-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SL+AT4jk0yI858j3gmVeh8At9EL2/TpcWS1r0G0Lo1pgPfPUy64jpIhCi3Ku7LZE O5P4lCgPS7bzgaoZwUPurw== 0000909012-04-000809.txt : 20041122 0000909012-04-000809.hdr.sgml : 20041122 20041122152419 ACCESSION NUMBER: 0000909012-04-000809 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041122 DATE AS OF CHANGE: 20041122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THINKPATH INC CENTRAL INDEX KEY: 0001070630 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 52209027 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14813 FILM NUMBER: 041160589 BUSINESS ADDRESS: STREET 1: 55 UNIVERSITY AVE STE 505 STREET 2: TORONTO, ONTARIO, CANADA CITY: M5J 2H7 BUSINESS PHONE: 4163648800 MAIL ADDRESS: STREET 1: 55 UNIVERSITY AVE STE 505 STREET 2: TORONTO, ONTARIO, CANADA CITY: MCJ 2H7 FORMER COMPANY: FORMER CONFORMED NAME: THINKPATH COM INC DATE OF NAME CHANGE: 20000414 FORMER COMPANY: FORMER CONFORMED NAME: IT STAFFING LTD DATE OF NAME CHANGE: 19980917 10-Q 1 t301452.txt THINKPATH INC. - FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____________ TO ________________ COMMISSION FILE NUMBER __________ THINKPATH INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) ONTARIO 52-209027 - ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 201 WESTCREEK BOULEVARD BRAMPTON, ONTARIO L6T 5S6 --------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (905) 460-3040 ------------------- (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_| AS OF NOVEMBER 22, 2004 THERE WERE 9,662,365,979 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING. THINKPATH INC. SEPTEMBER 30, 2004 QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Number Item 1. Financial Statements Interim Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003.................................................... Interim Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003............................. Interim Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2004 and the year ended December 31, 2003.................................................... Interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003.................................... Notes to Interim Consolidated Financial Statements................... Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations................................................ Item 3. Quantitative and Qualitative Disclosures about Market Risk........... Item 4. Controls and Procedures.............................................. PART II - OTHER INFORMATION Item 1. Legal Proceedings ................................................... Item 2. Changes in Securities and Use of Proceeds ........................... Item 3. Defaults Upon Senior Securities ..................................... Item 4. Submission of Matters to a Vote of Security Holders ................. Item 5. Other Information ................................................... Item 6. Exhibits and Reports on Form 8-K .................................... ITEM 1. FINANCIAL STATEMENTS THINKPATH INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2004 (UNAUDITED) (AMOUNTS EXPRESSED IN US DOLLARS) THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003 (AMOUNTS EXPRESSED IN US DOLLARS) September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ ASSETS CURRENT ASSETS Cash 143,685 483,443 Accounts receivable 2,160,399 1,766,061 Prepaid expenses 239,633 128,612 ------------------ ----------------- 2,543,717 2,378,116 PROPERTY AND EQUIPMENT 925,604 1,182,751 GOODWILL 3,748,732 3,748,732 INVESTMENT IN NON-RELATED COMPANIES 45,669 45,669 OTHER ASSET 58,765 53,321 ------------------ ----------------- 7,322,487 7,408,589 ================== ================= THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003 (AMOUNTS EXPRESSED IN US DOLLARS)
September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ LIABILITIES CURRENT LIABILITIES Receivable Discount Facility 615,835 1,128,444 Accounts payable 1,660,527 2,650,783 Current portion of long-term debt 123,541 279,800 Current portion of notes payable 853,491 859,936 12% Convertible Debenture 226,078 215,558 ------------------ ----------------- 3,479,472 5,134,521 LONG-TERM DEBT 153,088 13,176 ------------------ ----------------- 3,632,560 5,147,697 ================== ================= COMMITMENTS AND CONTINGENCIES (NOTE 20) STOCKHOLDERS' EQUITY CAPITAL STOCK 47,682,489 43,576,292 DEFICIT (42,667,061) (39,999,711) ACCUMULATED OTHER COMPREHENSIVE LOSS (1,325,501) (1,315,689) ------------------ ----------------- 3,689,927 2,260,892 ------------------ ----------------- 7,322,487 7,408,589 ================== =================
The accompanying notes are an integral part of these interim consolidated financial statements THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS)
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30, 2004 2003 2004 2003 ---- ---- ---- ---- $ $ $ $ REVENUE 3,125,899 2,649,681 9,507,784 7,611,673 COST OF SERVICES 1,981,507 1,770,861 6,089,123 5,154,467 -------------- -------------- -------------- -------------- GROSS PROFIT 1,144,392 878,820 3,418,661 2,457,206 -------------- -------------- -------------- -------------- EXPENSES Administrative 583,840 563,406 1,736,566 1,757,448 Selling 385,902 279,048 1,045,053 782,065 Depreciation and amortization 118,683 143,155 399,699 519,791 -------------- -------------- -------------- -------------- 1,088,425 985,609 3,181,318 3,059,304 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES 55,967 (106,789) 237,343 (602,098) Interest Charges 1,064,652 1,700,638 2,842,147 6,777,521 -------------- -------------- -------------- -------------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,008,685) (1,807,427) (2,604,804) (7,379,619) Income Taxes 15,906 1,343 20,382 13,366 -------------- -------------- -------------- -------------- LOSS FROM CONTINUING OPERATIONS (1,024,591) (1,808,770) (2,625,186) (7,392,985) INCOME (LOSS) FROM DISCONTINUED OPERATIONS (INCLUDING GAIN ON DISPOSAL) (15,141) (49,062) (42,164) 234,295 -------------- -------------- -------------- -------------- NET LOSS (1,039,732) (1,857,832) (2,667,350) (7,158,690) ============== ============== ============== ============== WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING BASIC AND DILUTED 5,601,027,960 448,877,336 4,200,637,587 290,295,250 ============== ============== ============== ============== LOSS FROM CONTINUING OPERATIONS PER WEIGHTED AVERAGE COMMON STOCK BASIC AND DILUTED (0.00) (0.00) (0.00) (0.02) ============== ============== ============== ==============
The accompanying notes are an integral part of these interim consolidated financial statements THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND THE YEAR ENDED DECEMBER 31, 2003 (AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED COMMON STOCK CAPITAL OTHER NUMBER OF STOCK COMPREHENSIVE COMPREHENSIVE SHARES AMOUNTS DEFICIT LOSS LOSS ------------------------------------------------------------------------------ Balance as of December 31, 2002 66,258,043 33,367,034 (30,966,083) (1,077,521) ============================================= ============= Net loss for the year -- -- (9,033,628) (9,033,628) ------------- Other comprehensive loss, net of tax: Foreign currency translation (238,168) (238,168) ------------- Comprehensive loss (9,271,796) ============= Conversion of 12% senior secured convertible debenture 2,368,413,224 901,891 -- Interest on 12% senior secured convertible debenture 153,405,397 142,875 -- Debt settled through the issuance of common stock 16,997,854 449,333 -- Common stock and warrants issued for services 10,980,000 226,500 -- Warrants issued for cash 121,184,669 1,241,514 -- Beneficial conversion on issuance of convertible debt -- 7,247,145 -- --------------------------------------------- ------------- Balance as of December 31, 2003 2,737,239,187 43,576,292 (39,999,711) (1,315,689) ============================================= ============= Net loss for the period -- -- (2,667,350) (2,667,350) ------------- Other comprehensive loss, net of tax: Foreign currency translation (9,812) (9,812) ------------- Comprehensive loss (2,677,162) ============= Conversion of 12% senior secured convertible debenture 4,223,054,463 293,376 -- Interest on 12% senior secured convertible debenture 180,460,870 29,380 -- Common stock and warrants issued for services 250,197,488 175,336 -- Warrants issued for cash 377,053,570 1,100,225 -- Beneficial conversion on issuance of convertible debt -- 2,507,880 -- --------------------------------------------- ------------- Balance as of September 30, 2004 7,768,005,578 47,682,489 (42,667,061) (1,325,501) ============================================= =============
The accompanying notes are an integral part of these interim consolidated financial statements. THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS)
2004 2003 ---- ---- $ $ Cash flows from operating activities Net loss (2,667,350) (7,158,690) ---------- ---------- Adjustments to reconcile net loss to net cash used in operating activities: Amortization 432,363 557,147 Amortization of beneficial conversion (included in interest) 2,507,880 6,179,406 Interest on 12% senior secured convertible debentures 29,380 56,893 Decrease (increase) in accounts receivable (369,870) 872,350 Decrease (increase) in prepaid expenses (109,203) 32,189 Decrease in accounts payable (1,014,369) (1,057,702) Decrease in long-term receivable -- 57,775 Decrease in deferred revenue -- (163,593) Common stock and warrants issued for services 175,336 226,500 Accounts payable settled with common stock -- 449,333 Debt forgiveness -- (30,565) Gain on disposal of IT Recruitment division -- (190,627) ---------- ---------- Net cash used in operating activities (1,015,833) (169,584) ---------- ---------- Cash flows from investing activities Purchase of property and equipment (173,598) (92,295) Proceeds on disposal of IT Recruitment division -- 146,406 ---------- ---------- Net cash provided by (used in) investing activities (173,598) 54,111 ---------- ---------- Cash flows from financing activities Repayment of notes payable (6,444) (31,453) Repayment of long-term debt (572,711) (1,532,119) Proceeds from issuance of capital stock 229,121 -- Proceeds from issuance of debentures and warrants 1,175,000 1,650,000 ---------- ---------- Net cash provided by financing activities 824,966 86,428 ---------- ---------- Effect of foreign currency exchange rate changes 24,707 (17,356) ---------- ---------- Net decrease in cash (339,758) (46,401) Cash Beginning of period 483,443 114,018 ---------- ---------- End of period 143,685 67,617 ========== ========== SUPPLEMENTAL CASH ITEMS: Interest paid 304,887 598,121 ========== ========== Income taxes paid 15,906 13,366 ========== ========== SUPPLEMENTAL NON-CASH ITEMS: Common shares issued for liabilities -- 449,333 ========== ==========
The accompanying notes are an integral part of these interim consolidated financial statements. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 1. MANAGEMENT'S INTENTIONS AND GOING CONCERN Certain principal conditions and events are prevalent which indicate that there could be substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. These conditions and events include significant operating losses, working capital deficiencies, and violation of certain loan covenants. At September 30, 2004, the Company had a working capital deficiency of $935,755, a deficit of $42,667,061 and has suffered recurring losses from operations. With insufficient working capital from operations, the Company's primary sources of cash are a receivable discount facility with Morrison Financial Services Limited and proceeds from the sale of equity securities. At September 30, 2004, the balance on the receivable discount facility was $615,835. The Company is currently within margin of its receivable discount facility with Morrison Financial Services Limited based on 75% of qualifying accounts receivable. As at November 19, 2004, management's plans to mitigate and alleviate these adverse conditions and events include: a) Ongoing restructuring of debt obligations and settlement of outstanding legal claims. b) Focus on growth in the engineering division, including design services and technical publications. c) Expansion of the engineering service offerings in Ontario, Canada. Although there can be no assurances, it is anticipated that continued cash flow improvements will be sufficient to cover current operating costs and will permit payments to certain vendors and interest payments on debt. Despite its negative working capital and deficit, the Company believes that its management has developed a business plan that if successfully implemented could substantially improve the Company's operational results and financial condition. However, the Company can give no assurances that its current cash flows from operations, if any, borrowings available under its receivable discounting facility with Morrison Financial Services Limited, and proceeds from the sale of securities, will be adequate to fund its expected operating and capital needs for the next twelve months. The adequacy of cash resources over the next twelve months is primarily dependent on its operating results, and the closing of new financing, all of which are subject to substantial uncertainties. Cash flows from operations for the next twelve months will be dependent, among other factors, upon the effect of the current economic slowdown on sales, the impact of the restructuring plan and management's ability to implement its business plan. The failure to return to profitability and optimize operating cash flows in the short term, and close alternate financing, could have a material adverse effect on the Company's liquidity position and capital resources. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Going Concern These consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities and commitments in the normal course of business. The application of the going concern concept is dependent on the Company's ability to generate sufficient working capital from operations and external investors. These consolidated financial statements do not give effect to any adjustments should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts differing from those reflected in the consolidated financial statements. Management plans to obtain sufficient working capital from operations and external financing to meet the Company's liabilities and commitments as they become payable over the next twelve months. There can be no assurance that management's plans will be successful. Failure to obtain sufficient working capital from operations and external financing will cause the Company to curtail operations. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. b) Change of Name On June 6, 2001, the Company changed its name from Thinkpath.com Inc. to Thinkpath Inc. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) c) Principal Business Activities Thinkpath Inc. is an engineering services company which, along with its wholly-owned subsidiaries, Thinkpath US Inc. (formerly Cad Cam Inc.), Thinkpath Michigan Inc. (formerly Cad Cam of Michigan Inc.), Thinkpath Technical Services Inc. (formerly Cad Cam Technical Services Inc.), provides engineering, design, technical publications and staffing, services to enhance the resource performance of clients. In addition, the Company owns the following companies which are currently inactive: Systemsearch Consulting Services Inc., International Career Specialists Ltd., Microtech Professionals Inc., E-Wink Inc. (80%), Thinkpath Training Inc. (formerly ObjectArts Inc.), Thinkpath Training US Inc. (formerly ObjectArts US Inc.) and TidalBeach Inc. In 2002, the Company sold Njoyn Software Incorporated, a wholly-owned subsidiary. d) Basis of consolidated financial statement presentation The consolidated financial statements include the accounts of the Company and its controlled subsidiaries. The earnings of the subsidiaries are included from the date of acquisition for acquisitions accounted for using the purchase method. For subsidiaries accounted for by the pooling of interest method their earnings have been included for all periods reported. All significant inter-company accounts and transactions have been eliminated. e) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts from and to banks, and any other highly liquid investments purchased with a maturity of three months or less. The carrying amount approximates fair value because of the short maturity of those instruments. f) Other Financial Instruments The carrying amounts of the Company's other financial instruments approximate fair values because of the short maturity of these instruments or the current nature of interest rates borne by these instruments. g) Long-Term Financial Instruments The fair value of each of the Company's long-term financial assets and debt instruments is based on the amount of future cash flows associated with each instrument discounted using an estimate of what the Company's current borrowing rate for similar instruments of comparable maturity would be. h) Property and Equipment Property and equipment are recorded at cost and are amortized over the estimated useful lives of the assets principally using the declining balance method. The Company's policy is to record leases, which transfer substantially all benefits and risks incidental to ownership of property, as acquisition of property and equipment and to record the occurrences of corresponding obligations as long-term liabilities. Obligations under capital leases are reduced by rental payments net of imputed interest. i) Net Income (Loss) and Diluted Net Income (Loss) Per Weighted Average Common Stock Net income (Loss) per common stock is computed by dividing net income (loss) for the year by the weighted average number of common stock outstanding during the year. Diluted net income (loss) per common stock is computed by dividing net income for the year by the weighted average number of common stock outstanding during the year, assuming that all convertible preferred stock, stock options and warrants as described in note 13 were converted or exercised. Stock conversions, stock options and warrants which are anti-dilutive are not included in the calculation of diluted net income (loss) per weighted average common stock. j) Revenue 1) The Company provides the services of engineering staff on a project basis. The services provided are defined by guidelines to be accomplished by clearly defined milestones and revenue is recognized upon the accomplishment of the relevant milestone. As services are rendered, the costs incurred are reflected as Work in Progress. Revenue is recognized upon the persuasive evidence of an agreement, delivery has occurred, the fee is fixed or determinable and collection reasonably assured. 