10KSB 1 t301751.txt THINKPATH ANNUAL REPORT 12/31/04 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2004 COMMISSION FILE NUMBER 001-14813 THINKPATH INC. ------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ONTARIO, CANADA 52-209027 ----------------------------------- ----------------- (JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 201 WESTCREEK BOULEVARD, BRAMPTON, ONTARIO CANADA L6T 5S6 --------------------------------------------- ------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (905) 460-3040 ---------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, NO PAR VALUE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENT TO THIS FORM 10-KSB. YES X NO ___ THE ISSUER'S REVENUES FOR THE MOST RECENT FISCAL YEAR WERE $12,623,743. THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING STOCK HELD BY NON-AFFILIATES BASED UPON THE LAST SALE PRICE ON APRIL 12, 2005 WAS APPROXIMATELY $2,166,408. AS OF APRIL 12, 2005 THERE WERE 21,667,204,400 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, ISSUED AND OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE: NONE. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT. YES____ NO X THINKPATH INC. INDEX TO ANNUAL REPORT ON FORM 10-KSB PART I Item 1. Description of Business Item 2. Description of Property Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Common Equity and Related Shareholder Matters Item 6. Management's Discussion and Analysis or Plan of Operation Item 7. Financial Statements Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 8A. Controls and Procedures Item 8B. Other Information PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act Item 10. Executive Compensation Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Item 12. Certain Relationships and Related Transactions Item 13. Exhibits Item 14. Principal Accountant Fees and Services SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein including, without limitation, those concerning (i) Thinkpath Inc.'s ("Thinkpath") strategy, (ii) Thinkpath's expansion plans, and (iii) Thinkpath's capital expenditures, contain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") concerning Thinkpath's operations, economic performance and financial condition. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Thinkpath undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. EXCHANGE RATE DATA Thinkpath maintains its books of account in Canadian dollars, but has provided the financial data in this Form 10-KSB in United States dollars and on the basis of generally accepted accounting principles as applied in the United States, and Thinkpath's audit has been conducted in accordance with generally accepted auditing standards in the United States. All references to dollar amounts in this Form 10-KSB, unless otherwise indicated, are to United States dollars. The following table sets forth, for the periods indicated, certain exchange rates based on the noon buying rate in New York City for cable transfers in Canadian dollars. Such rates are the number of United States dollars per one Canadian dollar and are the inverse of rates quoted by the Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average exchange rate is based on the average of the exchange rates on the last day of each month during such periods. On April 12, 2005, the exchange rate was Cdn$0.8113 per US$1.00. Year ended December 31, 2004 2003 ---- ---- Rate at end of year $0.8303 $0.7727 Average rate during year 0.7701 0.7163 High 0.8532 0.7747 Low 0.7138 0.6327 PART I ITEM 1. DESCRIPTION OF BUSINESS Unless otherwise indicated, all reference to "Thinkpath", "us", "our" and "we" refer to Thinkpath Inc. and its wholly-owned subsidiaries: Thinkpath US Inc. (formerly Cad Cam Inc.), an Ohio corporation, Thinkpath Michigan Inc. (formerly Cad Cam of Michigan Inc.), a Michigan corporation and Thinkpath Technical Services Inc. (formerly Cad Cam Technical Services Inc.), an Ohio corporation. In addition, Thinkpath owns the following companies which are currently inactive: Systemsearch Consulting Services Inc., an Ontario corporation, International Career Specialists Ltd., an Ontario corporation, E-Wink Inc. (80%), a Delaware corporation, Thinkpath Training Inc. (formerly ObjectArts Inc.), an Ontario corporation, Thinkpath Training US Inc. (formerly ObjectArts US Inc.), a New York corporation, MicroTech Professionals Inc., a Massachusetts corporation, and TidalBeach Inc., an Ontario corporation. In 2002, Thinkpath sold Njoyn Software Incorporated, a wholly-owned subsidiary. HISTORY We are a global provider of engineering services including design, build, drafting, technical publishing, and documentation, and on-site engineering support. Our customers include defense contractors, aerospace, automotive, health care and manufacturing companies, including Lockheed Martin, General Dynamics, General Electric, General Motors, Ford Motors, Magna, ABB and Hill-Rom Company. For over 25 years, Thinkpath Inc. has been helping companies achieve success with their design and engineering objectives. With offices and design centers located in the United States and Canada and a partner in India, Thinkpath's team of highly-skilled professionals are well suited to meet our clients project engineering and staff augmentation needs. VISION Our vision is to build lasting partnerships with our clients by delivering cost effective, quality, project engineering services; thus allowing us national and international scope, a respected, listed public company and a major player in the defense and aerospace market space. This vision will be attained by providing an enjoyable work environment for our employees while ensuring financial strength and sustainable growth of the company for the benefit of our stakeholders. MISSION Our mission is to enable time-pressed organizations to capitalize on the power and value of our expertise, by developing high quality custom solutions, in all our service offerings. STRATEGY Thinkpath is repositioning in growth industries and targeting customers with high growth potential, such as defense. We are poised to benefit from increased demand generated by aerospace and defense-related customers who will increasingly rely on our project engineering design and technical staffing services. The United States military budget is now over $500 billion and defense programs such as the Future Combat System, Joint Strike Fighter (JSF), the Global Hawk remote piloted vehicle, the Bradley Fighting Vehicle, and the Black Hawk helicopter, have ignited demand. We will continue to solidify our relationships to actively increase new business opportunities with target customers including General Dynamics, Lockheed Martin, Boeing, General Electric, United Defense and TACOM. We will continue to grow organically and once our restructuring is complete we will grow through acquisitions. Acquisitions will be limited to profitable engineering companies, which must have an immediate accretive impact. SERVICES ENGINEERING & DESIGN SERVICES Thinkpath Inc. provides the full spectrum of project engineering services. We provide a true end-to-end solution, from concept design and build, drafting to technical publishing and documentation, and on-site engineering support. Our engineering and design services cover every facet of a project from concept to SLA prototyping to a complete turnkey package that delivers a finished, operating system. Our engineers handle the drafting, the detailing and the parametric modeling. We have experienced engineers on staff as well as a pool of skilled consultants whom we can call on to provide internal design services. We have provided CAD drafting and modeling services to countless customers incorporating many industries. We have developed the technical skill base and management structure to organize CAD services for programs of any size and currently manage these services for large projects in the aerospace, defense, automotive, medical equipment, packaging, and many other high tech industries. We have expert-level engineering and design capability that ranges from traditional 2-D and 3-D AutoCAD programs to the most sophisticated parametric and solid modeling platforms, including, Unigraphics NX, Pro/Engineer, Solid Works, SDRC Ideas, and Catia. In all, we have nearly two-dozen engineering design programs along with the specialty modules to perform surface modeling, hydraulic, electrical, large weldments, casting, and other design functions. Our software inventory includes ancillary programs to perform Finite Element and other engineering analyses. Our staff encompasses the entire range of disciplines including mechanical, civil, structural, and electrical engineering. Our design services range from drafting and design, to detailing and geometric dimensioning and tolerancing (GD&T). As a component of our engineering design efforts, we are ISO 9001 certified, and subscribe to the Six Sigma Principles of continuous quality improvement. This uncompromising commitment to quality is built into every phase of a project we manage for all of our clients. Our offices maintain and follow a complete set of ISO compliant policies, procedures, and work instructions, and our branches in Detroit, Michigan and Cincinnati, Ohio are current ISO 9001 practitioners. CAD SERVICES Thinkpath offers a full menu of computer-aided design (CAD) services to support manufacturing, architectural, engineering, government, and health care industries. The company can quickly respond to client needs by using its experienced staff and multiple shift operation. FEA SERVICES Thinkpath is a premier provider of Finite Element Analysis (FEA) services. Our service offering includes Structural and Mechanical solutions in Linear and Non-Linear (Static and Dynamic) modes. We also provide FEA solutions for Thermal, Vibrational and Fatigue conditions. We provide these services using the latest tools in Computer-Aided Engineering, such as ANSYS and NASTRAN. On assignment for our FEA solutions are our most senior engineers, who have advanced degrees in engineering and vast experience in engineering design and analysis. TECHNICAL PUBLICATIONS AND DOCUMENTATION We provide technical publishing programs for complete integration into engineering and design departments of government, military contractors, aerospace and automotive customers. Our technical publications expertise covers every aspect of the documentation milieu, from pre-installation (site preparation), through installation, operation, service, maintenance, and repair. We have the capability to produce the full range of ATA compliant manuals, and our clients range from the