of our common stock may be
granted to officers, directors, consultants, key employees, advisors and similar
parties who provide the Company with their skills and expertise. The 2002 Stock
Option Plan is designed to enable management to attract and retain qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the 2002 Stock Option Plan may be exercisable for up to ten years,
generally require a minimum three-year vesting period, and shall be at an
exercise price all as determined by our Compensation Committee provided that,
the exercise price of any options may not be less than the fair market value of
the shares of our common stock on the date of the grant. Options are
non-transferable, and are exercisable only by the participant (or by his or her
guardian or legal representative) during his or her lifetime or by his or her
legal representatives following death.
If: (i) we are not the surviving entity in any merger, consolidation or
other reorganization (or survives only as a subsidiary of an entity); (ii) we
sell, lease or exchange all or substantially all of our assets to any other
person or entity; (iii) we are to be dissolved and liquidated; (iv) any person
or entity, including a "group" as contemplated by Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, acquires or gains ownership or
control (including, without limitation, power to vote) of more than 50% of the
outstanding shares of our voting stock (based upon voting power); or (v) as a
result of or in connection with a contested election of directors, the persons
who were directors with us before such election shall cease to constitute a
majority of the Board of Directors (each such event is referred to herein as a
"Corporate Change"); no later than (a) ten days after the approval by our
shareholders of such merger, consolidation, reorganization, sale, lease or
exchange of assets or dissolution or such election of directors or (b) 30 days
after a change of control of the type described in clause (iv), our Compensation
Committee, acting in its sole discretion without the consent or approval of any
optionee, shall act to effect 1 or more of the following alternatives, which may
vary among individual optionees and which may vary among options held by any
individual optionee: (1) accelerate the time at which options then outstanding
may be exercised so that such options may be exercised in full for a limited
period of time on or before a specified date (before or after such Corporate
Change) fixed by our Compensation Committee, after which specified date all
unexercised options and all rights of optionees thereunder shall terminate; (2)
require the mandatory surrender to us by selected optionees of some or all of
the outstanding Options held by such optionees (irrespective of whether such
options are then exercisable under the provisions of the 2002 Stock Option Plan)
as of a date before or after such Corporate Change, specified by our
Compensation Committee, in which event our Compensation Committee shall
thereupon cancel such options and we shall pay to each optionee an certain
amount of cash per share; (3) make such adjustments to options then outstanding
our Compensation Committee deems appropriate to reflect such Corporate Change
(provided, however, that they may determine in its sole discretion that no
adjustment is necessary to options then outstanding); or (4) provide that the
number and class of shares covered by an option theretofore granted shall be
adjusted so that such option shall thereafter cover the number and class of
shares or other securities or property (including, without limitation, cash) to
which the optionee would have been entitled pursuant to the terms of the
agreement of merger, consolidation or sale of assets and dissolution if,
immediately prior to such merger, consolidation or sale of assets, and
dissolution, the optionee had been the holder of record of the number of shares
of common stock then covered by such option.
If a participant ceases affiliation with us 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 us become available again for issuance
under the 2002 Stock Option Plan, subject to applicable securities regulation.
The 2002 Stock Option Plan may be terminated or amended at any time by
our Board of Directors, except that the number of shares of our common stock
reserved for issuance upon the exercise of options granted under the 2002 Stock
Option Plan may not be increased without the consent of our shareholders.
(iv) The amendment of our Articles of Incorporation to increase the
authorized number of shares of our common stock from 30,000,000 to 100,000,000
shares.
For Against Withheld
24,473,632 1,052,269 43,850
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On March 21, 2002, Thinkpath filed a report on Form 8-K to disclose the
disposition of its subsidiary, Njoyn Software Incorporated.
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 19, 2002 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
I, Declan French, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thinkpath Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Declan French
-----------------------
Declan French
Chief Executive Officer
I, Kelly Hankinson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thinkpath Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Kelly Hankinson
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Kelly Hankinson
Chief Financial Officer