2) Prior to the sale of the IT recruitment division (Note 16), the Company provided the services of information technology consultants on a contract basis and revenue was recognized as services were performed. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 3) Prior to the sale of the IT recruitment division (Note 16), the Company placed information technology professionals on a permanent basis and revenue was recognized upon candidates' acceptance of employment. If the Company received non-refundable upfront fees for "retained searches", the revenue was recognized upon the candidates' acceptance of employment. 4) Prior to the sale of the training division (Note 16), the Company provided advanced training and certification in a variety of technologies and revenue was recognized on delivery. 5) Prior to the sale of the technology division (Note 16), the Company licensed software in the form of a Human Capital Management System called Njoyn. The revenue associated with providing this software consisted of an initial set up fee, customization and training as agreed and an ongoing monthly per user fee. The allocation of revenue to the various elements was based on the Company's determination of the fair value of the elements if they had been sold separately. The customers had the right to choose a provider to host the software which was unrelated to the Company. The set-up fee and customization revenue was recognized upon delivery of access to the software with customization completed in accordance with milestones determined by the contract. Revenue was recognized on a percentage of completion basis for contracts with significant amounts of customization and clearly defined milestones agreed to by the customer and an enforceable right to invoice and collect on a partial completion basis. For contracts which required significant customization, without clearly defined milestones, and an inability to estimate costs, revenue was reflected on a completed contract basis. Substantial completion was determined based on customer acceptance of the software. 6) Prior to the sale of the technology division (Note 16), the Company also signed contracts for the customization or development of SecondWave, a web development software in accordance with specifications of its clients. The project plan defined milestones to be accomplished and the costs associated. These amounts were billed as they were accomplished and revenue was recognized as the milestones were reached. The work in progress for costs incurred beyond the last accomplished milestone was reflected at the period end. The contracts did not include any post-contract customer support. Additional customer support services were provided at standard daily rates, as services are required. k) Goodwill In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company began applying the new accounting rules effective January 1, 2002. Thinkpath completed SFAS No.142 impairment test and concluded that there was no impairment of recorded goodwill, as the fair value of its reporting units exceeded their carrying amount. l) Income Taxes The Company accounts for income tax under the provision of SFAS No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statement or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. Deferred tax assets may be reduced, if deemed necessary based on a judgmental assessment of available evidence, by a valuation allowance for the amount of any tax benefits which are more likely, based on current circumstances, not expected to be realized. m) Foreign Currency The Company is a foreign private issuer and maintains its books and records in Canadian dollars (the functional currency). The financial statements are converted to US dollars as the Company has elected to report in US dollars consistent with Regulation S-X, Rule 3-20. The translation method used is the current rate method which is the method mandated by FAS 52 where the functional currency is the foreign currency. Under the current method all assets and liabilities are translated at the current rate, stockholders' equity accounts are translated at historical rates and revenues and expenses are translated at average rates for the year. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) Due to the fact that items in the financial statements are being translated at different rates according to their nature, a translation adjustment is created. This translation adjustment has been included in accumulated other comprehensive income. Gains and losses on foreign currency transactions are included in financial expenses. n) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become known. o) Long-Lived Assets On January 1, 1996, the Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires that long-lived assets held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management used its best estimate of the undiscounted cash flows to evaluate the carrying amount and have reflected the impairment. In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS 144, effective January 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company's results of operations or financial condition. p) Comprehensive Income In 1999, the Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive Income". This standard requires companies to disclose comprehensive income in their financial statements. In addition to items included in net income, comprehensive income includes items currently charged or credited directly to stockholders' equity, such as the changes in unrealized appreciation (depreciation) of securities and foreign currency translation adjustments. q) Accounting for Stock-Based Compensation In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was issued. It introduced the use of a fair value-based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize stock-based compensation expenses to employees based on the new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules continued in Accounting Principles Board Option No. 25, Accounting for stock issued to employees. However, SFAS No. 123 requires companies that choose not to adopt the new fair value accounting rules to disclose pro forma net income and earnings per share under the new method. SFAS No. 123 is effective for financial statements for fiscal years beginning after December 31, 1995. The Company has adopted the disclosure provisions of SFAS No. 123. SFAS No. 123 was amended by SFAS No. 148 which requires more prominent disclosure of stock based compensation. r) Computer software costs Prior to the sale of its wholly-owned subsidiary Njoyn Software Incorporated, the Company accounted for the cost of developing computer software. The Company recorded these costs as research and development expenses until the technological feasibility of the product had been established at which time the costs were deferred. At the end of each year, the Company compared the unamortized costs represented by deferred development costs in Other Assets to the net realizable value of the product to determine if a reduction in carrying value is warranted. The software developed for own use which may be sold as a separate product is the Njoyn software and during development, the Company decided to market the software and therefore for the costs incurred after technological feasibility was reached has been treated as Deferred Development costs and the amount evaluated on an annual basis to determine if a reduction in carrying value is warranted. On March 8, 2002, Thinkpath sold all of its shares in Njoyn Software Incorporated. s) Investments in Non-Related Companies The Company records its investments in companies in which it holds a 20% or more interest and in which the Company can exercise significant influence over the investee's operating and financial policies on the equity basis. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) The Company records its investment in companies in which it holds less than 20% interest or in which the Company has a 20% or greater interest but the Company is unable to exercise significant influence at fair market value. Changes in fair market value are adjusted in comprehensive income, unless the impairments are of a permanent nature, in which case the adjustments are recorded in earnings. t) Recent Pronouncements In April 2002, FASB issued SFAS No. 145, which, among other factors, changed the presentation of gains and losses on the extinguishments of debt. Any gain or loss on extinguishments of debt that does not meet the criteria in APB Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", shall be included in operating earnings and not presented separately as an extraordinary item. The new standard is effective for companies with fiscal years beginning after May 15, 2002. However, the Company has elected to adopt the standard as the debt restructuring gain in the current period, as permitted by SFAS No. 145. In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No.146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred in a Restructuring)". The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. In January 2003, FASB issued SFAS No. 148, Accounting for Stock -Based Compensation - Transition and Disclosures. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in the financial statements about the effects of stock-based compensation. The transitional guidance and annual disclosure provisions of this Statement was effective for the December 31, 2002 financial statements. The interim reporting disclosure requirements was effective for the March 31, 2003 financial statements. In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation elaborates on the existing disclosure requirement for most guarantees including loan guarantees, and clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," which addresses consolidation by business enterprises of variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The objective of Interpretation No. 46 is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not have any variable interest entities, and, accordingly, adoption is not expected to have a material effect on the Company. In April 2003, FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The amendments set forth in Statement 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is effective for contracts entered into or modified after June 30, 2003 with certain exceptions. The Company does not believe that the adoption of Statement No. 149 will have a material effect on the Company. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) In May 2003, FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". The Statement specifies that certain instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. This Statement is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, the Statement goes into effect at the beginning of the first interim period beginning after June 15, 2003. For contracts that were created or modified before May 31, 2003 and still exist at the beginning of the first interim period beginning after June 30, 2003, entities should record the transition to Statement No. 150 by reporting the cumulative effect of a change in an accounting principle. Statement No. 150 prohibits entities from restating financial statements for earlier years presented. The Company does not believe that the adoption of Statement No. 150 will have a material effect on the Company. u) Advertising Costs Advertising costs are expensed as incurred. 3. STOCK OPTION PLANS OPTIONS WEIGHTED AVERAGE EXERCISE PRICE a) Options outstanding at December 31, 2002 1,110,492 Options forfeited during the year (13,000) 3.19 --------- Options outstanding at December 31, 2003 1,097,492 Options forfeited during the period (6,000) 3.19 Options expired during the period (431,992) 3.19 --------- Options outstanding at September 30, 2004 659,500 ========= Options exercisable December 31, 2003 1,097,492 1.90 Options available for future grant December 31, 2003 20,013,000 Options exercisable September 30, 2004 659,500 1.53 Options available for future grant September 30, 2004 20,450,992 b) Range of Exercise Prices at September 30, 2004
Outstanding Weighted Options Options Weighted Options Average Outstanding exercisable Average Remaining Average Exercise Life Exercise Price Price $2.78 - $3.25 224,500 0.50 year $3.15 224,500 $3.15 $1 and under 435,000 1.58 years $0.70 435,000 $0.70
c) Pro-forma net income At September 30, 2004, the Company has five stock-based employee compensation plans, which are described more fully in Note 13(d). The Company accounts for those plans under the recognition and measurement principles of APB Opinion No.25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123 Accounting for Stock-Based Compensation, to stock-based employee compensation. SFAS No.123 was amended by SFAS No. 148 which requires more prominent disclosure of stock based compensation. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS)
Three Months Ended Sept 30, Nine Months Ended Sept 30, 2004 2003 2004 2003 ---- ---- ---- ---- Net loss as reported (1,039,732) (1,857,832) (2,667,350) (7,158,690) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects -- (20,858) (1,895) (85,114) ---------- ---------- ---------- ---------- Pro forma net loss (1,039,732) (1,878,690) (2,669,245) (7,243,804) ========== ========== ========== ========== Loss per share: Basic and diluted loss per share, as reported (0.00) (0.00) (0.00) (0.02) ========== ========== ========== ========== Pro forma loss per share (0.00) (0.00) (0.00) (0.02) ========== ========== ========== ==========
d) Black Scholes Assumptions The fair value of each option grant used for purposes of estimating the pro forma amounts summarized above is estimated on the date of grant using the Black-Scholes option price model with the weighted average assumptions shown in the following table: 2001 GRANTS Expected dividends ----------- Risk free interest rates 4.76% Volatility factors 100% Weighted average expected life 4.90 years Weighted average fair value per share .74 Expected dividends ----------- There were no option grants in the nine months ended September 30, 2004. There were no option grants in the year ended December 31, 2003. 4. ACCOUNTS RECEIVABLE
September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Accounts receivable 2,344,472 1,952,908 Less: Allowance for doubtful accounts (184,073) (186,847) ------------------ ----------------- 2,160,399 1,766,061 ================== ================= Allowance for doubtful accounts Balance, beginning of period 188,217 236,793 Provision 1,500 44,359 Recoveries (5,644) (94,305) ------------------ ----------------- Balance, end of period 184,073 186,847 ================== =================
5. PROPERTY AND EQUIPMENT
September 30, 2004 December 31, 2003 -------------------------------------- ----------------- ACCUMULATED COST AMORTIZATION NET NET $ $ $ $ Furniture and equipment 507,425 372,334 135,091 162,544 Computer equipment and software 5,388,579 4,602,078 786,501 1,014,540 Leasehold improvements 92,516 88,504 4,012 5,667 ---------- ---------- ---------- ---------- 5,988,520 5,062,916 925,604 1,182,751 ========== ========== ========== ========== Assets under capital lease 477,369 475,869 1,500 25,464 ========== ========== ========== ==========