airframe, electrical, hydraulic, pneumatic, and mechanical components to aircraft interiors, and jet propulsion systems. In the military arena, we produce MIL-SPEC compliant documentation for equipment that ranges from naval engines through the most advanced weapons systems. As with our engineering and design services, our technical publications group uses cutting edge technology to produce the documentation. Our publishing and technical illustration libraries include 20 programs that range from Microsoft Word for Windows (the Navy standard publishing platform), through SGML, HTML, and XML authoring and publishing suites. Although we still produce manuals on paper, we are now focused to a greater extent on e-documentation and interactive electronic technical manuals (IETMs). We maintain a complete staff of technical publication personnel consisting of highly skilled engineers and drafters. As a result, we can draw heavily upon our engineering resources to handle every step of the documentation process, including researching, writing, editing, illustration, printing and distribution. ON-SITE ENGINEERING SUPPORT On-site engineering support is a core Thinkpath business, and a natural outgrowth of our pioneering work in the computer aided design and drafting field. Initially, the need for on-site support involved both the training of the operators and their placement with manufacturers who needed people with the knowledge to operate the new (and at the time arcane) design software. Gradually the software became more user-friendly, and the basic business model for most large manufacturers demanded a leaner, more flexible staffing paradigm. This has lead to an increased demand for experienced engineers, designers, and draftsmen who are not only proficient using a diverse range of design programs, but who also have the requisite industry knowledge to step in and be immediately productive during periods of peak demand or new product introduction operations. CUSTOMERS Our customers are large and high-growth corporations from a wide variety of industries across North America. These customers include Fortune 500 companies and other high-profile companies. The majority of our relationships are long-term built on exceptional service, rigorous quality standards, and highly competitive pricing. The following is a partial listing of our clients: o General Motors Corporation: 26 years o Cummins, Inc.: 19 years o General Electric Aircraft Engines: 18 years o Heidelberg Web Systems: 13 years o Hill-Rom, Inc.: 13 years o General Dynamics Corporation: 12 years o Curtiss-Wright Flight Systems: 11 years o Johnson & Johnson (Ethicon and Depuy Groups): 11 years o B/E Aerospace (SPG and AMP Groups): 10 years o Daimler Chrysler Corporation: 10 years o Lockheed Martin Aeronautics Corporation: 8 years o ABB: 2 years o Magna: 2 years STRATEGIC PARTNERSHIPS By developing strategic partnerships with local and international engineering design firms, Thinkpath has gained a competitive advantage through access to our partner's resources, including markets, technologies, capital and people. This access has enabled us to successfully meet our client's demands while maintaining our gross profit margin and focusing on our core business offerings. COMPETITION The engineering services industry is highly competitive with high barriers to entry due to significant capital costs for tools and equipment and the specialized skills and knowledge required. We compete for potential customers with other providers of engineering services, and on-site consultants. Many of our current and potential competitors have longer operating histories, greater financial, marketing and human resources, and a larger base of professionals and customers than we do, all of which may provide these competitors with a competitive advantage. In addition, many of these competitors, including numerous smaller privately held companies, may be able to respond more quickly to customer requirements and to devote greater resources to the marketing of services than we are. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, prospects, financial condition and results of operations. Further, we cannot assure you that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not have a material adverse effect on our business, prospects, financial condition and results of operations. We believe that the principal factors relevant to competition in the engineering services industry are the recruitment and retention of highly qualified engineering professionals, rapid and accurate response to customer requirements and, to a lesser extent, pricing. TECHNOLOGY AND INFRASTRUCTURE We have established an extensive technology strategy and infrastructure that we believe provides us with a competitive advantage over less technologically advanced competitors. We have invested heavily in the creation and support of an integrated technological infrastructure that links all offices and employees and promotes uniformity in certain functions. Our accounting program provides for real-time financial reporting across dispersed branch offices. Our intranet and sales management software, provide each of our employees with access to the tools and information that help them to be successful and productive. This infrastructure allows us to integrate our acquisitions more easily and more cost-effectively than would otherwise be possible. EMPLOYEES AND CONSULTANTS EMPLOYEES As of April 12, 2005 we have 173 full-time employees, including 13 sales personnel, 15 administrative personnel and 145 engineers and technicians. Our staff at December 31, 2004 consisted of 162 full-time employees, including 13 sales personnel, 15 administrative and 134 engineers and technicians. Our staff at December 31, 2003 consisted of 180 full-time employees, including 13 sales personnel and 15 administrative and 152 engineers and technicians. We are not party to any collective bargaining agreements covering any of our employees, have never experienced any material labor disruption and are unaware of any current efforts or plans to organize our employees. We provide comprehensive salaries and benefits including a 401(k) plan with a company match, a pension plan, a comprehensive group medical plan, retiree health insurance, dental, short- and long-term disability, life, wellness benefit, tuition reimbursement, relocation benefits, health care and dependent care reimbursement accounts, scholarships and service awards. We also offer generous vacation packages and paid holidays. CONSULTANTS We enter into consulting agreements with engineering professionals at hourly rates based on each individual's technical skills and experience. As of April 12, 2005, approximately 14 professionals were performing services for our customers. At December 31, 2004, there were 6 professionals placed by us, performing services for our customers. At December 31, 2003, there were 20 professionals placed by us, performing services for our customers. RECENT EVENTS On January 31, 2005, we held our Annual General Meeting of Shareholders to elect the Board of Directors for the ensuing year, ratify the appointment of our independent auditors, and to vote upon the proposal to approve certain executive compensation. We failed to achieve a quorum and the meeting was adjourned and a new meeting date has been set for April 22, 2005. At the Annual General Meeting of Shareholders to be held on April 22, 2005, the shareholders will elect the Board of Directors for the ensuing year, ratify the appointment of our independent auditors, vote upon the proposal to approve certain executive compensation, vote upon the proposal to approve a reverse stock split of 5,000 to 1 of our outstanding common shares and ratify the adoption of our 2005 Stock Option Plan. Subsequent to December 31, 2004, we signed an Amendment Agreement to the Share Purchase Agreement dated December 23, 2004 with respect to the purchase of TBM Technologies Inc., an Ontario Corporation which provides design engineering services. Pursuant to the Share Purchase Agreement, we purchased TBM for approximately $250,000 payable in shares of our common stock, no par value. The Share Purchase Agreement also provided for price protection for the vendors for a period of two years from issuance. In the event that the vendors sought to sell their shares in an open market transaction within the two years following closing and the bid price was less than the price of the shares on issuance, we would be obligated to issue additional shares of unregistered common stock with a value equal to the difference up to a maximum of $250,000. Pursuant to the Amendment Agreement, the parties agreed to a put option, whereby we have the right at any time between the twelfth and fifteenth month anniversary of the effective date, to exercise our right to purchase the shares at a set price of $250,000. The parties also agreed that the effective date of the transaction be changed from November 1, 2004 to January 17, 2005. Subsequent to December 31, 2004, we have issued an additional 6,824,914,000 shares of its common stock to the convertible debenture holders upon the conversion of $321,900 of debentures and accrued interest. ITEM 2. DESCRIPTION OF PROPERTY We maintain our headquarters in 9,500 square foot offices located at 201 Westcreek Boulevard, Brampton, Ontario, Canada. We have leased such facility for a term of five years terminating in May 2008. We pay annual base rent of $135,000. We lease additional offices at the following locations: Location Square Feet Lease Expiration Current Rent Per Annum -------- ------------- ---------------- ----------------------- Cincinnati, Ohio 3,820 05/31/05 $22,204 (5 months) Columbus, Ohio 1,600 03/31/05 $ 6,750 (3 months) Columbus, Ohio (beg 04/01/05) 4,750 01/31/10 $33,840 Dayton, Ohio 6,421 12/31/05 $95,352 Detroit, Michigan 15,328 08/31/05 $112,017 (8 months) The lease commitments do not include an operating lease for premises that we are currently sub leasing to the purchaser of the United States training division. If the purchaser was to default on payment or abandon the premises, we would be liable for annual payments of $282,096 expiring August 31, 2006. The lease commitments also do not include an operating lease for premises located in the United States that were closed in the fourth quarter of 2002. We have not made any payments on this lease since the premises were abandoned, nor has the lessor tried to enforce payment. We may be liable for a lease balance of $44,597, which expired November 30, 2004. ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fiscal year covered by this report. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock began trading on the Nasdaq SmallCap Market on June 8, 1999, when we completed our initial public offering. Our common stock is currently listed on the Over-the-Counter Bulletin Board (OTC:BB) under the symbol "THTH-F". As of April 12, 2005, we had 21,667,204,400 shares of common stock outstanding. The following table sets forth the high and low sale prices for our common stock as reported on the OTC:BB during the current year to date and the years ended December 31, 2004 and 2003. HIGH LOW ---- --- Fiscal 2003 First Quarter $0.0500 $0.0070 Second Quarter $0.0095 $0.0039 Third Quarter $0.0063 $0.0016 Fourth Quarter $0.0034 $0.0016 Fiscal 2004 First Quarter $0.0027 $0.0008 Second Quarter $0.0110 $0.0006 Third Quarter $0.0006 $0.0001 Fourth Quarter $0.0010 $0.0001 Fiscal 2005 First Quarter $0.0010 $0.00001 Second Quarter (through to April 12, 2005) $0.0001 $0.00010 As of April 12, 2005, we had 173 holders of record and approximately 4,557 beneficial shareholders. On April 12, 2005, the last sale price of our common stock as reported on the OTC:BB was $.0001. DIVIDEND POLICY We have never paid or declared dividends on our common stock. The payment of cash dividends, if any, in the future is within the discretion of our Board of Directors and will depend upon our earnings, capital requirements, financial condition and other relevant factors. We intend to retain future earnings for use in our business. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FORWARD LOOKING STATEMENTS The following discussion and analysis should be read in conjunction with the selected historical financial data, financial statements and notes thereto and our other historical financial information contained elsewhere in this Annual Report on Form 10-KSB. The statements contained in this Annual Report on Form 10-KSB that are not historical are forward looking statements within the meaning of Section 27A of the Securities Act of and Section 21E of the Exchange Act, including statements regarding our expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include our statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included herein are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statement. It is important to note that our actual results could differ materially from those in such forward-looking statements. OVERVIEW Thinkpath provides engineering services including design, build, drafting, technical publishing and documentation, and on-site engineering support to customers in the defense, aerospace, automotive, health care and manufacturing industries. We were incorporated under the laws of the Province of Ontario, Canada in 1994. In September 1999, we acquired an engineering services company CadCam Inc. and its two subsidiaries, CadCam Michigan Inc. and CadCam Technical Services Inc. CadCam Inc. was founded in 1977. Our principal executive offices are located at 201 Westcreek Boulevard, Brampton, Ontario, Canada and our website is www.thinkpath.com. PLAN OF OPERATION In 2002 we began to focus our efforts on building relationships with customers in high growth industries such as defense and aerospace. We have since been repositioning in growth industries and targeting customers with high growth potential, such as those in defense. We are poised to benefit from the increased demand generated by aerospace and defense-related customers who will increasingly rely on our project engineering design expertise and technical staffing services. We will continue to solidify our relationships to actively increase new business opportunities with existing customers including General Dynamics, Lockheed Martin, Boeing, General Electric, United Defense and TACOM. We will continue to grow organically and through acquisitions. Acquisitions will be limited to profitable engineering companies, which must have an immediate accretive impact. REVENUE For the year ended December 31, 2004, we derived 93% of our revenue in the United States which is consistent with 2003. For the year ended December 31, 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 year ended December 31, 2003. Revenue from engineering services for the year ended December 31, 2004 was $12,400,000 representing an increase of $2,020,000 or 19% from $10,380,000 for the year ended December 31, 2003. 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 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 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 year ended December 31, 2004, information technology documentation services represented approximately 2% of our revenue compared to 4% for the year ended December 31, 2003. Revenue from information technology documentation services for the year ended December 31, 2004 decreased by 50% to $220,000 compared to $440,000 for the year ended December 31, 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 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 The Gillete Company, Armsworth and TAC/EMC Corporation. 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 year ended December 31, 2004 compared to 33% for the year ended December 31, 2003. This increase is attributable to the focus on higher margin time and material projects versus fixed cost projects which often result in unforeseen costs. 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 year ended December 31, 2004 was 22% which is consistent with the year ended December 31, 2003. RESULTS OF OPERATIONS STATEMENTS OF OPERATIONS--PERCENTAGES 2004 2003 ---- ---- REVENUE 100% 100% ---- ---- COST OF SERVICES 64% 68% ---- ---- GROSS PROFIT 36% 32% ---- ---- EXPENSES Administrative 24% 27% Selling 12% 11% Depreciation and amortization 4% 6% Write down of property and equipment 2% --% Debt forgiveness (9)% --% ---- ---- Operating income (loss) from continuing operations 3% (12)% Write off of investment in non-related companies --% --% Income (loss) from continuing operations before interest charges 3% (12)% Interest charges 34% 74% ---- ---- Loss from continuing operations before income taxes (31)% (86)% Income taxes --% --% ---- ---- Loss from continuing operations (31)% (86)% Income (loss) from discontinued operations (2)% 2% Net Loss (33)% (84)% ---- ---- THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003 Revenue. Revenue for the year ended December 31, 2004 increased by $1,800,000 or 17%, to $12,620,000 as compared to $10,820,000 for the year ended December 31, 2003. The increase is primarily attributable to the award of several contracts in 2004 with existing customers in the defense industry, our fastest growing market segment. As a result of these contracts, one customer had sales of approximately 31% of our total revenue in 2004. The same customer had sales of approximately 15% of our total revenue in 2003. Cost of Services. The cost of services for the year ended December 31, 2004 increased by $800,000, or 11%, to $8,140,000, as compared to $7,340,000 for the year ended December 31, 2003. This increase is consistent with the increase in revenue. However, as a percentage of revenue, the cost of services in 2004 was 64% compared to 68% in 2003. Gross Profit. Gross profit for the year ended December 31, 2004 increased by $1,015,000, or 29%, to $4,485,000 compared to $3,470,000 for the year ended December 31, 2003. As a percentage of revenue, gross profit in 2004 was 36% compared to 32% in 2003. The increase in gross profit is a result of the focus on higher margin time and materials projects versus fixed price projects which often result in unforeseen costs. Expenses. Total expenses for the year ended December 31, 2004 decreased by $690,000, or 14%, to $4,050,000 compared to $4,740,000 for the year ended December 31, 2003. Administrative Expenses. Administrative expenses increased by $70,000 or 2% to $2,990,000 for the year ended December 31, 2004 compared to $2,920,000 for the year ended December 31, 2003. As a percentage of revenue, administrative expenses have decreased from 27% in 2003 to 24% in 2004. Selling Expenses. Selling expenses increased by $260,000, or 23%, to $1,410,000 for the year ended December 31, 2004 compared to $1,150,000 for the year ended December 31, 2003. This increase is attributable to the addition of sales staff as well as the increase in commissions which is consistent with the increase in revenue. As a percentage of revenue, selling expenses for the year ended December 31, 2004 are 12% compared to 11% for the year ended December 31, 2003. Depreciation and Amortization. For the year ended December 31, 2004, depreciation and amortization expenses decreased by $145,000, or 22%, to $520,000 from $665,000 for the year ended December 31, 2003. As a percentage of revenue, depreciation and amortization expenses have decreased from 6% in 2003 to 4% in 2004. Write down of property and equipment. At December 31, 2004, we wrote down property and equipment in the amount of $270,000. The fair value of the impaired asset was generally estimated by discounting the expected future cash flows of the individual assets. Impairment was indicated by adverse change in market prices, current period cash flow losses combined with a history of losses, or a significant change in the manner in which the asset is to be used. Debt Forgiveness. At December 31, 2004, we recognized debt forgiveness of approximately $1,140,000 related to debt forgiveness on the settlement of an outstanding legal claim of $470,000 in consideration of payment of approximately $261,000 and settlement of our notes payable totaling $670,000 in consideration of payments totaling approximately $235,000. Income (Loss) from Continuing Operations. For the year ended December 31, 2004, we had operating income from continuing operations of $430,000 compared to an operating loss of $1,270,000 in 2003. Write off of investment in non-related companies. At December 31, 2004, we wrote off our investment in Digital Cement of $45,000 as it was determined that we did not fulfill certain obligations required of us as part of an agreement with Digital Cement and the ownership of our shares were transferred back to Digital Cement. At December 31, 2004, we also wrote off our investment in Conexys of $1. Income (loss) from Continuing Operations Before Interest Charges. For the year ended December 31, 2004, we had income of $385,000 from continuing operations before interest charges compared to a loss of $1,270,000 in 2003. Interest Charges. For the year ended December 31, 2004, interest charges decreased by $3,620,000, or 45%, to $4,370,000 from $7,990,000 for the year ended December 31, 2003. This decrease is largely attributable to the