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) Amortization of property and equipment for the nine months ended September 30, 2004 amounted to $300,756 including amortization of assets under capital lease of $27,181. Amortization of property and equipment for the year ended December 31, 2003 amounted to $541,309 including amortization of assets under capital lease of $67,875. 6. INVESTMENT IN NON-RELATED COMPANIES Investment in non-related companies are represented by the following: September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Conexys 1 1 Digital Cement 45,668 45,668 ------ ------ Total 45,669 45,669 ====== ====== i) Conexys During the year ended December 31, 1999, $383,146 of the Conexys investment was included as a short-term investment as the Company had intended to sell these shares on the open market. During fiscal 2000, the Company acquired additional shares of Conexys at a cost of approximately $284,365 in consideration of services rendered and reclassified the total investment as available for sale. Effective February 26, 2003, the common shares of Conexys were temporarily suspended from trading on the Bermuda Stock Exchange as it does not have adequate sources of funding for its immediate operating requirements and is currently investigating various options to retain and maximize shareholder value including the restructuring of its debt and refinancing of the Company. At December 31, 2002, the Company wrote down its investment by $667,510 to a carrying value of $1. The write down was considered a permanent decline in value and as such was recorded as a charge to operations. ii) Digital Cement During fiscal 2000, the Company acquired 1,125,000 shares of Digital Cement, representing approximately 4% of that Company's shares in consideration of the co-licensing of SecondWave, software developed by TidalBeach Inc., a wholly-owned subsidiary of Thinkpath Inc. The value of these shares was determined to be approximately $507,865 based on a offer to a third party to purchase shares in the Company at a price of $0.50 per share. During 2001, the fair value was adjusted to $346,415 with a charge of $161,450 to comprehensive income. During 2002, the fair value was adjusted to $45,668 with a charge of $300,747 to comprehensive income. During 2003, the Company collected a long-term receivable in the amount of $53,924, owed by Digital Cement. 7. GOODWILL Goodwill is the excess of cost over the value of assets acquired over liabilities assumed in the purchase of the subsidiaries. Goodwill has been allocated to reporting units as follows:
September 30, 2004 December 31, 2003 -------------------------------------------------- ----------------- ACCUMULATED ACCUMULATED IMPAIRMENT COST AMORTIZATION LOSSES NET NET $ $ $ $ IT Recruitment (Systemsearch Consulting Services) 448,634 303,337 145,297 -- -- Technical Publications & Engineering (CadCam Inc.) 5,518,858 535,164 1,234,962 3,748,732 3,748,732 --------- --------- --------- --------- --------- 5,967,492 838,501 1,380,259 3,748,732 3,748,732 ========= ========= ========= ========= =========
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. This statement requires the Company to evaluate the carrying value of goodwill and intangible assets based on assumptions and estimates of fair value and future cash flow information. These assumptions reflect management's best estimates and may differ from actual results. If different assumptions and estimates are used, carrying values could be adversely impacted, resulting in write downs that could adversely affect the Company's earnings. At December 31, 2003, the Company performed its annual impairment test for goodwill and determined that no adjustment to the carrying value of goodwill was needed. On an ongoing basis, absent any impairment indicators, the Company expects to perform a goodwill impairment test as of the end of the fourth quarter of every year. 8. OTHER ASSET
September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Cash surrender value of life insurance 58,765 53,321 ------ ------ Total 58,765 53,321 ====== ======
Amortization of other assets amounted to nil for the nine months ended September 30, 2004 and the year ended December 31, 2003. 9. RECEIVABLE DISCOUNT FACILITY i) September 30, 2004 At September 30, 2004, the Company had a receivable discount facility in the amount of $615,835 with Morrison Financial Services Limited which allowed the Company to borrow up to 75% of the value of qualified accounts receivables to a maximum of $1,500,000, bearing interest at 30% per annum. ii) December 31, 2003 At December 31, 2003, the Company had a receivable discount facility in the amount of $1,130,000 with Morrison Financial Services Limited which allowed the Company to borrow up to 75% of the value of qualified accounts receivables to a maximum of $3,000,000, bearing interest at 30% per annum. 10. CONVERTIBLE DEBENTURE Pursuant to a share purchase agreement dated December 5, 2002, the Company entered into an agreement (the "12% Senior Secured Convertible Debenture Agreement"), with a syndicate of investors for debentures of up to $3,000,000. The first debenture of $800,000 was purchased together with 50,285,714 warrants on closing. The debenture will become due twelve months from the date of issuance. The investors will have the right to acquire up to $800,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until December 5, 2009 at a purchase price of $.0175 per share. The Company is required to pay interest to the debenture holder on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On June 30, 2003 and July 22, 2003, 12,571,428 of these warrants were repriced from $.0175 to $.00137 per share. On October 14, 2003, 12,571,428 of these warrants were repriced from $.00137 to $.00075 per share. On June 18, 2004, 1,142,857 of these warrants were repriced from $.00075 to $.00025 per share. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) On December 18, 2002, the Company entered into a share purchase agreement with Tazbaz Holdings Limited for the issuance and sale by the Company of a $100,000 principal amount Convertible Debenture and 5,625,000 warrants to purchase shares of the Company's common stock. The debenture will become due twelve months from the date of issuance. Tazbaz Holdings Limited will have the right to acquire up to $100,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until December 18, 2009 at a purchase price of $.0175 per share. The Company is required to pay interest to Tazbaz Holdings Limited on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On April 7, 2004, all of these warrants were repriced from $.0175 to $.0004 per share. The proceeds of $900,000 received by the Company in 2002 were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $707,050. The value of the beneficial conversion feature was determined to be $2,898,328 which was credited to paid in capital and charged to earnings as interest expense in 2002. During the year ended December 31, 2003, the Company sold an additional $2,075,000 in convertible debentures along with 770,033,457 warrants. The debentures will become due twelve months from the date of issuance. The investors will have the right to acquire up to $2,075,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at purchase prices ranging from $.0175 to $.00075 per share. The Company is required to pay interest to the debenture holder on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On April 7, 2004, 11,999,999 of these warrants were repriced from $.0175 to $.0004 per share. On June 18, 2004, 279,324,980 of these warrants were repriced from $.00075 to $.00025 per share. The proceeds of $2,075,000 received by the Company in 2003 were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $1,150,625. At December 31, 2003, the value of the beneficial conversion feature on all issued convertible debentures was determined to be $6,865,928 which was credited to paid in capital and charged to earnings as interest expense. On January 8, 2004, the Company sold an additional $25,000 in convertible debentures along with 1,428,571 warrants pursuant to the share purchase agreement (the "12% Senior Secured Convertible Debenture Agreement") dated December 5, 2002. The debentures will become due twelve months from the date of issuance. The investors will have the right to acquire up to $25,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.0175 per share. The Company is required to pay interest to the debenture holder on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On April 7, 2004 all of these warrants were repriced from $.0175 to $0.0004 per share On March 25, 2004, the Company entered into a new share purchase agreement with Bristol Investment Fund, Ltd. for the issuance and sale by the Company of debentures of up to $1,000,000. The first debenture of $350,000 was purchased together with 924,000,000 warrants on closing. The debenture will become due twelve months from the date of issuance. Bristol will have the right to acquire up to $350,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until March 25, 2011 at a purchase price of $.000417 per share. The Company is required to pay interest to Bristol on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On June 18, 2004, all of these warrants were repriced from $.000417 to $.00025 per share. On March 29, 2004, the Company entered into a new share purchase agreement with Tazbaz Holdings Limited for the issuance and sale by the Company of a $100,000 principal amount Convertible Debenture and 250,000,000 warrants to purchase shares of the Company's common stock. The debenture will become due twelve months from the date of issuance. Tazbaz Holdings Limited will have the right to acquire up to $100,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until March 29, 2011 at a purchase price of $.0004 per share. The Company is required to pay interest to Tazbaz Holdings Limited on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) On May 20 and June 18, 2004, the Company sold an additional $400,000 in convertible debentures together with 1,682,352,942 warrants to Bristol Investment Fund, Ltd. pursuant to the March 25, 2004 share purchase agreement. The debentures will become due twelve months from the date of issuance. Bristol will have the right to acquire up to $400,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.00025 per share. The Company is required to pay interest to Bristol on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On May 24, 2004 and June 18, 2004, the Company entered into new share purchase agreements with Tazbaz Holdings Limited for the issuance and sale by the Company of $300,000 principal amount Convertible Debentures and 1,157,142,857 warrants to purchase shares of the Company's common stock. The debentures will become due twelve months from the date of issuance. Tazbaz Holdings Limited will have the right to acquire up to $300,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.00025 per share. The Company is required to pay interest to Tazbaz Holdings Limited on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. The proceeds of $1,175,000 received by the Company in the nine months ended September 30, 2004 were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $871,104. At September 30, 2004, the value of the beneficial conversion feature on all issued convertible debentures was determined to be $2,413,143 which was credited to paid in capital and charged to earnings as interest expense. 11. LONG-TERM DEBT i) September 30, 2004 Effective March 25, 2004, the Company amended its loan agreement with Terry Lyons. The balance of accrued interest was added to the original principal amount of $259,356 for a new principal balance of $299,768. Monthly payments of $10,000 began April 5, 2004 until the full amount of the note, including interest is paid in full. The interest rate was reduced from 30% per annum to US prime plus 14%. ii) December 31, 2003 At December 31, 2003, the Company had a loan balance of $259,356 with Terry Lyons and no principal payments had been made.
September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ a) Included therein: A loan with T. Lyons payable in monthly payments of $10,000 beginning April 5, 2004 and bearing interest at US prime plus 14% per annum. This loan is subordinated to Morrison Financial Services Limited 265,231 259,356 Various capital leases with various payment terms and interest rates 11,398 33,620 ------ ------ 276,629 292,976 Less: current portion 123,541 279,800 ------- ------- Total $153,088 $13,176 ======== =======
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) b) Future principal payments obligations as at September 30, 2004, were as follows: 2004 32,520 2005 128,878 2006 115,231 2007 -- 2008 -- -------- $276,629 ======== c) Interest expense related to long-term debt was $70,475 for the nine months ended September 30, 2004. Interest expense related to long-term debt was $119,339 for the year ended December 31, 2003. 12. NOTES PAYABLE a) On August 1, 2002, the Company restructured its note payable to Roger Walters, reducing the principal from $675,000 to $240,000 in consideration of the issuance of 1,000,000 shares of its common stock. Principal payments of $4,000 were to be made monthly starting September 1, 2002 until August 1, 2007. This loan is non-interest bearing. Also as part of the restructuring, the Company agreed to price protection on the 1,756,655 shares that were issued to Mr. Walters in January 2002. In the event that the bid price is less than $.27 per share when Mr. Walters seeks to sell his shares in an open market transaction, the Company will be obligated to issue additional shares of unregistered common stock with a value equal to the difference between $.27 per share and the closing bid price to a floor of $.14 per share. The Company has accounted for its modification in the terms of its notes payable as troubled debt restructuring. Accordingly, the Company has recognized a gain on the restructuring of the old debt based upon the difference between the total carrying value of the original debt (with any accrued interest) and the total future cash flows of the restructured debt. The gain on the restructured debt, included in expenses in the consolidated statement of operations is as follows: Old debt Principal balance $ 675,000 Accrued interest -- --------- Carrying value 675,000 Common stock issued (2,631,185 shares at $0.0942) (247,858) Principle balance of new debt (240,000) Interest (payable through maturity) -- --------- Gain on restructured debt $ 187,142 ========= All future cash payments under the modified terms will be accounted for as reductions of note payable and no interest expense will be recognized for any period between the closing date and the maturity date. The note is subordinated to Morrison Financial Services Limited and to the 12% Senior Secured Convertible Debenture holders. The Company has not made any principal payments to Mr. Walters since December 2002 and is currently in default of the loan agreement. As a result of the default, the principal balance bears interest at 12% per annum until payment is made and the note is due on demand. The entire note payable has been reclassified as current. The Company intends to make payments as cash becomes available. b) On August 1, 2002, the Company restructured its note payable to Denise Dunne-Fushi, reducing the principal from $1,740,536 to $600,000 in consideration of the issuance of 4,000,000 shares of its common stock. In addition a prior debt conversion of $225,000 that was to be paid in capital was forgiven. Principal payments of $10,000 per month were to begin November 1, 2002 bearing 5% interest until October 1, 2007. In addition, the Company agreed to cover the monthly expense associated with Ms. Dunne-Fushi's family health benefits until May 2004 and vehicle lease until August 2004. The Company has accounted for its modification in the terms of its notes payable as troubled debt restructuring. Accordingly, the Company has recognized a gain on the restructuring of the old debt based upon the difference between the total carrying value of the original debt (with any accrued interest) and the total future cash flows of the restructured debt. The gain on the restructured debt, included in expenses in the consolidated statement of operations is as follows: Old debt Principal balance $1,740,536 Accrued interest -- Capital stock payable 225,000 ---------- Carrying value 1,965,536 Common stock issued (4,000,000 shares at $0.0942) (376,800) Principle balance of new debt (600,000) Interest, insurance and vehicle lease costs (98,987) ---------- Gain on restructured debt $ 889,749 ========== All future cash payments under the modified terms will be accounted for as reductions of note payable and no interest, insurance or vehicle expense will be recognized for any period between the closing date and the maturity date. The note is secured under a general security agreement but is subordinated to Morrison Financial Services Limited and to the 12% Senior Secured Convertible Debenture holders. The Company has not made any principal payments to Ms. Dunne-Fushi since December 2002 and is currently in default of the loan agreement. As a result of the default, Ms. Dunne-Fushi has the option of enforcing the security she holds and therefore the entire note payable has been reclassified as current. The Company intends to make further payments as cash becomes available. September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Note Payable to Roger Walters 224,000 224,000 Note Payable to Denise Dunne 629,491 635,936 ------- ------- 853,491 859,936 Less: current portion 853,491 859,936 ------- ------- Total -- -- ======= ======= 13. CAPITAL STOCK a) Authorized Unlimited Common stock, no par value 1,000,000 Preferred stock, issuable in series, rights to be determined by the Board of Directors b) Issued On January 24, 2003, the Company amended its Articles of Incorporation to increase its authorized common stock from 100,000,000 to 800,000,000. On October 2, 2003, the Company amended its Articles of Incorporation to increase its authorized common stock from 800,000,000 to an unlimited number of shares. During the year ended December 31, 2003, the Company issued 16,997,854 shares of its common stock in settlement of various accounts payable and liabilities in the amount of $449,333. This amount includes 12,427,535 shares of common stock, no par value per share, issued and registered on January 28, 2003 to Declan A. French, the Company's Chief Executive Officer, pursuant to an amendment to his employment agreement. Also included are 2,423,744 shares of common stock, no par value per share, issued to an employee as a signing bonus pursuant to his employment agreement. The Company also issued 2,146,575 shares to Vantage Point Capital, an investor relations firm, in settlement of accounts payable. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) During the year ended December 31, 2003, the Company issued 10,980,000 shares of its common stock and warrants as payment for a variety of services in the amount of $226,500. This includes 4,000,000 shares of common stock, no par value per share, issued to Rainery Barba pursuant to a consulting agreement with the Company dated February 7, 2003 for provision of legal and advisory services for a period of one year. Also included, are 4,200,000 shares of common stock, no par value per share issued to Dailyfinancial.com Inc. pursuant to a consulting agreement with the Company dated February 7, 2003 for the provision of corporate consulting services in connection with mergers and acquisitions, corporate finance and other financial services. The Company also issued 2,780,000 shares and warrants to various parties in consideration of financial services rendered. During the year ended December 31, 2003 the Company issued 121,184,669 shares of its common stock to the 12% Senior Secured Convertible Debenture Holders on the exercise of warrants. During the year ended December 31, 2003, the Company issued 2,521,818,621 shares of its common stock upon the conversion of 12% Senior Secured Convertible Debentures in the amount of $2,309,712. During the nine months ended September 30, 2004, the Company issued 250,197,488 shares of common stock, no par value per share, in consideration of consulting services in the amount of $175,336. This includes 250,000,000 shares of common stock, no par value per share, issued to Jeffrey Flannery pursuant to a consulting agreement with the Company dated May 26, 2004 for the provision of marketing and business development consulting services for a period of one year. During the nine months ended September 30, 2004, the Company issued 4,403,515,333 shares of its common stock upon the conversion of 12% Senior Secured Convertible Debentures in the amount of $776,400. c) Warrants On December 30, 1999, 475,000 warrants were issued in conjunction with the private placement of the Series A, preferred stock. They are exercisable at any time and in any amount until December 30, 2004 at a purchase price of $3.24 per share. These warrants have been valued at $1,091,606 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.33%. This amount has been treated as a cumulative effect adjustment to retained earnings. For purposes of earnings per share, this amount has been included with preferred share dividend in the 2000 financial statements. In connection with the Initial Public Offering, the underwriters received 110,000 warrants which were exercisable at a purchase price of $8.25 per share until June 1, 2004. On April 16, 2000, we issued 50,000 warrants in connection with a private placement of Series A stock and 300,000 warrants on the issue of Class B preferred shares. The warrants were issued with a strike price of $3.71 and expire April 16, 2005. These warrants have been valued at $939,981 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.18%. This amount has been treated as a preferred share dividend in the 2000 financial statements. In connection with the private placement of Series B preferred stock 225,000 warrants were issued. They are exercisable at a purchase price of $3.58. These warrants have been valued at $533,537 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.13%. This amount has been treated as a preferred share dividend in the 2000 financial statements. In 2000, in connection with the purchase of the investment in E-Wink 500,000 warrants were issued. They are exercisable at a purchase price of $3.25 and expire March 6, 2005. These warrants have been valued at $1,458,700 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.50%. This amount has been treated as part of the cost of the E-Wink investment. In 2000, in connection with the private placement of August 22, 2000, 560,627 warrants were issued. They are exercisable at a purchase price of $2.46 and expire August 22, 2005. These warrants have been valued at $1,295,049 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.13%. This amount has been treated as an allocation of the proceeds on the common stock issuance. On January 26, 2001, the Company: (a) repriced warrants to purchase up to 100,000 shares of its common stock, which warrants weres issued to a certain investor in the April 2000 private placement offering of Series B 8% Cumulative Preferred Stock, so that such warrants are exercisable at any time until April 16, 2005 at a new purchase price of $1.00 per share; (b) repriced warrants to purchase an aggregate of up to 280,693 shares of its common stock, which warrants were issued to the placement agent, certain financial advisors, and the placement agent's counsel in our August 2000 private placement offering of units, so that such warrants are exercisable at any time until August 22, 2005 at a new purchase price of $1.00 per share; and (c) issued warrants to purchase up to 250,000 shares of its common stock exercisable at any time and in any amount until January 26, 2006 at a purchase price of $1.50 per share. In February 2001, 150,000 of such warrants were exercised by KSH Investment Group, the placement agent in the Company's August 2000 private placement offering. The exercise prices of the revised and newly issued warrants are equal to, or in excess of, the market price of our common stock on the date of such revision or issuance. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) Following verbal agreements in December 2000, on January 24, 2001, the Company signed an agreement with The Del Mar Consulting Group, a California corporation, to represent it in investors' communications and public relations with existing shareholders, brokers, dealers and other investment professionals. The Company issued a non-refundable retainer of 400,000 shares to Del Mar and is required to pay $4,000 per month for on-going consulting services. In addition, Del Mar has a warrant to purchase 400,000 shares of common stock at $1.00 per share and 100,000 shares at $2.00 which expires January 24, 2005 and which are exercisable commencing August 1, 2001. As the agreement to issue the non-refundable retainer was reached in December 2000, the 400,000 shares with a value of $268,000 has been included in the shares issued for services rendered and has been included in financing expenses for December 31, 2000. The commitment to issue the non-refundable deposit was effected in December 2000. The value of the warrants of $216,348 has been included in paid in capital in January 2001 and the expense was reflected over the six month period ending August 1, 2001. In April 2001, the warrants were cancelled and new warrants were issued which are exercisable at $0.55. 200,000 of the warrants are exercisable commencing April 2001 and the balance are exercisable commencing August 1, 2001. The value of the change in the warrants of $29,702 has been included in the paid in capital in April 2001 and the additional expense was amortized in the period ending August 1, 2001. During the year ended December 31, 2001, the Company issued 22,122 shares to the Business Development Bank of Canada on the exercise of warrants at $1.00. During the year ended December 31, 2001, the Company issued 723,436 warrants to the Series C Preferred Stock investors of which 663,484 have a strike price of $0.54 and expire on April 18, 2005. The balance of 59,952 have a strike price of $0.63 and expire on June 8, 2005. As of December 31, 2003, all 723,436 warrants issued in connection with the purchase of the Series C Preferred Stock remain outstanding and none have been exercised. On May 24, 2002, the Company entered into an agreement with Tazbaz Holdings Limited, pursuant to which Tazbaz securitized an overdraft position of the Company with Bank One in the amount of $650,000 until the Bank's repayment on December 5, 2002. Pursuant to this agreement the Company issued 10,000,000 warrants; 6,000,000 of which are exercisable at any time and in any amount until November 15, 2009 at a purchase price of $.08 per share, and 4,000,000 of which are exercisable at any time and in any amount until November 15, 2009 at a purchase price of $.04 per share. On October 1, 2002, the Company entered into consulting agreements with a group of seven consultants with expertise in restructuring, financing, legal and management services for one-year terms to assist the Company with its restructuring and refinancing efforts. In consideration for such services the Company issued 10,600,000 warrants which are exercisable at any time and in any amount until September 30, 2003 at a purchase price of $.025 per share. As of December 31, 2003, 7,200,000 warrants had been exercised with net proceeds of $192,500. On December 5, 2002, the Company issued 50,285,714 warrants to holders of the 12% Senior Secured Convertible Debentures which are exercisable at any time and in any amount until December 5, 2009 at a purchase price of $.0175 per share. On June 30, 2003 and July 22, 2003, 12,571,428 of these warrants were repriced from $.0175 to $.00137 per share. On October 14, 2003, 12,571,428 of these warrants were repriced from $.00137 to $.00075 per share. On June 18, 2004, 1,142,857 of these warrants were repriced from $.00075 to $.00025 per share. Pursuant to the December 18, 2002 convertible debenture, the Company issued 5,625,000 warrants to Tazbaz Holdings Limited, which are exercisable at any time and in any amount until December 18, 2009 also at a purchase price of $0.175 per share. On April 7, 2004, all of these warrants were repriced from $.0175 to $.0004 per share. During the year ended December 31, 2003, the Company issued 770,033,457 warrants to holders of the 12% Senior Secured Convertible Debentures which are exercisable at any time and in any amount for seven years from the date of closing at purchase prices ranging from $.0175 to $.00075 per share. On June 30, 2003, 45,714,286 of these warrants were repriced from $.0175 to $.00875 per share. On October 14, 2003, 314,576,307 of these warrants were repriced from $.00137 to $.00075 per share. On April 7, 2004, 11,999,999 of these warrants were repriced from $.0175 to $.0004 per share. On June 18, 2004, 279,324,980 of these warrants were repriced from $.00075 to $.00025 per share. On January 8, 2004, the Company sold issued 1,428,571 warrants to holders of the 12% Senior Secured Convertible Debentures which are exercisable at any time and in any amount for seven years from the date of closing at a purchase price of $.0175 per share. On April 7, 2004 all of these warrants were repriced from $.0175 to $0.0004 per share On March 25, 2004, the Company issued 924,000,000 warrants to Bristol Investment Fund, Ltd. which are exercisable at any time and in any amount until March 25, 2011 at a purchase price of $.000417 per share. On June 18, 2004, all of these warrants were repriced from $.000417 to $.00025 per share. On March 25, 2004 the Company issued 250,000,000 warrants to Tazbaz Holdings Limited, which are exercisable at any time and in any amount until March 29, 2011 at a purchase price of $0.0004 per share. On May 20 and June 18, 2004, the Company issued 1,682,352,942 warrants to Bristol Investment Fund, Ltd. which are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.00025 per share. On May 24, 2004 and June 18, 2004, the Company issued 1,157,142,857 warrants to Tazbaz Holdings Limited which are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.00025 per share. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) d) Stock Options In June 2001, the directors approved the adoption of the 2001 Stock Option Plan. Each of the plans provides for the issuance of 435,000 options. In October 2002, the directors of the Company adopted and the stockholders approved the adoption of the Company's 2002 Stock Option Plan which provides for the issuance of 6,500,000 options. In October 2003, the directors of the Company adopted and the stockholders approved the adoption of the Company's 2003 Stock Option Plan which provides for the issuance of 20,000,000 options. The plans are administrated by the Compensation Committee or the Board of Directors, which determine among other things, those individuals who shall receive options, the time period during which the options may be partially or fully exercised, the number of common stock to be issued upon the exercise of the options and the option exercise price. The plans are effective for a period of ten years and options may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide their skills and expertise to the Company. Options granted under the plans generally require a three-year vesting period, and shall be at an exercise price that may not be less than the fair market value of the common stock on the date of the grant. Options are non-transferable and if a participant ceases affiliation with the Company by reason of death, permanent disability or retirement at or after age 65, the option remains exercisable for one year from such occurrence but not beyond the option's expiration date. Other types of termination allow the participant 90 days to exercise the option, except for termination for cause, which results in immediate termination of the option. Any unexercised options that expire or that terminate upon an employee's ceasing to be employed by the Company become available again for issuance under the plans, subject to applicable securities regulation. The plans may be terminated or amended at any time by the Board of Directors, except that the number of common stock reserved for issuance upon the exercise of options granted under the plans may not be increased without the consent of the stockholders of the Company. 14. DEFERRED INCOME TAXES AND INCOME TAXES a) Deferred Income Taxes The components of the future tax liability classified by source of temporary differences that gave rise to the benefit are as follows:
September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Tax values of depreciable assets in excess of accounting values 498,000 -- Losses available to offset future income taxes 3,260,400 4,046,200 Share issue costs 115,154 115,154 ---------- ------- 3,873,554 4,161,354 Less: Valuation allowance (3,873,554) (4,161,354) ---------- ---------- -- -- ========== ==========
As part of the acquisitions of Cad Cam Inc. and MicroTech Professionals Inc., there was a change of control which resulted in the subsidiaries being required to change from the cash method to the accrual method of accounting for income tax purposes. b) Current Income Taxes Current income taxes consist of:
September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Amount calculated at Federal and Provincial statutory rates (1,058,787) (3,704,770) ---------- ---------- Increase resulting from: Permanent and other differences 1,366,985 2,978,164 Valuation allowance (287.816) 756,326 ---------- ---------- 1,080,519 3,734,490 ---------- ---------- Current income taxes 21,732 29,720 ========== ==========
Issue expenses totaling approximately $1,300,000 may be claimed at the rate of 20% per year until 2005. To the extent that these expenses create a loss, the loss is available to be carried forward for seven years from the year the loss is incurred. The Company has not reflected the benefit of utilizing non-capital losses totaling approximately $8,200,000 or a capital loss totaling $750,000 in the future as a deferred tax asset as at September 30, 2004. As at the completion of the September 30, 2004 financial statements, management believed it was more likely than not that the results of future operations would not generate sufficient taxable income to realize the deferred tax assets. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 15. COMPREHENSIVE LOSS
Nine Months Ended September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Net loss (2,667,350) (9,033,628) Other comprehensive loss Foreign currency translation adjustments (9,812) (238,168) ------- --------- Comprehensive loss (2,677,162) (9,271,796) =========== ===========
The foreign currency translation adjustments are not currently adjusted for income taxes since the Company is situated in Canada and the adjustments relate to the translation of the financial statements from Canadian dollars into United States dollars done only for the convenience of the reader. 16. DISCONTINUED OPERATIONS Effective March 8, 2002, the Company sold its technology division, Njoyn Software Incorporated to Cognicase Inc., a Canadian company. As part of the transaction, Cognicase assumed all of the staff in the Company's technology division, including the employees of TidalBeach Inc. The Company will not have future revenues from either its Njoyn or Secondwave products and therefore the technology operations have been reported as discontinued. There was no technology revenue for the three months ended September 30, 2004 and 2003. The net loss for the three months ended September 30 was $1,200 in 2004 and $12,000 in 2003. There was no technology revenue for the six months ended September 30, 2004 and 2003. The net loss for the nine months ended September 30, was $3,900 in 2004 and $24,000 in 2003. Effective May 1, 2002, the Company signed an agreement with triOS Training Centres Limited, an Ontario company, for the purchase of certain assets of the Toronto training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, triOS assumed the Toronto training staff and is subletting the classroom facilities. On November 1, 2002, the Company entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of the New York training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC assumed the New York training staff, some assets and is subletting the classroom facilities. As a result of these two transactions, the Company will not have future revenues from its training division and therefore the operations have been reported as discontinued. There was no training revenue for the three months ended September 30, 2004 and 2003. The net loss from the training division for the three months ended September 30, 2004 was $14,000 compared to $30,000 in 2003. There was no training revenue for the nine months ended September 30, 2004 and $162,000 in 2003. The net loss from the training division for the nine months ended September 30, 2004 was $39,000 compared to net income of $64,000 in 2003. Effective June 27, 2003, the Company signed an agreement with Brainhunter.com Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT recruitment division for a nominal amount of cash and the assumption of all employee liabilities. As a result of this transaction, the Company will not have future revenues from its IT recruitment division and therefore the operations have been reported as discontinued. There was no IT recruitment revenue for the three months ended September 30, 2004 and $18,000 in 2003. Net income from the IT recruitment division for the three months ended September, 2004 was nil compared to a net loss of $8,000 in 2003. There was no IT recruitment revenue for the nine months ended September 30, 2004 and $1,440,000 in 2003. Net income from the IT recruitment division for the nine months ended September 30, 2004 was nil and $3,000 in 2003. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) The following table presents the revenues, loss from operations and other components attributable to the discontinued operations of Njoyn Software Incorporated, TidalBeach Inc., Thinkpath Training Inc. and Thinkpath Training US Inc. and the IT recruitment division for the three months and nine months ended September 30:
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------- ------------------------------ 2004 2003 2004 2003 $ $ $ $ Revenues -- 17,666 -- 1,606,533 -------- -------- -------- --------- Income (loss) from operations before income taxes (14,091) (48,762) (40,814) 44,593 Provision for Income Taxes 1,050 300 1,350 925 Gain on disposal of IT Recruitment Division -- -- -- 190,627 -------- -------- -------- --------- Income (loss) from discontinued operations (15,141) (49,062) (42,164) 234,295 ======== ======== ======== =========
17. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The Company issued common shares and warrants for the following: Nine Months Ended September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Services rendered 175,336 226,500 Accounts payable -- 449,333 ------- ------- 175,336 675,833 ======= ======= 18. SEGMENTED INFORMATION a) Sales by Geographic Area
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------- ------------------------------ 2004 2003 2004 2003 ---- ---- ---- ---- $ $ $ $ Canada 216,620 224,222 561,796 387,742 United States of America 2,909,279 2,425,459 8,945,988 7,223,931 --------- --------- --------- --------- 3,125,899 2,649,681 9,507,784 7,611,673 ========= ========= ========= =========
b) Net Income (Loss) by Geographic Area
Three Months Ended September 30, Nine Months Ended September 30, 2004 2003 2004 2003 ---- ---- ---- ---- $ $ $ $ Canada (1,401,376) (1,995,967) (3,794,145) (7,536,146) United States of America 361,644 138,135 1,126,795 377,456 ---------- ---------- ---------- ---------- (1,039,732) (1,857,832) (2,667,350) (7,158,690) ========== ========== ========== ==========
c) Identifiable Assets by Geographic Area
September 30, 2004 December 31, 2003 ------------------ ----------------- $ $ Canada 1,157,716 1,369,904 United States of America 6,164,771 6,038,685 --------- --------- 7,322,487 7,408,589 ========= =========
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) d) Revenue and Gross Profit by Operating Segment
Three Months Ended September 30, Nine Months Ended September 30, 2004 2003 2004 2003 ---- ---- ---- ---- $ $ $ $ Revenue Tech Pubs and Engineering 3,080,571 2,544,152 9,328,681 7,271,146 IT Documentation 45,318 105,529 179,103 340,527 ---------- ---------- ---------- ---------- 3,125,899 2,649,681 9,507,784 7,611,673 ========== ========== ========== ========== Gross Profit Tech Pubs and Engineering 1,134,944 854,889 3,381,567 2,386,039 IT Documentation 9,448 23,931 37,094 71,167 ---------- ---------- ---------- ---------- 1,144,392 878,820 3,418,661 2,457,206 ========== ========== ========== ==========
e) Revenues from Major Customers The consolidated entity had the following revenues from major customers: For the three and nine months ended September 30, 2004, one customer had sales of $1,008,468 and $2,965,921 representing approximately 33% and 31% of total revenue. For the year ended December 31, 2003, one customer had sales of $1,568,232, representing approximately 15% of total revenue. f) Purchases from Major Suppliers There were no significant purchases from major suppliers. 19. EARNINGS PER SHARE The Company has adopted Statement No. 128, Earnings Per Share, which requires presentation, in the consolidated statement of income, of both basic and diluted earnings per share.
Three Months Ended September 30, Nine Months Ended September 30, 2004 2003 2004 2003 ---- ---- ---- ---- $ $ $ $ NUMERATOR Net loss from continuing operations (1,024,591) (1,808,770) (2,625,186) (7,392,985) Income (loss) from discontinued operations (15,141) (49,062) (42,164) 234,295 ------------- ----------- ------------- ----------- Net loss (1,039,732) (1,857,832) (2,667,350) (7,158,690) ============= =========== ============= =========== DENOMINATOR Weighted Average common stock outstanding 5,601,027,960 448,877,336 4,200,637,587 290,295,250 ============= =========== ============= =========== Basic and diluted loss per common share from continuing operations (0.00) (0.00) (0.00) (0.03) ============= =========== ============= =========== Basic and diluted loss per common share after discontinued operations (0.00) (0.00) (0.00) (0.02) ============= =========== ============= =========== Average common stock outstanding 5,601,027,960 448,877,336 4,200,637,587 290,295,250 Average common stock issuable -- -- -- -- -- -- -- -- Average common stock outstanding assuming dilution 5,601,027,960 448,877,336 4,200,637,587 290,295,250 ============= =========== ============= ===========
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) The outstanding options and warrants as detailed in note 13 were not included in the computation of the diluted earnings per common share as the effect would be anti-dilutive. The earnings per share calculation (basic and diluted) does not include any common stock for common stock payable, as the effect would be anti-dilutive. As of November 19, 2004, the Company has issued a total of 7,028,133,955 shares of its common stock to the convertible debenture holders upon the conversion of $3,291,400 of debentures and accrued interest. 20. COMMITMENTS AND CONTINGENCIES a) Lease Commitments Minimum payments under operating leases for premises occupied by the Company and its subsidiaries offices, located throughout Ontario, Canada and the United States, exclusive of most operating costs and realty taxes, as at September 30, 2004, for the next five years are as follows: 2004 $110,480 2005 345,303 2006 119,715 2007 119,715 2008 39,905 Thereafter -- -------- $735,118 ======== The lease commitments do not include two operating leases for premises that the Company is currently sub leasing to the purchasers of the Canadian and United States training divisions. If the purchasers were to default on payment or abandon the premises, the Company would be liable for annual payments of$282,096 expiring August 31, 2006 and $150,534 expiring September 30, 2010. The lease commitments do not include an operating lease for premises located in the United States that was closed in the fourth quarter of 2002. The Company has not made any payments on this lease since the premises were abandoned. The Company does not intend to make any further payments and the lessor has not tried to enforce payment. The Company may be liable for a lease balance of $44,597which expires November 30, 2004. b) On October 1, 2003, SITQ National Inc. ("SITQ'), a former landlord, filed a statement against the Company and its Directors, with the Superior Court of Justice of Ontario, Canada, Court File No. 03-CV-256327CM3, demanding payment of rent arrears of approximately $760,000 and alleging damages for breach of lease for future rent in the sum of $3,250,000. The lease covered premises located in Ontario, Canada that were abandoned by the Company in April 2003. The term of the lease does not expire until December 31, 2010. The rent arrears of $760,000 has been accrued but management believes there is no merit for the breach of lease for future rent of $3,250,000 and accordingly has made no provision in the accounts or in these financial statements with respect to this matter. The Company intends to defend this claim vigorously. On October 6, 2003, the Company entered into a settlement agreement with the Canadian Imperial Bank of Commerce ("CIBC") in the sum of $150,000. This settlement was pursuant to a claim filed against Thinkpath Training Inc., a subsidiary of the Company, with the Superior Court of Justice of Ontario, Canada, Court File No. 41967, demanding payment of damages in the sum of $150,000 pursuant to an operating account overdraft balance. The settlement includes payment of the overdraft, accrued interest and legal fees and will be paid in monthly installments over fifteen months beginning October 25, 2003. At September 30, 2004, an amount of $31,120 related to the above settlement is included in accounts payable. On March 17, 2004, Johnston & Associates, LLC, a South Carolina corporation, filed a statement against the Company with the Superior Court of Justice of Ontario, Canada, Court File No. C-294-04, demanding payment of $60,000 pursuant to a consulting agreement entered into April 2002. The Company intends to defend this claim vigorously. c) The Company is party to various lawsuits arising from the normal course of business and its restructuring activities. No material provision has been recorded in the accounts for possible losses or gains. Should any expenditure be incurred by the Company for the resolution of these lawsuits, they will be charged to the operations of the year in which such expenditures are incurred. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 21. SUBSEQUENT EVENTS Subsequent to September 30, 2004, the Company has issued an additional 2,308,509,800 shares of its common stock to the convertible debenture holders upon the conversion of $104,900 of debentures and accrued interest. On October 14, 2004, the Company signed a letter of intent with TBM Technologies Inc., an Ontario Corporation which provides Design Engineering services, pursuant to which the Company will purchase TBM for approximately $250,000 payable in shares of the Company's common stock with price protection for a period of two years from issuance. In the event that the vendors seek to sell their shares in an open market transaction within the two years following closing and the bid price is less than the price of the shares on issuance, the Company will be obligated to issue additional shares of unregistered common stock with a value equal to the difference up to a maximum of $250,000. The transaction will be effective November 1, 2004 and is anticipated to close on November 22, 2004. On November 12, 2004, the Company sold an additional $875,000 in convertible debentures with original issue discount (OID) together with 4,750,000,000 warrants to a group of investors including Bristol Investment Fund Ltd., Alpha Capital and Tazbaz Holdings Inc. Pursuant to the Share Purchase Agreement, the debentures will become due twelve months from the date of issuance. The investors will have the right to acquire up to $875,000 (equal to 125% of the aggregate subscription amount of $700,000) worth of the Company's common stock at a price the lesser of $.0002 or 80% of the average of the three lowest intraday prices on three separate trading days during the twenty days trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.0002 per share. The Company received $615,000 in net proceeds from the transaction. The proceeds were used to settle debt and litigation settlement obligations with the balance to be used for working capital. On November 12, 2004, the Company reached a settlement with SITQ National Inc., of the action commenced at Toronto, Ontario as Court File No. 03-CV-256327CM3 against the Company by SITQ, in which SITQ claimed damages for breach of Lease for arrears of Rent, Additional Rent and other amounts payable pursuant to the Lease. In consideration of a monetary payment by the Company of approximately $261,000 and execution of a Mutual Full and Final Release, SITQ dismissed the aforementioned action and forgave the Company the balance of the rent arrears, future rents and damages of approximately $3,750,000. On November 12, 2004, the Company reached a settlement with Denise Dunne-Fushi with respect to the note payable to Dunne-Fushi by the Company in the amount of $629,491. In consideration of a monetary payment by the Company of $202,000 and execution of a Full and Final Release, Dunne-Fushi released the Company of all rights and debt held by her and forgave the balance of the note payable of approximately $427,491. On November 12, 2004, the Company reached a settlement with Roger Walters with respect to the note payable to Walters by the Company in the amount of $224,000 plus accrued interest. In consideration of a monetary payment by the Company of $33,600 and execution of a Full and Final Release, Walters released the Company of all rights and debt held by him and forgave the balance of the note payable and accrued interest of approximately $237,400. 22. FINANCIAL INSTRUMENTS a) Credit Risk Management The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce its credit risk, the Company has adopted credit policies, which include the analysis of the financial position of its customers and the regular review of their credit limits. In some cases, the Company requires bank letters of credit or subscribes to credit insurance. b) Concentration of Credit Risk The Company does not believe it is subject to any significant concentration of credit risk. Cash and short-term investments are in place with major financial institutions and corporations. c) Interest Risk The long-term debt bears interest rates that approximate the interest rates of similar loans. Consequently, the long-term debt risk exposure is minimal. d) Fair Value of Financial Instruments The carrying value of the accounts receivable, bank indebtedness, and accounts payable on acquisition of subsidiary company approximates the fair value because of the short-term maturities on these items. The carrying amount of the long-term assets approximates the fair value of these assets. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT SEPTEMBER 30, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) The fair value of the Company's long-term debt is estimated on the quoted market prices for the same or similar debt instruments. The fair value of the long-term debt approximates the carrying value. 23. COMPARATIVE FIGURES Certain figures in the September 30, 2003 financial statements have been reclassified to conform with the basis of presentation used at September 30, 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and notes thereto and the other historical financial information of Thinkpath Inc. contained elsewhere in this Form 10-Q. The statements contained in this Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended including statements regarding Thinkpath Inc.'s expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include Thinkpath Inc.'s statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included in this Form 10-Q are based on information available to Thinkpath Inc. on the date hereof, and Thinkpath Inc. assumes no obligation to update any such forward-looking statement. It is important to note that Thinkpath Inc.'s actual results could differ materially from those in such forward-looking statements. All dollar amounts stated throughout this Form 10-Q are in United States dollars unless otherwise indicated. Unless otherwise indicated, all reference to "Thinkpath," "us," "our," and "we," refer to Thinkpath Inc. and its subsidiaries. OVERVIEW We are a global provider of engineering services including design, build, drafting, technical publishing and documentation, and on-site engineering support. Our customers include defense contractors, aerospace, automotive, health care and manufacturing companies, including Lockheed Martin, General Dynamics, General Electric, General Motors, Ford Motors, Cummins Engine, Magna, ABB and Hill-Rom Company. On December 12, 2001, the Securities and Exchange Commission issued FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, which encourages additional disclosure with respect to a company's critical accounting policies, the judgments and uncertainties that affect a company's application of those policies, and the likelihood that materially different amounts would be reported under different conditions and using different assumptions. Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. Certain of our accounting policies and estimates have a more significant impact on our financial statements than others, due to the magnitude of the underlying financial statement elements. CONSOLIDATION Our determination of the appropriate accounting method with respect to our investments in subsidiaries is based on the amount of control we have, combined with our ownership level, in the underlying entity. Our consolidated financial statements include the accounts of our parent company and our wholly-owned subsidiaries. All of our investments are accounted for on the cost method. If we had the ability to exercise significant influence over operating and financial policies of a company, but did not control such company, we would account for these investments on the equity method. Accounting for an investment as either consolidated or by the equity method would have no impact on our net income (loss) or stockholders' equity in any accounting period, but would impact individual income statement and balance sheet items, as consolidation would effectively "gross up" our income statement and balance sheet. However, if control aspects of an investment accounted for by the cost method were different, it could result in us being required to account for an investment by consolidation or the equity method. Under the cost method, the investor only records its share of the investee's earnings to the extent that it receives dividends from the investee; when the dividends received exceed the investee's earnings subsequent to the date of the investor's investment, the investor records a reduction in the basis of its investment. Under the cost method, the investor does not record its share of losses of the investee. Conversely, under either consolidation or equity method accounting, the investor effectively records its share of the investee's net income or loss, to the extent of its investment or its guarantees of the investee's debt. At September 30, 2004, all of our investments in non-related companies totaling $45,669 were accounted for using the cost method. Accounting for an investment under either the equity or cost method has no impact on evaluation of impairment of the underlying investment; under either method, impairment losses are recognized upon evidence of permanent losses of value. REVENUE RECOGNITION We recognize revenue in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which has four basic criteria that must be met before revenue is recognized: - - Existence of persuasive evidence that an arrangement exists; - - Delivery has occurred or services have been rendered; - - The seller's price to the buyer is fixed and determinable; and, - - Collectibility is reasonably assured. Our various revenue recognition policies are consistent with these criteria. We provide the services of engineering staff on a project basis. The services provided are defined by guidelines to be accomplished by clearly defined milestones and revenue is recognized upon the accomplishment of the relevant milestone. As services are rendered, the costs incurred are reflected as Work in Progress. Revenue is recognized upon the persuasive evidence of an agreement, delivery has occurred, the fee is fixed or determinable and collection reasonably assured. Prior to the sale of our IT recruitment division, we provided the services of information technology consultants on a contract basis and revenue was recognized as services were performed. We also placed information technology professionals on a permanent basis and revenue was recognized upon candidates' acceptance of employment. If we received non-refundable upfront fees for "retained searches", the revenue was recognized upon the candidates' acceptance of employment. Prior to the sale of our training division, we provided advanced training and certification in a variety of technologies and revenue was recognized on delivery. Prior to the sale of our technology division, we licensed software in the form of a Human Capital Management System called Njoyn. The revenue associated with providing this software consisted of an initial set up fee, customization and training as agreed and an ongoing monthly per user fee. The allocation of revenue to the various elements was based on our determination of the fair value of the elements if they had been sold separately. The customers had the right to choose a provider to host the software which was unrelated to us. The set-up fee and customization revenue was recognized upon delivery of access to the software with customization completed in accordance with milestones determined by the contract. Revenue was recognized on a percentage of completion basis for contracts with significant amounts of customization and clearly defined milestones agreed to by the customer and an enforceable right to invoice and collect on a partial completion basis. For contracts that required significant customization, without clearly defined milestones, and an inability to estimate costs, revenue was reflected on a completed contract basis. Substantial completion was determined based on customer acceptance of the software. Prior to the sale of our technology division, we also signed contracts for the customization or development of SecondWave, an internet development software in accordance with specifications of our clients. The project plan defined milestones to be accomplished and the costs associated. These amounts were billed as they were accomplished and revenue was recognized as the milestones were reached. The work in progress for costs incurred beyond the last accomplished milestone was reflected at the period end. The contracts did not include any post-contract customer support. Additional customer support services were provided at standard daily rates, as services were required. CARRYING VALUE GOODWILL AND INTANGIBLE ASSETS Prior to January 1, 2002, our goodwill and intangible assets were accounted for in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement required us to evaluate the carrying value of our goodwill and intangible assets upon the presence of indicators of impairment. Impairment losses were recorded when estimates of undiscounted future cash flows were less than the value of the underlying asset. The determination of future cash flows or fair value was based upon assumptions and estimates of forecasted financial information that may differ from actual results. If different assumptions and estimates were used, carrying values could be adversely impacted, resulting in write-downs that would adversely affect our earnings. In addition, we amortized our goodwill balances on a straight-line basis over 30 years. The evaluation of the useful life of goodwill required our judgment, and had we chosen a shorter time period over which to amortize goodwill, amortization expense would have increased, adversely impacting our operations. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. This statement requires us to evaluate the carrying value of goodwill and intangible assets based on assumptions and estimates of fair value and future cash flow information. These assumptions and estimates may differ from actual results. If different assumptions and estimates are used, carrying values could be adversely impacted, resulting in write-downs that could adversely affect our earnings. At December 31, 2003, we performed our annual impairment test for goodwill and determined that no adjustment to the carrying value of goodwill was needed. The IT recruitment unit was tested for impairment in the third quarter of 2002, after the annual forecasting process. Due to a decrease in margins and the loss of key sales personnel, operating profits and cash flows were lower than expected in the first nine months of 2002. Based on that trend, the earnings forecast for the next two years was revised. At September 30, 2002, we recognized a goodwill impairment loss of $57,808 in the IT recruitment unit. The fair value of that reporting unit was estimated using the expected present value of future cash flows. During the fourth quarter of 2002, the IT recruitment unit experienced further decline, indicating impairment. The fair value of the unit was estimated using the expected present value of future cash flows. At December 31, 2002, a further goodwill impairment loss of $87,489 was recognized. The Technical Publications and Engineering unit was also tested for impairment in the fourth quarter of 2002, as operating profits, cash flows and forecasts were lower than expected. At December 31, 2002, a goodwill impairment loss of $1,234,962 was recognized. The fair value of that reporting unit was estimated using the expected present value of future cash flows. On an ongoing basis, absent any impairment indicators, we expect to perform a goodwill impairment test as of the end of the fourth quarter of each year. FOREIGN CURRENCY TRANSLATION The books and records of our Canadian operations are recorded in Canadian dollars. The financial statements are converted to US dollars as we have elected to report in US dollars consistent with Regulation S-X, Rule 3-20. The translation method used is the current rate method which is the method mandated by FAS 52 where the functional currency is the foreign currency. Under the current method all assets and liabilities are translated at the current rate, stockholders' equity accounts are translated at historical rates and revenues and expenses are translated at average rates for the year. Due to the fact that items in the financial statements are being translated at different rates according to their nature, a translation adjustment is created. This translation adjustment has been included in accumulated other comprehensive income. There can be no assurance that we would have been able to exchange currency on the rates used in these calculations. We do not engage in exchange rate-hedging transactions. A material change in exchange rates between United States and Canadian dollars could have a material effect on our reported results. THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003 REVENUE For the three months ended September 30, 2004, we derived 93% of our revenue in the United States compared to 92% for the three months ended September 30, 2003. For the three months ended September 30, 2004, our primary source of revenue was engineering services including engineering design and build, technical publications and documentation and on-site engineering support. Engineering services represented 99% of total revenue compared to 96% for the three months ended September 30, 2003. Revenue from engineering services for the three months ended September 30, 2004 increased by $540,000 or 21% to $3,080,000 compared to $2,540,000 for the three months ended September 30, 2003. The increase in revenue from engineering services is largely attributable to the significant increase in sales to a major defense customer located in the United States pursuant to contracts won in the fourth quarter 2003 and the first quarter 2004. This customer represented approximately 32% of total revenue for the three months ended September 30, 2004 compared to 15% for the same period last year. Our engineering services include the complete planning, staffing, development, design, implementation and testing of a project. It can also involve enterprise-level planning and project anticipation. Our specialized engineering services include: design, build and drafting, technical publications and documentation. We outsource our technical publications and engineering services on both a time and materials and project basis. For project work, the services provided are defined by guidelines to be accomplished by milestone and revenue is recognized upon the accomplishment of the relevant milestone. As services are rendered, the costs incurred are reflected as Work in Progress. Revenue is recognized upon the persuasive evidence of an agreement, delivery of the service, and when the fee is fixed or determinable and collection is probable. Customers we provide engineering services to include General Dynamics, General Electric, General Motors, Lockheed Martin, Cummins Engines, Magna, ABB and Hill-Rom Company. For the three months ended September 30, 2004, information technology documentation services represented approximately 1% of our revenue compared to 4% for the three months ended September 30, 2003. Revenue from information technology documentation services for the three months ended September 30, 2004 decreased by $60,000 or 57% to $45,000 compared to $105,000 for the three months ended September 30, 2003. The substantial decrease in revenue from information technology documentation services is primarily due to the loss of sales personnel and the general economic slowdown in this industry. This division offers a very specialized service, and relied on several key customers in a very localized market. Many of these customers have either cancelled projects or have put a number of their projects on hold. In response to these conditions, we terminated the staff in this division in 2002 and transferred the existing contracts to another office. We provide outsourced information technology documentation services in two ways: complete project management and the provision of skilled project resources to supplement a customer's internal capabilities. Revenue is recognized on the same basis as technical publications and engineering outsourcing services. Selected information technology documentation services customers include Fidelity Investments, SMD Tech Aid Corporation, CDI Corporation, and the Gillette Company. GROSS PROFIT Gross profit is calculated by subtracting all direct costs from net revenue. The direct costs of engineering services include wages, benefits, software training and project expenses. The average gross profit for the engineering division was 37% for the three months ended September 30, 2004 compared to 34% for the three months ended September 30, 2003. Gross profit for the three months ended September 30, 2004 increased by $280,000 or 33% to $1,130,000 compared to $850,000 for the three months ended September 30, 2003. The increase in gross profit for technical publications and engineering services is a result of the increase in higher margin contracts in engineering design, technical publications and documentation compared to the lower margins earned on traditional on-site engineering support. In addition, we are engaging in more time-and-materials based contracts versus fixed-cost contracts which prevents against project and costs overruns. The direct costs of information technology documentation services include contractor wages, benefits, and project expenses. The average gross profit for the information technology division for the three months ended September 30, 2004 was 21% compared to 23% for the three months ended September 30, 2003. Gross profit for the three months ended September 30, 2004 decreased by $15,000 or 63% to $9,000 compared to $24,000 for the three months ended September 30, 2003. THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 REVENUE For the nine months ended September 30, 2004, we derived 94% of our revenue in the United States compared to 95% for the nine months ended September 30, 2003. The decrease in total revenue derived from the United States is a result of the slight increase in engineering sales in Canada. At the beginning of 2003, a division was created to focus on building engineering services in Ontario in lieu of IT recruitment services, which had traditionally dominated our sales in Canada. During the nine months ended September 30, 2004, this division closed several small contracts that resulted in revenues of $560,000 compared to $390,000 for the same period last year. For the nine months ended September 30, 2004, our primary source of revenue was engineering services including engineering design and build, technical publications and documentation and on-site engineering support. Engineering services represented 98% of total revenue compared to 96% for the nine months ended September 30, 2003. Revenue from engineering services for the nine months ended September 30, 2004 increased by $2,060,000 or 28% to $9,330,000 compared to $7,270,000 for the nine months ended September 30, 2003. The increase in revenue from engineering services is largely attributable to the significant increase in sales to a major defense customer located in the United States pursuant to contracts won in the fourth quarter 2003 and the first quarter 2004. This customer represented approximately 31% of total revenue for the nine months ended September 30, 2004 compared to 12% for the same period last year. Our engineering services include the complete planning, staffing, development, design, implementation and testing of a project. It can also involve enterprise-level planning and project anticipation. Our specialized engineering services include: design, build and drafting, technical publications and documentation. We outsource our technical publications and engineering services on both a time and materials and project basis. For project work, the services provided are defined