reduced interest expense of $3,810,000 on the beneficial conversion feature recognized on the convertible debentures compared to an expense of $7,250,000 in 2003. Loss from Continuing Operations before Income Taxes. Loss from continuing operations before income taxes for the year ended December 31, 2004 decreased by $5,260,000 or 57% to a loss of $4,000,000 as compared to a loss of $9,260,000 for the year ended December 31, 2003. Income Taxes. Income tax expense for the year ended December 31, 2004 decreased by $12,000 or 40% to $18,000 compared to $30,000 for the year ended December 31, 2003. Loss from Continuing Operations. Loss from continuing operations for the year ended December 31, 2004 decreased by $5,280,000 or 57% to a loss of $4,010,000 compared to a loss of $9,290,000 for the year ended December 31, 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 our Njoyn or Secondwave products and therefore the technology operations have been reported as discontinued. There was no technology revenue for the years ended December 31, 2004 and 2003. The net loss for the year ended December 31, 2004 was $17,000 compared to net income of $13,000 in 2003. Included in the loss for 2004 is a write down of property and equipment in the amount of $14,000. Effective May 1, 2002, we signed an agreement with triOS Training Centres Limited, an Ontario company, for the purchase of certain assets of our 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. On November 1, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of our New York training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC 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 our training division and therefore the operations have been reported as discontinued. There was no training revenue for the year ended December 31, 2004 and $160,000 in 2003. The net loss from the training division for the year ended December 31, 2004 was $180,000 and $20,000 in 2003. Included in the loss for 2004 is a write down of property and equipment in the amount of $130,000. Effective June 27, 2003, we signed an agreement with Brainhunter.com Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT recruitment division for a nominal amount of cash and the assumption of all employee liabilities. The gain on disposal of $190,627 has been reflected in the Income (loss) from discontinued operations in 2003. Of the $190,627, $146,627 was received in cash on closing with the balance of $44,000 due in a promissory note payable by June 27, 2004. As of April 12, 2005, the note remains outstanding, however, we believe that it is collectable. As a result of this transaction, we will not have future revenues from our IT recruitment division and therefore the operations have been reported as discontinued. There was no IT recruitment revenue for the year ended December 31, 2004 and $1,460,000 in 2003. Net income from the IT recruitment division for the year ended December 31, 2004 was nil and $75,000 in 2003. Net Loss. Net loss decreased by $4,825,000 or 53% to $4,205,000 for the year ended December 31, 2004 compared to $9,030,000 for the year ended December 31, 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 December 31, 2004, the balance on the receivable discount facility was $720,000 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 November 12, 2004, 840,000,000 of these warrants were repriced from $.00025 to $.0002 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 November 12, 2004, 1,529,411,765 of these warrants were repriced from $.00025 to $.00020 per share. 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. On November 12, 2004, we sold an additional $875,000 in convertible debentures with original issue discount (OID) together with 4,687,500,000 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. We 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. The proceeds of $2,050,000 on the sale of convertible debentures received during the year ended December 31, 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 $1,319,000. At December 31, 2004, the value of the beneficial conversion feature on all issued convertible debentures was determined to be $3,655,000 which was credited to paid in capital and charged to earnings as interest expense. At December 31, 2004, we had cash of $180,000 and a working capital deficiency of $120,000. At December 31, 2004, we had a cash flow deficiency from operations of $1,400,000. At December 31, 2003, we had cash of $480,000 and a working capital deficiency of $2,760,000. At December 31, 2003, we had a cash flow deficiency from operations of $170,000. At December 31, 2004, we had a cash flow deficiency from investing activities of $200,000 related to the purchase of property and equipment. At December 31, 2003, we had a cash flow deficiency from investing activities of $20,000. At December 31, 2004 we had cash flow from financing activities of $1,325,000 attributable primarily to proceeds of $1,875,000 from the sale of convertible debentures and $230,000 from the exercise of common stock purchase warrants which was offset by the repayment of debt of approximately $780,000. At December 31, 2003, we had cash flow from financing activities of $560,000 attributable primarily to proceeds of $2,075,000 from the sale of convertible debentures and $90,000 from the exercise of common stock purchase warrants, which was offset by the repayment of debt of $1,605,000. At December 31, 2004 we had a loan balance of $227,951 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 December 31, 2004, we had approximately $40,000 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. On November 12, 2004, we reached a settlement with Roger Walters with respect to a note payable in the amount of $224,000. Principal payments of $4,000 were to have been made monthly starting September 1, 2002 until August 1, 2007. The note was subordinated to Morrison Financial Services Limited and to the 12% Senior Secured Convertible Debenture holders. We did not make any principal payments to Mr. Walters since December 2002 and were in default of the loan agreement. As a result of the default, the principal balance bore interest at 12% per annum until payment was made and the note was due on demand. The entire note payable was reclassified as current at December 31, 2003. In consideration of our payment of $33,600 and execution of a Full and Final Release, Walters released all rights and debt held by him and forgave the balance of the note payable and accrued interest totaling approximately $239,741. On November 12, 2004, we reached a settlement with Denise Dunne-Fushi with respect to a note payable in the amount of $629,492. Principal payments of $10,000 per month were to have been made monthly beginning November 1, 2002 bearing 5% interest until October 1, 2007. In addition, we 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 note was secured under a general security agreement and was subordinated to Morrison Financial Services Limited and to the 12% Senior Secured Convertible Debenture holders. We did not make any principal payments to Ms. Dunne-Fushi since December 2002 and were in default of the loan agreement. As a result of the default, Ms. Dunne-Fushi had the option of enforcing the security she held and therefore the entire note payable was reclassified as current at December 31, 2003. In consideration of our payment of $202,000 and execution of a Full and Final Release, Dunne-Fushi released all rights and debt held by her and forgave the balance of the note payable of approximately $427,492. 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 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 with certain exceptions. We do not believe that the adoption of SFAS No. 149 will have a material impact, if any, on our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This statement specifies that certain instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 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 SFAS No. 150 by reporting the cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits entities from restating financial statements for earlier years presented. We do not believe that the adoption of SFAS No. 150 will have a material impact, if any, on our results of operations or financial position. In December 2003, the FASB issued SFAS No. 132 (Revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106. This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS No. 132 (Revised) will retain and revise the disclosure requirements contained in the original SFAS No. 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS No. 132 (Revised) generally is effective for fiscal years ending after December 15, 2003. We do not believe that the adoption of SFAS No. 132 (Revised) will have a material impact, if any, on our results of operations or financial position. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43". This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS No. 151 will have a material impact, if any, on our results of operations or financial position as it does not have inventory. In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67, which references the financial accounting and reporting guidance for real estate time-sharing transactions in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions. SFAS No. 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. We do not believe that the adoption of SFAS No. 152 will have a material impact, if any, on our results of operations or financial position. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29", effective for nonmonetary asset exchanges occurring in the fiscal year beginning January 1, 2006. This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. We do not believe that the adoption of SFAS No. 153 will have a impact, if any, on our results of operations or financial position. In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-based Payment". This statement requires employers to expense costs related to share-based payment transactions with employees. With limited exceptions, SFAS No. 123 (Revised) requires that the fair value of share-based payments to employees be expensed over the period service is received. SFAS No. 123 (Revised) becomes mandatorily effective on July 1, 2005. We intend to adopt this standard using the modified retrospective method of transition. This method requires that issued financial statements be restated based on the amounts previously calculated and reported in the pro forma footnote disclosures required by SFAS No. 123. SFAS No. 123 (Revised) allows the use of both closed form models (e.g., Black-Scholes Model) and open form models (e.g., lattice models) to measure the fair value of the share-based payment as long as that model is capable of incorporating all of the substantive characteristics unique to share-based awards. In accordance with the transition provisions of SFAS No. 123 (Revised), the expense attributable to an award will be measured in accordance with the company's measurement model at that award's date of grant. We believe the pro forma disclosures in Note 3 (c) provide an appropriate short-term indicator of the level of expense that will be recognized in accordance with SFAS No. 123 (Revised). However, the total expense recorded in future periods will depend on several variables, including the number of shared-based awards that vest and the fair value of those vested awards. CRITICAL ACCOUNTING ESTIMATES AND POLICIES On December 12, 2001, the Securities and Exchange Commission issued FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, which encourages additional disclosure with respect to a company's critical accounting policies, the judgments and uncertainties that affect a company's application of those policies, and the likelihood that materially different amounts would be reported under different conditions and using different assumptions. Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. Certain 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 December 31, 2004, we wrote down our investments in non-related companies to nil. At December 31, 2003, all of our investments in non-related companies totaling $45,669 were accounted for using the cost method. Accounting for an investment under either the equity or cost method has no impact on evaluation of impairment of the underlying investment; under either method, impairment losses are recognized upon evidence of permanent losses of value. 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, 2004, 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 SFAS No. 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. ITEM 7. FINANCIAL STATEMENTS THINKPATH INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004 AND 2003 TOGETHER WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (AMOUNTS EXPRESSED IN US DOLLARS) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF THINKPATH INC. We have audited the accompanying consolidated balance sheets of Thinkpath Inc. (incorporated in Ontario) as of December 31, 2004 and 2003 and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the years ended December 31, 2004 and 2003. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Thinkpath Inc. as of December 31, 2004 and 2003 and the consolidated results of its operations and its cash flows for each of the years ended December 31, 2004 and 2003 in conformity with generally accepted accounting principles in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(a) to the consolidated financial statements, the Company has suffered recurring losses from operations and has recurring negative working capital that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Should the company be unable to continue as a going concern, certain assets and liabilities will have to be adjusted to their liquidated values. Since the accompanying consolidated financial statements have not been prepared and audited in accordance with generally accepted accounting principles and standards in Canada, they may not satisfy the reporting requirements of Canadian statutes and regulations. Schwartz Levitsky Feldman LLP Chartered Accountants Toronto, Ontario, Canada April 12, 2005 F-1 THINKPATH INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 2004 2003 ---- ---- $ $ ASSETS CURRENT ASSETS Cash 180,121 483,443 Accounts receivable 2,243,513 1,766,061 Prepaid expenses 88,403 128,612 ---------- ---------- 2,512,037 2,378,116 PROPERTY AND EQUIPMENT 494,003 1,182,751 GOODWILL 3,748,732 3,748,732 INVESTMENT IN NON-RELATED COMPANIES -- 45,669 OTHER ASSET 61,562 53,321 ---------- ---------- 6,816,334 7,408,589 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. F-2 THINKPATH INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 2004 2003 ---- ---- $ $ LIABILITIES CURRENT LIABILITIES Receivable Discount Facility 723,995 1,128,444 Accounts payable 1,257,799 2,650,783 Current portion of long-term debt 85,099 279,800 Current portion of notes payable -- 859,936 12% Convertible Debentures 566,653 215,558 ----------- ----------- 2,633,546 5,134,521 LONG-TERM DEBT 182,837 13,176 ----------- ----------- 2,816,383 5,147,697 =========== =========== COMMITMENTS AND CONTINGENCIES (NOTE 20) STOCKHOLDERS' EQUITY CAPITAL STOCK 49,531,299 43,576,292 DEFICIT (44,204,935) (39,999,711) ACCUMULATED OTHER COMPREHENSIVE LOSS (1,326,413) (1,315,689) ----------- ----------- 3,999,951 2,260,892 ----------- ----------- 6,816,334 7,408,589 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-3 THINKPATH INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 2004 2003 ---- ---- $ $ REVENUE 12,623,743 10,817,667 COST OF SERVICES 8,138,516 7,344,114 ------------- ----------- GROSS PROFIT 4,485,227 3,473,553 ------------- ----------- EXPENSES Administrative 2,989,086 2,923,813 Selling 1,411,352 1,152,311 Depreciation and amortization 524,618 665,143 Write down of property and equipment 268,558 -- Debt forgiveness (1,139,111) -- ------------- ----------- 4,054,503 4,741,267 INCOME (LOSS) FROM CONTINUING OPERATIONS 430,724 (1,267,714) Write off of investment in non-related companies (45,669) -- ------------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES 385,055 (1,267,714) Interest Charges 4,373,928 7,994,211 ------------- ----------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (3,988,873) (9,261,925) Income Taxes 17,870 30,165 ------------- ----------- LOSS FROM CONTINUING OPERATIONS (4,006,743) (9,292,090) INCOME (LOSS) FROM DISCONTINUED OPERATIONS (INCLUDING GAIN ON DISPOSAL OF $190,627 IN 2003) (198,481) 258,462 ------------- ----------- NET LOSS (4,205,224) (9,033,628) ============= =========== WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING BASIC AND DILUTED 5,646,085,499 719,412,600 ============= =========== LOSS FROM CONTINUING OPERATIONS PER WEIGHTED AVERAGE COMMON STOCK BASIC AND DILUTED (0.00) (0.01) ============= =========== The accompanying notes are an integral part of these consolidated financial statements. F-4 THINKPATH INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 2004 AND 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 2,368,413,224 901,891 -- convertible debentures Interest on 12% senior secured 153,405,397 142,875 -- convertible debentures Debt settled through the issuance 16,997,854 449,333 -- of common stock Common stock and warrants issued for 10,980,000 226,500 -- services Warrants issued for cash 121,184,669 1,241,514 -- Beneficial conversion on issuance of -- 7,247,145 -- convertible debt -------------- ---------- ----------- ---------- Balance as of December 31, 2003 2,737,239,187 43,576,292 (39,999,711) (1,315,689) ============== ========== =========== ========== Net loss for the year -- -- (4,205,224) (4,205,224) ---------- Other comprehensive loss, net of tax: Foreign currency translation (10,724) (10,724) ---------- Comprehensive loss (4,215,948) ========== Conversion of 12% senior secured 9,603,054,463 379,906 -- convertible debentures Interest on 12% senior secured 634,917,670 44,813 -- convertible debentures Common stock and warrants 250,197,488 175,336 -- issued for services Warrants issued for cash 377,053,570 1,548,120 -- Beneficial conversion on -- 3,806,832 -- issuance of convertible debt -------------- ---------- ----------- ---------- Balance as of December 31, 2004 13,602,462,378 49,531,299 (44,204,935) (1,326,413) ============== ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-4 THINKPATH INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS)
2004 2003 ---- ---- $ $ Cash flows from operating activities Net loss (4,205,224) (9,033,628) ---------- ---------- Adjustments to reconcile net loss to net cash used in operating activities: Amortization 568,069 716,781 Beneficial conversion on issuance of convertible debt 3,806,832 7,247,145 Interest on 12% senior secured convertible debentures 44,813 142,875 Original issuance discount 175,000 -- Loss on disposition -- 167,802 Write down of property and equipment 414,212 -- Write off of investment in non-related companies 45,669 -- Gain on disposal of IT Recruitment division assets -- (190,627) Debt forgiveness (1,139,111) (30,565) Decrease (increase) in accounts receivable (455,092) 1,000,368 Decrease in prepaid expenses 64,839 72,115 Decrease in accounts payable (920,256) (831,697) Decrease in long-term receivable -- 57,775 Decrease in deferred revenue -- (163,754) Common stock and warrants issued for services 175,336 226,500 Accounts payable settled with common stock -- 449,333 ---------- ---------- Net cash used in operating activities (1,424,913) (169,577) ---------- ---------- Cash flows from investing activities Purchase of property and equipment (198,152) (163,549) Proceeds on disposal of IT Recruitment division assets -- 146,406 ---------- ---------- Net cash used in investing activities (198,152) (17,143) ---------- ---------- Cash flows from financing activities Repayment of receivable discount facility (419,163) (1,379,930) Repayment of notes payable (242,044) (35,021) Repayment of long-term debt (117,304) (193,767) Proceeds from issuance of common stock 229,121 90,889 Proceeds from issuance of debentures and warrants 1,875,000 2,075,000 ---------- ---------- Net cash provided by financing activities 1,325,610 557,171 ---------- ---------- Effect of foreign currency exchange rate changes (5,867) (1,026) ---------- ---------- Net increase (decrease) in cash (303,322) 369,425 Cash Beginning of year 483,443 114,018 ---------- ---------- End of year 180,121 483,443 ========== ========== SUPPLEMENTAL CASH ITEMS: Interest paid 572,044 788,260 ========== ========== Income taxes paid 20,576 29,720 ========== ========== SUPPLEMENTAL NON-CASH ITEMS: Common shares issued for liabilities -- 449,333 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-5 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (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 recurring operating losses and working capital deficiencies. At December 31, 2004, the Company had a working capital deficiency of $121,509 and a deficit of $43,757,637 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 December 31, 2004, the balance on the receivable discount facility was $723,995. 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 April 12, 2005, 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. 