by guidelines to be accomplished by milestone and revenue is recognized upon the accomplishment of the relevant milestone. As services are rendered, the costs incurred are reflected as Work in Progress. Revenue is recognized upon the persuasive evidence of an agreement, delivery of the service, and when the fee is fixed or determinable and collection is probable. Customers we provide engineering services to include General Dynamics, General Electric, General Motors, Lockheed Martin, Boeing, Caterpillar, Cummins Engines, Magna and ABB. For the nine months ended September 30, 2004, information technology documentation services represented approximately 2% of our revenue compared to 4% for the nine months ended September 30, 2003. Revenue from information technology documentation services for the nine months ended September 30, 2004 decreased by $160,000 or 47% to $180,000 compared to $340,000 for the nine months ended September 30, 2003. The decrease in revenue from information technology documentation services is primarily due to the loss of sales personnel and the general economic slowdown in this industry. This division offers a very specialized service, and relied on several key customers in a very localized market. Many of these customers have either cancelled projects or have put a number of their projects on hold. In response to these conditions, we terminated the staff in this division in 2002 and transferred the existing contracts to another office. We provide outsourced information technology documentation services in two ways: complete project management and the provision of skilled project resources to supplement a customer's internal capabilities. Revenue is recognized on the same basis as technical publications and engineering outsourcing services. Selected information technology documentation services customers include Fidelity Investments, SMD Tech Aid Corporation, CDI Corporation, and the Gillette Company. GROSS PROFIT Gross profit is calculated by subtracting all direct costs from net revenue. The direct costs of engineering services include wages, benefits, software training and project expenses. The average gross profit for the engineering division was 36% for the nine months ended September 30, 2004 compared to 33% for the nine months ended September 30, 2003. Gross profit for the nine months ended September 30, 2004 increased by $990,000 or 41% to $3,380,000 compared to $2,390,000 for the nine months ended September 30, 2003. The increase in gross profit for technical publications and engineering services is a result of the increase in higher margin contracts in engineering design, technical publications and documentation compared to the lower margins earned on traditional on-site engineering support. In addition, we are engaging in more time-and-materials based contracts versus fixed-cost contracts which prevents against project and costs overruns. The direct costs of information technology documentation services include contractor wages, benefits, and project expenses. The average gross profit for the information technology division for the nine months ended September 30, 2004 was 21% which is consistent with the nine months ended September 30, 2003. RESULTS OF OPERATIONS STATEMENTS OF OPERATIONS--PERCENTAGES (UNAUDITED) THREE MONTHS NINE MONTHS ENDED SPET 30, ENDED SEPT 30, -------------- --------------- 2004 2003 2004 2003 ---- ---- ---- ---- REVENUE 100% 100% 100% 100% ---- ---- ---- ---- COST OF SERVICES 63% 67% 64% 68% ---- ---- ---- ---- GROSS PROFIT 37% 33% 36% 32% ---- ---- ---- ---- EXPENSES Administrative 19% 21% 18% 23% Selling 12% 11% 11% 10% Depreciation and amortization 4% 5% 4% 7% ---- ---- ---- ---- Income (loss) from continuing operations before interest charges 2% (4)% 3% (8)% Interest charges 34% 64% 30% 89% ---- ---- ---- ---- Loss from continuing operations before income taxes (32)% (68)% (27)% (97)% Income taxes --% --% --% --% ---- ---- ---- ---- Loss from continuing operations (32)% (68)% (27)% (97)% Income (loss) from discontinued operations --% (2)% --% 3% Net Loss (32)% (70)% (27)% (94)% ---- ---- ---- ---- THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003 Revenue. Revenue for the three months ended September 30, 2004 increased by $480,000 or 18%, to $3,130,000, as compared to $2,650,000 for the three months ended September 30, 2003. The increase is primarily attributable to new contracts with existing defense, automotive, and aerospace customers that were awarded in the fourth quarter of 2003. Cost of Services. The cost of services for the three months ended September 30, 2004 increased by $210,000, or 12%, to $1,980,000, as compared to $1,770,000 for the three months ended September 30, 2003. The increase in cost of services is consistent with the increase in revenue. However, the cost of services as a percentage of revenue decreased from 67% for the three months ended September 30, 2003 to 63% for the three months ended September 30, 2004. Gross Profit. Gross profit for the three months ended September 30, 2004 increased by $260,000, or 30%, to $1,140,000 compared to $880,000 for the three months ended September 30, 2003. The increase in gross profit is consistent with the increase in revenue. As a percentage of revenue, gross profit increased from 33% for the three months ended September 30, 2003 to 37% for the three months ended September 30, 2004. The increase in gross profit is a result of the increase in higher margin contracts in engineering design, technical publications and documentation compared to the lower margins earned on traditional on-site engineering support. In addition, we are engaging in more time-and-materials based contracts versus fixed-cost contracts which prevents against project and costs overruns. Expenses. Expenses for the three months ended September 30, 2004 increased by $100,000, or 10%, to $1,090,000 compared to $990,000 for the three months ended September 30, 2003. Administrative expenses increased by $20,000 or 4% to $580,000 for the three months ended September 30, 2004 compared to $560,000 for the three months ended September 30, 2003. The increase reflects the additional rent and general office costs associated with the increased project work in the engineering services division in the third quarter of 2004. Selling expenses for the three months ended September 30, 2004 increased by $110,000, or 39%, to $390,000 from $280,000 for the three months ended September 30, 2003. The increase in selling expenses is consistent with the increase in sales as the sales team's compensation is commissioned based. In addition, new sales staff were hired in the third quarter of 2004. For the three months ended September 30, 2004, depreciation and amortization expenses decreased by $20,000, or 14%, to $120,000 from $140,000 for the three months ended September 30, 2003. 0perating Income (Loss) from Continuing Operations. For the three months ended September 30, 2004, income from continuing operations increased by $170,000 or 155% to income of $60,000 as compared to a loss of $110,000 for the three months ended September 30, 2003. Interest Charges. For the three months ended September 30, 2004, interest charges decreased by $640,000, or 38%, to $1,060,000 from $1,700,000 for the three months ended September 30, 2003. The beneficial conversion feature on all issued convertible debentures was determined to be $970,000 for the three months ended September 30, 2004 compared to $1,580,000 for the three months ended September 30, 2003. Loss from Continuing Operations before Income Taxes. Loss from continuing operations before income taxes for the three months ended September 30, 2004 decreased by $800,000 or 44% to a loss of $1,010,000 as compared to a loss of $1,810,000 for the three months ended September 30, 2003. Income Taxes. Income taxes for the three months ended September 30, 2004 increased by $15,000 to $16,000 as compared to $1,000 for the three months ended September 30, 2003. Loss from Continuing Operations. Loss from continuing operations for the three months ended September 30, 2004 decreased by $790,000 or 44% to a loss of $1,020,000 compared to a loss of $1,810,000 for the three months ended September 30, 2003. Income (Loss) from Discontinued Operations. Operations of the technology, training and IT recruitment divisions have been reported as discontinued for the three months ended September 30, 2004 and 2003. Effective March 8, 2002, we sold our technology division, Njoyn Software Incorporated to Cognicase Inc., a Canadian company. As part of the transaction, Cognicase assumed all of the staff in our technology division, including the employees of TidalBeach Inc. We will not have future revenues from either the Njoyn or SecondWave products. There was no technology revenue for the three months ended September 30, 2004 and 2003. The operating loss from the technology division for the three months ended September 30, 2004 was $2,000 and $12,000 for the same period in 2003. Effective May 1, 2002, we signed an agreement with triOS Training Centres Limited, an Ontario company, for the sale of certain assets of the Toronto training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, triOS assumed the Toronto training staff and is subletting the classroom facilities. On November 1, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the sale of certain assets of the New York training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC assumed the New York training staff, some assets and is subletting the classroom facilities. As a result of these two transactions, we will not have future revenues from either training division. There was no training revenue for the three months ended September 30, 2004 and 2003. The operating loss from the training division for the three months ended September 30, 2004 was $14,000 compared to $30,000 for the same period in 2003. Effective June 27, 2003, we signed an agreement with Brainhunter.com Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT recruitment division for a nominal amount of cash and the assumption of all employee liabilities. As a result of this transaction, we will not have future revenues from the IT recruitment division and therefore the operations have been reported as discontinued. There was no IT recruitment revenue for the three months ended September 30, 2004 and $18,000 for the same period in 2003. Net income from the IT recruitment division for the three months ended September 30, 2004 was nil compared to a net loss of $8,000 in 2003. Net Loss. Net loss decreased by $820,000 or 44% to $1,040,000 for the three months ended September 30, 2004 compared to $1,860,000 for the three months ended September 30, 2003. THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 Revenue. Revenue for the nine months ended September 30, 2004 increased by $1,900,000 or 25%, to $9,510,000, as compared to $7,610,000 for the nine months ended September 30, 2003. The increase is primarily attributable to new contracts with existing defense, automotive, and aerospace customers that were awarded in the fourth quarter of 2003. Cost of Services. The cost of services for the nine months ended September 30, 2004 increased by $940,000, or 18%, to $6,090,000, as compared to $5,150,000 for the nine months ended September 30, 2003. The increase in cost of services is consistent with the increase in revenue. However, the cost of services as a percentage of revenue decreased from 68% for the nine months ended September 30, 2003 to 64% for the nine months ended September 30, 2004. Gross Profit. Gross profit for the nine months ended September 30, 2004 increased by $960,000, or 39%, to $3,420,000 compared to $2,460,000 for the nine months ended September 30, 2003. The increase in gross profit is consistent with the increase in revenue. As a percentage of revenue, gross profit increased from 32% for the nine months ended September 30, 2003 to 36% for the nine months ended September 30, 2004. The increase in gross profit is a result of the increase in higher margin contracts in engineering design, technical publications and documentation compared to the lower margins earned on traditional on-site engineering support. In addition, we are engaging in more time-and-materials based contracts versus fixed-cost contracts which prevents against project and costs overruns. Expenses. Expenses for the nine months ended September 30, 2004 increased by $120,000, or 4%, to $3,180,000 compared to $3,060,000 for the nine months ended September 30, 2003. Administrative expenses decreased by $20,000 or 1% to $1,740,000 for the nine months ended September 30, 2004 compared to $1,760,000 for the nine months ended September 30, 2003. The decrease reflects the reduction in administrative expenses as a result of cost cutting in the first quarter of 2004 specifically in the areas of salaries and general office expenses. Selling expenses for the nine months ended September 30, 2004 increased by $270,000, or 35%, to $1,050,000 from $780,000 for the nine months ended September 30, 2003. The increase in selling expenses is consistent with the increase in sales as the sales team's compensation is commissioned based. In addition, new sales staff were hired in the second and third quarters of 2004. For the nine months ended September 30, 2004, depreciation and amortization expenses decreased by $120,000, or 23%, to $400,000 from $520,000 for the nine months ended September 30, 2003. 0perating Income (Loss) from Continuing Operations. For the nine months ended September 30, 2004, income from continuing operations increased by $840,000 or 140% to income of $240,000 as compared to a loss of $600,000 for the nine months ended September 30, 2003. Interest Charges. For the nine months ended September 30, 2004, interest charges decreased by $3,940,000, or 58%, to $2,840,000 from $6,780,000 for the nine months ended September 30, 2003. This decrease is attributable to the higher value of the beneficial conversion feature on all issued convertible debentures at September 30, 2003, which was determined to be $6,180,000 compared to $2,510,000 for the nine months ended September 30, 2004. Loss from Continuing Operations before Income Taxes. Loss from continuing operations before income taxes for the nine months ended September 30, 2004 decreased by $4,780,000 or 65% to a loss of $2,600,000 as compared to a loss of $7,380,000 for the nine months ended September 30, 2003. Income Taxes. Income taxes for the nine months ended September 30, 2004 increased by $7,000 to $20,000 as compared to $13,000 for the nine months ended September 30, 2003. Loss from Continuing Operations. Loss from continuing operations for the nine months ended September 30, 2004 decreased by $4,760,000 or 64% to a loss of $2,630,000 compared to a loss of $7,390,000 for the nine months ended September 30, 2003. Income (Loss) from Discontinued Operations. Operations of the technology, training and IT recruitment divisions have been reported as discontinued for the nine months ended September 30, 2004 and 2003. There was no technology revenue for the nine months ended September 30, 2004 and 2003. The operating loss from the technology division for the nine months ended September 30, 2004 was $4,000 and $24,000 for the same period in 2003. There was no training revenue for the nine months ended September 30, 2004 and $162,000 for the same period in 2003. The operating loss from the training division for the nine months ended September 30, 2004 was $39,000 compared to net income of $64,000 for the same period in 2003. There was no IT recruitment revenue for the nine months ended September 30, 2004 and $1,440,000 for the same period in 2003. Net income from the IT recruitment division for the nine months ended September 30, 2004 was nil and $3,000 in 2003. The gain on disposal of the IT recruitment division of $190,627 has been reflected in the Income (loss) from discontinued operations in 2003. Net Loss. Net loss decreased by $4,490,000 or 63% to $2,670,000 for the nine months ended September 30, 2004 compared to $7,160,000 for the nine months ended September 30, 2003. LIQUIDITY AND CAPITAL RESOURCES With insufficient working capital from operations, our primary sources of cash are a receivable discount facility with Morrison Financial Services Limited and proceeds from the sale of convertible debentures. Our primary capital requirements include debt service and working capital needs. Our facility with Morrison Financial Services Limited is a receivable discount facility whereby we are able to borrow up to 75% of qualifying receivables at 30% interest per annum. At September 30, 2004, the balance on the receivable discount facility was $620,000 based on 75% of qualifying accounts receivable. On January 8, 2004, we sold $25,000 in convertible debentures along with 1,428,571 warrants pursuant to the share purchase agreement (the "12% Senior Secured Convertible Debenture Agreement") dated December 5, 2002. The debentures will become due twelve months from the date of issuance. The investors will have the right to acquire up to $25,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.0175 per share. We are required to pay interest to the debenture holder on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On April 7, 2004 all of these warrants were repriced from $.0175 to $0.0004 per share. On March 25, 2004, we entered into a new share purchase agreement with Bristol Investment Fund, Ltd. for the issuance and sale of debentures of up to $1,000,000. The first debenture of $350,000 was purchased together