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. F-6 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 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 acquired prior to June 30, 2001 and accounted for by the pooling of interest method, earnings have been included for all periods reported. All significant inter-company accounts and transactions have been eliminated. 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 amounts approximates fair values 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 (loss) for the year by the weighted average number of common stock outstanding during the year, assuming that all convertible preferred stock, stock options and warrants as described in note 13 were converted or exercised. Stock conversions, stock options and warrants which are anti-dilutive are not included in the calculation of diluted net income (loss) per weighted average common stock. 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. 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 F-7 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 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 were 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 of its Canadian companies in Canadian dollars (their functional currency). The financial statements of the Canadian companies are converted to US dollars as the Company has elected to report in US dollars consistent with Regulation S-X, Rule 3-20. The translation method used is the current rate method which is the method mandated by SFAS No. 52 where the functional currency is the foreign currency. Under the current method all assets and liabilities are translated at the current rate, stockholders' equity accounts are translated at historical rates and revenues and expenses are translated at average rates for the year. Due to the fact that items in the financial statements are being translated at different rates according to their nature, a translation adjustment is created. This translation adjustment has been included in accumulated other comprehensive income. Gains and losses on foreign currency transactions are included in financial expenses. 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 and these differences could be material. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become known. F-8 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 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 No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144, effective January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's results of operations or financial condition. 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) Leases Leases are classified as either capital or operating. Those leases that transfer substantially all the benefits and risks of ownership of property to the Company are accounted for as capital leases. All other leases are accounted for as operating leases. Capital leases are accounted for as assets and are fully amortized on a straight-line basis over the lesser of the period of expected use of the assets or the lease term. Commitments to repay the principal amounts arising under capital lease obligations are included in current liabilities to the extent that the amount is repayable within one year, otherwise the principal is included in long term debt obligations. The capitalized lease obligation reflects the present value of future lease payments. The financing element of the lease payments is charged to interest expense in the consolidated statement of operations over the term of the lease. Operating lease costs are charged to administrative expense in the consolidated statement of operations on a straight-line basis. 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. 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 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The amendments set forth in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 with certain exceptions. The Company does not believe that the adoption of SFAS No. 149 will have a material impact, if any, on its results of operations or financial position. F-9 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This statement specifies that certain instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 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 SFAS No. 150 by reporting the cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits entities from restating financial statements for earlier years presented. The Company does not believe that the adoption of SFAS No. 150 will have a material impact, if any, on its results of operations or financial position. In December 2003, the FASB issued SFAS No. 132 (Revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106". This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS No. 132 (Revised) will retain and revise the disclosure requirements contained in the original SFAS No. 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS No. 132 (Revised) generally is effective for fiscal years ending after December 15, 2003. The Company does not believe that the adoption of SFAS No. 132 (Revised) will have a material impact, if any, on its results of operations or financial position. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43". This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS No. 151 will have a material impact, if any, on its results of operations or financial position as it does not have inventory. In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67", which references the financial accounting and reporting guidance for real estate time-sharing transactions in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions". SFAS No. 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. The Company does not believe that the adoption of SFAS No. 152 will have a material impact, if any, on its results of operations or financial position. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29", effective for nonmonetary asset exchanges occurring in the fiscal year beginning January 1, 2006. This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. The Company does not believe that the adoption of SFAS No. 153 will have an impact, if any, on its results of operations or financial position. In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-based Payment". This statement requires employers to expense costs related to share-based payment transactions with employees. With limited exceptions, SFAS No. 123 (Revised) requires that the fair value of share-based payments to employees be expensed over the period service is received. SFAS No. 123 (Revised) becomes mandatorily effective on July 1, 2005. The Company intends to adopt this standard using the modified retrospective method of transition. This method requires that issued financial statements be restated based on the amounts previously calculated and reported in the pro forma footnote disclosures required by SFAS No. 123. SFAS No. 123 (Revised) allows the use of both closed form models (e.g., Black-Scholes Model) and open form models (e.g., lattice models) to measure the fair value of the share-based payment as long as that model is capable of incorporating all of the substantive characteristics unique to share-based awards. In accordance with the transition provisions of SFAS No. 123 (Revised), the expense attributable to an award will be measured in accordance with the company's measurement model at that award's date of grant. The Company believes the pro forma disclosures in Note 3 (c) provide an appropriate short-term indicator of the level of expense that will be recognized in accordance with SFAS No. 123 (Revised). However, the total expense recorded in future periods will depend on several variables, including the number of shared-based awards that vest and the fair value of those vested awards. u) Advertising Costs Advertising costs are expensed as incurred. F-10 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 3. STOCK OPTION PLANS WEIGHTED AVERAGE EXERCISE OPTIONS PRICE ------- ----- a) Options outstanding at December 31, 2002 1,110,492 Options forfeited during the year (13,000) 3.19 Options expired during the year (181,492) 2.10 --------- Options outstanding at December 31, 2003 916,000 ========= Options forfeited during the year (6,000) 3.19 Options expired during the year (350,500) 3.04 --------- ---- Options outstanding at December 31, 2004 559,500 ========= Options exercisable December 31, 2003 916,000 1.32 Options exercisable December 31, 2004 559,500 1.22 Options available for future grant December 31, 2003 8,167,000 Options available for future grant December 31, 2004 7,810,500 b) Range of Exercise Prices at December 31, 2004 Options Weighted Outstanding Weighted Average Average Average Outstanding Remaining Exercise Options Exercise Options Life Price Exercisable Price ------- ---- ----- ----------- ----- $3.25 42,000 0.41 3.25 42,000 3.25 $2.78 - 3.19 82,500 0.22 2.97 82,500 2.97 $0.67-$0.70 435,000 1.31 0.70 435,000 0.70 c) Pro-forma net income At December 31, 2004, the Company has four 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. 2004 2003 ---- ---- Net loss as reported (4,205,224) (9,033,628) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects (1,895) (101,581) ---------- ---------- Pro forma net loss (4,207,119) (9,135,209) ========== ========== Loss per share: Basic and diluted loss per share, as reported (0.00) (0.01) ========== ========== Pro forma loss per share (0.00) (0.01) ========== ========== F-11 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) d) Black Scholes Assumptions The fair value of each option grant used for purposes of estimating the pro forma amounts summarized above is estimated on the date of grant using the Black-Scholes option price model with the weighted average assumptions shown in the following table: 2001 GRANTS ----------- Risk free interest rates 4.76% Volatility factors 100% Weighted average expected life 4.90 years Weighted average fair value per share .74 Expected dividends -- There were no option grants in the year ended December 31, 2004. There were no option grants in the year ended December 31, 2003. 4. ACCOUNTS RECEIVABLE 2004 2003 ---- ---- $ $ Accounts receivable 2,423,161 1,952,908 Less: Allowance for doubtful accounts (179,648) (186,847) ---------- ---------- 2,243,513 1,766,061 ========== ========== Allowance for doubtful accounts Balance, beginning of year 186,847 236,793 Provision 25,738 44,359 Recoveries (32,937) (94,305) ---------- ---------- Balance, end of year 179,648 186,847 ========== ========== 5. PROPERTY AND EQUIPMENT
2004 2003 -------------------------------------- --------- ACCUMULATED COST AMORTIZATION NET NET $ $ $ $ Furniture and equipment 167,212 131,967 35,245 162,544 Computer equipment and software 3,399,311 2,950,538 448,773 1,014,540 Leasehold improvements 40,978 30,993 9,985 5,667 --------- --------- ------- --------- 3,607,501 3,113,498 494,003 1,182,751 ========= ========= ======= ========= Assets under capital lease 234,255 143,566 90,689 25,464 ========= ========= ======= =========
Amortization of property and equipment for the year ended December 31, 2004 amounted to $568,069 including amortization of assets under capital lease of $51,278. Amortization of property and equipment for the year ended December 31, 2003 amounted to $716,781 including amortization of assets under capital lease of $67,875. 6. INVESTMENT IN NON-RELATED COMPANIES Investment in non-related companies is represented by the following: 2004 2003 ---- ---- $ $ Conexys -- 1 Digital Cement -- 45,668 ---- ------ Total -- 45,669 ==== ====== F-12 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 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. 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. 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. On October 9, 2003, Conexys voluntarily withdrew its listing from the Bermuda Stock Exchange and the company was wound up. At December 31, 2004, the Company wrote off its investment in Conexys of $1. 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 an 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 as per an agreement dated February 14, 2003 establishing the terms for the early repayment of the note and the requirement of the Company to produce certain documentation relating to its software. At December 31, 2004, the Company wrote off its investment in Digital Cement as it was determined that the Company did not fulfill certain obligations required of it as part of the February 14, 2003 agreement and ownership of the shares were transferred back to 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:
2004 2003 ---- ---- ACCUMULATED ACCUMULATED IMPAIRMENT COST AMORTIZATION LOSSES NET NET ------------------------------------------------------------------ $ $ $ $ $ IT Recruitment (Systemsearch Consulting 448,634 303,337 145,297 -- -- Services) 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 ========= ======= ========= ========= =========
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, 2004 and 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. F-13 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 8. OTHER ASSET 2004 2003 ---- ---- $ $ Cash surrender value of life insurance 61,562 53,321 ------ ------ Total 61,562 53,321 ====== ====== Amortization of other assets amounted to nil for the years ended December 31, 2004 and 2003. 9. RECEIVABLE DISCOUNT FACILITY i) December 31, 2004 At December 31, 2004, the Company had a receivable discount facility in the amount of $723,995 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 $1,128,444 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 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. On November 12, 2004, 167,244,016 of these warrants were repriced from $.00025 to $.00020 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 F-14 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 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 November 12, 2004, 840,000,000 of these warrants were repriced from $.00025 to $.00020 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. On May 20, 2004 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 November 12, 2004, 1,529,411,765 of these warrants were repriced from $.00025 to $.00020 per share. 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 $.00028 and $.00025 per share, respectively. 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 November 12, 2004, the Company sold an additional $875,000 in convertible debentures with original issue discount (OID) together with 4,687,500,000 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. The proceeds of $2,050,000 received by the Company during the year ended December 31, 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 $1,319,000. At December 31, 2004, the value of the beneficial conversion feature on all issued convertible debentures was determined to be $3,654,507 which was credited to paid in capital and charged to earnings as interest expense. F-15 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 11. LONG-TERM DEBT i) December 31, 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. 2004 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 227,951 259,356 Various capital leases with various payment terms and interest rates 39,985 33,620 ------- ------- 267,936 292,976 Less: current portion 85,099 279,800 ------- ------- Total 182,837 13,176 ======= ======= b) Future principal payments obligations as at December 31, 2004, were as follows: 2005 85,099 2006 110,254 2007 72,583 2008 -- 2009 -- -------- $267,936 ======== c) Interest expense related to long-term debt was $69,037 for the year ended December 31, 2004. Interest expense related to long-term debt was $119,339 for the year ended December 31, 2003. 12. NOTES PAYABLE a) The Company had a note payable to Roger Walters in the amount of $224,000. Principal payments of $4,000 were to be made monthly starting September 1, 2002 until August 1, 2007. The note was subordinated to Morrison Financial Services Limited and to the 12% Senior Secured Convertible Debenture holders. The Company did not make any principal payments to Mr. Walters since December 2002 and was in default of the loan agreement. As a result of the default, the principal balance bore interest at 12% per annum until payment was made and the note was due on demand. The entire note payable was reclassified as current at December 31, 2003. On November 12, 2004, the Company reached a settlement with Roger Walters with respect to the note payable. 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 $239,741 which is included in debt forgiveness in the consolidated statement of operations. F-16 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) b) The Company had a note payable to Denise Dunne-Fushi in the amount of $635,936. 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 note was secured under a general security agreement and was subordinated to Morrison Financial Services Limited and to the 12% Senior Secured Convertible Debenture holders. Although the Company made family health benefit and vehicle lease payments in the amount of $6,444, it did not make any principal payments and was therefore in default of the loan agreement. As a result of the default, Ms. Dunne-Fushi had the option of enforcing the security she held and therefore the entire note payable was reclassified as current at December 31, 2003. On November 12, 2004, the Company reached a settlement with Denise Dunne-Fushi with respect to the note payable in the amount of $629,492. 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 $427,492. The Company has accounted for its settlements as troubled debt restructuring. Accordingly, the Company has recognized a gain based upon the difference between the total carrying value of the original debt (with any accrued interest) and the cash payments made to Walters and Dunne. The gain on the settlement, included in debt forgiveness in the consolidated statement of operations is as follows: WALTERS DUNNE ------- ----- $ $ Old Debt Principal balance 224,000 629,492 Accrued interest 49,341 -- -------- -------- Carrying value 273,341 629,492 Cash payment (33,600) (202,000) ======== ======== Gain on settlement 239,741 427,492 ======== ======== 2004 2003 ---- ---- $ $ Note Payable to Roger Walters -- 224,000 Note Payable to Denise Dunne -- 635,936 -------- -------- -- 859,936 Less: current portion -- 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. F-17 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (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 $2,515,000. During the year ended December 31, 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 year ended December 31, 2004, the Company issued 377,053,570 shares of its common stock to the 12% Senior Secured Convertible Debenture Holders on the exercise of warrants. During the year ended December 31, 2004, the Company issued 10,237,972,133 shares of its common stock upon the conversion of 12% Senior Secured Convertible Debentures in the amount of $1,025,400. c) Warrants For each of the years presented, the following warrants for the purchase of one common share per warrant at the following prices per common share and expiry dates were outstanding: Number of warrants 2004 2003 Exercise price per share Expiry date -------------------------------------------------------------------------- -- 475,000 $3.24 2004 975,000 975,000 $3.25 to $3.71 2005 279,934 279,934 $2.46 2005 440,645 440,645 $.63 to $1.00 2005 100,000 100,000 $1.50 2006 1,063,484 1,063,484 $.55 2006 6,000,000 6,000,000 $.08 2007 4,620,000 4,620,000 $.04 2009 26,285,714 26,285,714 $.0175 2009 -- 11,428,571 $.00075 2009 -- 5,625,000 $.00040 2009 1,142,857 1,142,857 $.00025 2009 21,428,571 21,428,571 $.0175 2010 14,285,714 14,285,714 $.00875 2010 166,666,667 346,571,428 $.00075 2010 -- 11,999,999 $.0004 2010 45,414,297 45,414,297 $.00025 2010 167,244,016 233,910,683 $.0002 2010 250,000,000 -- $.0004 2011 257,142,857 -- $.00028 2011 1,876,941,177 -- $.00025 2011 6,216,911,765 -- $.0002 2011 -------------------------------------------------------------------------- 9,056,942,698 732,046,897 -------------------------------------------------------------------------- F-18 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) A summary of changes to number of issued warrants is as follows: Outstanding at December 31, 2002 69,864,776 Issued 783,366,790 Exercised (121,184,669) Expired -- ------------- Outstanding at December 31, 2003 732,046,897 Issued 8,702,424,370 Exercised (377,053,569) Expired (475,000) ------------- Outstanding at December 31, 2004 9,056,942,698 ============= During the year ended December 2003, the Company repriced 11,428,571 warrants issued in 2002 from $.0175 to $.00137 per share, 5,625,000 warrants issued in 2002 from $.0175 to $.0004 per share and 1,142,857 warrants issued in 2002 from $.00075 to $.00025 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, 31,428,571 of these warrants were repriced from $.0175 to $.00875 per share. On October 14, 2003, 241,652,507 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 November 12, 2004, 167,244,016 of these warrants were repriced from $.00025 to $.0002 per