with 924,000,000 warrants on closing. The debenture will become due twelve months from the date of issuance. Bristol will have the right to acquire up to $350,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until March 25, 2011 at a purchase price of $.000417 per share. We are required to pay interest to Bristol on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On June 18, 2004, all of these warrants were repriced from $.000417 to $.00025 per share. On March 29, 2004, we entered into a new share purchase agreement with Tazbaz Holdings Limited for the issuance and sale of a $100,000 Convertible Debenture and 250,000,000 warrants. The debenture will become due twelve months from the date of issuance. Tazbaz Holdings Limited will have the right to acquire up to $100,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until March 29, 2011 at a purchase price of $.0004 per share. We are required to pay interest to Tazbaz Holdings Limited on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On May 20, 2004 and June 18, 2004, we sold an additional $400,000 in convertible debentures together with 1,682,352,942 warrants to Bristol Investment Fund, Ltd. pursuant to the March 25, 2004 share purchase agreement. The debentures will become due twelve months from the date of issuance. Bristol will have the right to acquire up to $400,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.00025 per share. We are required to pay interest to Bristol on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On May 24, 2004 and June 18, 2004, we entered into new share purchase agreements with Tazbaz Holdings Limited for the issuance and sale of $300,000 principal amount Convertible Debentures and 1,157,142,857 warrants. The debentures will become due twelve months from the date of issuance. Tazbaz Holdings Limited will have the right to acquire up to $300,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.00025 per share. We are required to pay interest to Tazbaz Holdings Limited on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. The proceeds of $1,175,000 received by us in the nine months ended September 30, 2004 were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $871,104. At September 30, 2004, the value of the beneficial conversion feature on all issued convertible debentures was determined to be $2,413,143 which was credited to paid in capital and charged to earnings as interest expense. At September 30, 2004, we had cash of $140,000 and a working capital deficiency of $940,000. At September 30, 2004, we had a cash flow deficiency from operations of $1,020,000, largely attributable to the increase in accounts receivable of $370,000 and the decrease in accounts payable of $1,010,000. At September 30, 2003, we had cash of $70,000 and a working capital deficiency of $2,380,000. At September 30, 2003, we had a cash flow deficiency from operations of $170,000. At September 30, 2004, we had a cash flow deficiency from investing activities of $170,000 related to the purchase of property and equipment. At September 30, 2003, we had cash flow from investing activities of $50,000 largely attributable to the proceeds received on the disposal of our IT Recruitment division of $150,000. At September 30, 2004 we had cash flow from financing activities of $825,000 attributable primarily to proceeds of $1,175,000 from the sale of convertible debentures and proceeds of $230,000 from the exercise of warrants which was offset by the repayment of debt of approximately $580,000. At September 30, 2003, we had cash flow from financing activities of $90,000 attributable primarily to proceeds of $1,650,000 from the sale of convertible debentures, which was offset by the repayment of debt of $1,560,000. At September 30, 2004 we had a loan balance of $265,000 with an individual, Terry Lyons. Effective March 25, 2004, we amended our loan agreement with Terry Lyons. The balance of accrued interest was added to the original principal amount of $259,356 for a new principal balance of $299,768. Monthly payments of $10,000 began April 5, 2004 and will continue until the full amount of the note, including interest is paid in full. The interest rate was reduced from 30% per annum to US prime plus 14%. This loan is subordinated to Morrison Financial Services Limited. At September 30, 2004, we had approximately $11,000 outstanding on various capital leases with various payment terms and interest rates. The average balance on the terms of leases are 12 months and cover primarily the hardware and various software applications required to support our engineering division. At September 30, 2004, we had a note payable of $224,000 owed to Roger Walters, the former shareholder of CadCam Inc. Principal payments of $4,000 per month were to begin September 1, 2002 until August 1, 2007. This note is non-interest bearing and is subordinated to Morrison Financial Services Limited and the 12% Senior Secured Convertible Debenture holders. We have not made any principal payments to Mr. Walters since December 2002 and we are currently in default of the loan agreement. As a result of the default, the principal balance bears interest at 12% per annum until payment is made. Subsequent to September 30, 2004, this note payable was restructured as disclosed below in Recent Events. At September 30, 2004, we had a note payable of $630,000 owed to Denise Dunne-Fushi, the vendor of MicroTech Professionals Inc. Principal payments of $10,000 per month were to begin November 1, 2002 bearing 5% interest until October 1, 2007. In addition, we were obligated to cover the monthly expense associated with Ms. Dunne-Fushi's family health benefits and a vehicle lease until May 2004. The note is secured under a general security agreement but is subordinated to Morrison Financial Services Limited and the 12% Senior Secured Convertible Debenture holders. We have not made scheduled principal payments to Ms. Dunne-Fushi since December 2002 and are currently in default of the loan agreement. As a result of the default, Ms. Dunne-Fushi has the option of enforcing the security she holds. Subsequent to September 30, 2004 this note payable was restructured as disclosed below in Recent Events. Although we believe that our current working capital and cash flows from restructured operations will be adequate to meet our anticipated cash requirements going forward, we have accrued liabilities and potential settlements of outstanding claims that may require additional funds. We will have to raise these funds through equity or debt financing. There can be no assurance that additional financing will be available at all or that if available, such financing will be obtainable on terms favorable to us and would not be dilutive. Despite our recurring losses and negative working capital, we believe that we have developed a business plan that, if successfully implemented, could substantially improve our operational results and financial condition. However, we can give no assurances that our current cash flows from operations, if any, borrowings available under our receivable discount facility, and proceeds from the sale of securities, will be adequate to fund our expected operating and capital needs for the next twelve months. The adequacy of our cash resources over the next twelve months is primarily dependent on our operating results and our ability to raise additional financing, which are subject to substantial uncertainties. Cash flow from operations for the next twelve months will depend, among other things, upon the effect of the current economic slowdown on our sales and management's ability to implement our business plan. The failure to return to profitability and optimize operating cash flow in the short term, and to successfully raise additional financing, could have a material adverse effect on our liquidity position and capital resources, which may force us to curtail our operations. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued SFAS No. 145, which, among other factors, changed the presentation of gains and losses on the extinguishments of debt. Any gain or loss on extinguishments of debt that does not meet the criteria in APB Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", shall be included in operating earnings and not presented separately as an extraordinary item. We will adopt SFAS No. 145 at the beginning of fiscal year 2003 and do not expect the provisions of SFAS No. 145 to have any impact on our financial position, results of operations or cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No.146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred in a Restructuring)". We will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. In January 2003, the FASB issued SFAS No. 148, Accounting for Stock -Based Compensation - Transition and Disclosures. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in the financial statements about the effects of stock-based compensation. The transitional guidance and annual disclosure provisions of this Statement is effective for the December 31, 2002 financial statements. The interim reporting disclosure requirements is effective for our March 31, 2003 financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation elaborates on the existing disclosure requirement for most guarantees including loan guarantees, and clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," which addresses consolidation by business enterprises of variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The objective of Interpretation No. 46 is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to entities created before January 31, 2003, in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We do not have any variable interest entities, and, accordingly, adoption is not expected to have a material effect on our financial position, results of operations or cash flows. In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The amendments set forth in Statement 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is effective for contracts entered into or modified after June 30, 2003 with certain exceptions. We do not believe that the adoption of Statement No. 149 will have a material effect on our financial position, results of operations or cash flows. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". The Statement specifies that certain instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. This Statement is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, the Statement goes into effect at the beginning of the first interim period beginning after June 15, 2003. For contracts that were created or modified before May 31, 2003 and still exist at the beginning of the first interim period beginning after June 30, 2003, entities should record the transition to Statement No. 150 by reporting the cumulative effect of a change in an accounting principle. Statement No. 150 prohibits entities from restating financial statements for earlier years presented. We do not believe that the adoption of Statement No. 150 will have a material effect on our financial position, results of operations or cash flows. RECENT EVENTS Subsequent to September 30, 2004, we issued an additional 2,308,509,800 shares of our common stock to the convertible debenture holders upon the conversion of $104,900 of debentures and accrued interest. On October 14, 2004, we signed a letter of intent with TBM Technologies Inc., an Ontario Corporation which provides Design Engineering services, pursuant to which we will purchase TBM for approximately $250,000 payable in shares of our common stock with price protection for a period of two years from issuance. In the event that the vendors seek to sell their shares in an open market transaction within the two years following closing and the bid price is less than the price of the shares on issuance, we will be obligated to issue additional shares of unregistered common stock with a value equal to the difference up to a maximum of $250,000. The transaction will be effective November 1, 2004 and is anticipated to close on November 22, 2004. On November 12, 2004, we sold an additional $875,000 in convertible debentures with original issue discount (OID) together with 4,750,000,000 warrants to a group of investors including Bristol Investment Fund Ltd., Alpha Capital and Tazbaz Holdings Inc. Pursuant to the Share Purchase Agreement, the debentures will become due twelve months from the date of issuance. The investors will have the right to acquire up to $875,000 (equal to 125% of the aggregate subscription amount of $700,000) worth of our common stock at a price the lesser of $.0002 or 80% of the average of the three lowest intraday prices on three separate trading days during the twenty days trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of seven years from closing at a purchase price of $.0002 per share. The proceeds of $615,000 received from this transaction were used to settle debt and litigation settlement obligations with the balance to be used for working capital. On November 12, 2004, we reached a settlement with SITQ National Inc., of the action commenced at Toronto, Ontario as Court File No. 03-CV-256327CM3 against us by SITQ, in which SITQ claimed damages for breach of Lease for arrears of Rent, Additional Rent and other amounts payable pursuant to the Lease. In consideration of a monetary payment by us of approximately $261,000 and execution of a Mutual Full and Final Release, SITQ dismissed the aforementioned action and forgave the balance of the rent arrears, future rents and damages of approximately $3,750,000. On November 12, 2004, we reached a settlement with Denise Dunne-Fushi with respect to the note payable to Dunne-Fushi by us in the amount of $629,491. In consideration of a monetary payment by us of $202,000 and execution of a Full and Final Release, Dunne-Fushi released us of all rights and debt held by her and forgave the balance of the note payable of approximately $427,491. On November 12, 2004, we reached a settlement with Roger Walters with respect to the note payable to Walters by us in the amount of $224,000 plus accrued interest. In consideration of a monetary payment by us of $33,600 and execution of a Full and Final Release, Walters released us of all rights and debt held by him and forgave the balance of the note payable and accrued interest of approximately $237,400. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See heading "Foreign Currency Translation" in Management's Discussion and Analysis of Financial Condition and Results Of Operations. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 45 days prior to the filing date of this Form 10-Q filed for the three months ended September 30, 2004 (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting the officers on a timely basis to material information relating to us (including our wholly owned subsidiaries) required to be included in our reports filed or submitted under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are party to the following pending legal proceedings: On March 17, 2004, Johnston & Associates, LLC, a South Carolina corporation, filed a statement against us with the Superior Court of Justice of Ontario, Canada, Court File No. C-294-04, demanding payment of $60,000 pursuant to a consulting agreement entered into April 2002. We intend to defend this claim vigorously. We are not party to any other material litigation, pending or otherwise. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K4 (a) Exhibits Exhibit 31. Rule 13a-14(a)/15d-14(a) Certifications. Exhibit 32.1 Certification by the Chief Executive Officer Relating to a Periodic Report Containing Financial Statements.* Exhibit 32.2 Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.* (b) Reports on Form 8-K. * The Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THINKPATH INC. Dated: November 22, 2004 By: /s/ Declan French By: /s/ Kelly Hankinson --------------------- ----------------------- Declan French Kelly L. Hankinson Chief Executive Officer Chief Financial Officer EX-31.1 2 exh31-1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, Declan A. French, Chief Executive Officer of Thinkpath Inc., 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 45 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 the registrant's board of directors: 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. Date: November 22, 2004 /s/ Declan French ----------------------- Declan A. French Chief Executive Officer EX-31.2 3 exh31-2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION I, Kelly L. Hankinson, Chief Financial Officer of Thinkpath Inc., 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 45 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 the registrant's board of directors: 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. Date: November 22, 2004 /s/ Kelly Hankinson ----------------------- Kelly L. Hankinson Chief Financial Officer EX-32.1 4 exh32-1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Thinkpath, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Declan A. French, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. November 22, 2004 By: /s/ Declan A. French Name: Declan A. French Title: Chief Executive Officer EX-32.2 5 exh32-2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Thinkpath, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kelly Hankinson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. November 22, 2004 By: /s/ Kelly Hankinson Name: Kelly Hankinson Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----