share. On January 8, 2004, the Company 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 for a period of seven years from closing 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 November 12, 2004, 840,000,000 of these warrants were repriced from $.00025 to $.0002 per share. On March 29, 2004 the Company issued 250,000,000 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 $0.0004 per share. On May 20, 2004 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 November 12, 2004, 1,529,411,765 of these warrants were repriced from $.00025 to $.0002 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 purchase prices of $.00028 and $.00025 per share, respectively. On November 12, 2004, the Company issued 4,687,500,000 warrants to holders of the Original Discount 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 $.0002 per share. d) Stock Options The Company's Board of Directors and shareholders have approved the adoption of the 1998 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock Option Plan, and 2002 Stock Option Plan, pursuant to which 8,370,000 options may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide their skills and expertise to the Company The plans are administrated by the Compensation Committee of the Board of Directors, which determine among other things, those individuals who shall receive options, the time period during which the options may be partially or fully exercised, the number of common stock to be issued upon the exercise of the options and the option exercise price. The plans are effective for a period of ten years. F-19 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 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: 2004 2003 ---- ---- $ $ Losses available to offset future income taxes 4,678,000 4,046,000 Share issue costs 357,000 550,000 Property and equipment 877,000 558,000 ------- ------- 5,912,000 5,154,000 Less: valuation allowance 5,912,000 5,154,000 --------- --------- -- -- 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: 2004 2003 ---- ---- $ $ Amounts calculated at Federal and Provincial statutory rates (1,503,170) (3,704,770) ---------- ---------- Permanent differences 763,040 1,986,935 Valuation allowance 758,000 1,748,000 ---------- ---------- 1,521,040 3,734,935 ---------- ---------- Current income taxes 17,870 30,165 ========== ========== Issue expenses totaling approximately $900,000 may be claimed at the rate of 20% per year until 2005. To the extent that these expenses create a loss, which are available to be carried forward for seven years for losses up to and including 2003 and for ten years commencing in 2004 from the year the loss is incurred. The Company has not reflected the benefit of utilizing non-capital losses totaling approximately $11,700,000 nor a capital loss totaling $750,000 in the future as a deferred tax asset as at December 31, 2004. As at the completion of the December 31, 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. F-20 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 15. COMPREHENSIVE LOSS 2004 2003 ---- ---- $ $ Net loss (4,205,224) (9,033,628) Other comprehensive loss Foreign currency translation adjustments (10,724) (238,168) ---------- ---------- Comprehensive loss (4,215,948) (9,271,796) ========== ========== The foreign currency translation adjustments are not currently adjusted for income taxes since the Company is located in Canada and the adjustments relate to the translation of the financial statements from Canadian dollars into United States dollars done only for the convenience of the reader. 16. 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 years ended December 31, 2004 and 2003. The net loss for the year ended December 31, 2004 was $17,000 compared to net income of $13,000 in 2003. Included in the loss for 2004 is a write down of property and equipment in the amount of $14,000. 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. 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 year ended December 31, 2004 and $160,000 in 2003. The net loss from the training division for the year ended December 31, 2004 was $180,000 and $20,000 in 2003. Included in the loss for 2004 is a write down of property and equipment in the amount of $130,000. Effective June 27, 2003, the Company signed an agreement with Brainhunter.com Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT recruitment division for a nominal amount of cash and the assumption of all employee liabilities. The gain on disposal of $190,627 has been reflected in the Income (loss) from discontinued operations in 2003. Of the $190,627, $146,627 was received in cash on closing with the balance of $44,000 due in a promissory note payable by June 27, 2004. As of April 12, 2005, the note remains outstanding, however, the Company believes that it is collectable. 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 year ended December 31, 2004 and $1,460,000 in 2003. Net income from the IT recruitment division for the year ended December 31, 2004 was nil and $75,000 in 2003. 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: 2004 2003 $ $ Revenues -- 1,622,699 -------- ---------- Income (loss) from operations before income taxes (195,775) 67,390 Provision (recovery) for Income Taxes 2,706 (445) Gain on disposal of IT Recruitment division assets -- 190,627 -------- ---------- Income (loss) from discontinued operations (198,481) 258,462 ======== ========== F-21 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 17. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The Company issued common shares and warrants for the following: 2004 2003 ----------- ----------- $ $ Services rendered 175,336 226,500 Accounts payable -- 449,333 ----------- ----------- 175,336 675,833 =========== =========== 18. SEGMENTED INFORMATION a) Sales by Geographic Area 2004 2003 ----------- ----------- $ $ Canada 890,337 833,281 United States of America 11,733,406 9,984,386 ----------- ----------- 12,623,743 10,817,667 b) Net Income (Loss) by Geographic Area 2004 2003 ----------- ----------- $ $ Canada (4,958,885) (8,953,301) United States of America 753,661 (80,327) ----------- ----------- (4,205,224) (9,033,628) =========== =========== c) Identifiable Assets by Geographic Area 2004 2003 ----------- ----------- $ $ Canada 499,483 1,369,904 United States of America 6,316,851 6,038,685 ----------- ----------- 6,816,334 7,408,589 =========== =========== d) Revenue and Gross Profit by Operating Segment 2004 2003 ----------- ----------- $ $ Revenue Tech Pubs and Engineering 12,404,556 10,379,327 IT Documentation 219,187 438,340 ----------- ----------- 12,623,743 10,817,667 Gross Profit Tech Pubs and Engineering 4,438,088 3,378,519 IT Documentation 47,139 95,034 ----------- ----------- 4,485,227 3,473,553 =========== =========== F-22 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) e) Revenues from Major Customers and Concentration of Credit Risk The consolidated entity had the following revenues from major customers: For the year ended December 31, 2004, one customer had sales of $3,952,397 representing approximately 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 operations, of both basic and diluted earnings per share. 2004 2003 ---- ---- $ $ NUMERATOR Loss from continuing operations (4,006,743) (9,292,090) Income (loss) from discontinued operations (198,481) 258,462 ------------- ----------- Net loss (4,205,224) (9,033,628) ============= =========== DENOMINATOR Weighted Average common stock outstanding 5,646,085,499 719,412,600 ============= =========== Basic and diluted loss per common share from continuing operations (0.00) (0.01) ============= =========== Basic and diluted loss per common share after discontinued operations (0.00) (0.01) ============= =========== Average common stock outstanding 5,646,085,499 719,412,600 Average common stock issuable -- -- ------------- ----------- Average common stock outstanding assuming dilution 5,646,085,499 719,412,600 ============= =========== 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 April 12, 2005, the Company has issued a total of 15,327,100,555 shares of its common stock to the convertible debenture holders upon the conversion of $3,862,300 of debentures and accrued interest. F-23 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 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 December 31, 2004, for the next five years are as follows: 2005 $389,795 2006 171,326 2007 171,326 2008 87,189 2009 45,120 Thereafter 3,760 -------- $868,516 ======== The lease commitments do not include an operating lease for premises that the Company is currently sub leasing to the purchaser of the United States training division. If the purchaser was to default on payment or abandon the premises, the Company would be liable for annual payments of $282,096 expiring August 31, 2006. 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 $44,597 which expired November 30, 2004. b) On November 12, 2004, the Company reached a settlement with SITQ National Inc. ("SITQ"), a former landlord, of the action commenced at Ontario, Canada 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. Included in debt forgiveness in the statement of operations is the amount of $471,878 related to this settlement. 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 and ending December, 2004. 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. F-24 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) 21. SUBSEQUENT EVENTS On January 12, 2005, Thinkpath renewed its receivable discount facility with Morrison Financial Services Limited for a period of one year and reduced its interest rate to 24% per annum from 30% per annum. Subsequent to year-end, the Company signed an Amendment Agreement to the Share Purchase Agreement dated December 23, 2004 with respect to the purchase of TBM Technologies Inc., an Ontario Corporation which provides design engineering services. Pursuant to the Share Purchase Agreement, the Company purchased TBM for approximately $250,000 payable in shares of the Company's common stock, no par value. The Share Purchase Agreement also provided for price protection for the vendors for a period of two years from issuance. In the event that the vendors sought to sell their shares in an open market transaction within the two years following closing and the bid price was less than the price of the shares on issuance, the Company would be obligated to issue additional shares of unregistered common stock with a value equal to the difference up to a maximum of $250,000. Pursuant to the Amendment Agreement, the parties agreed to a put option, whereby the Company has the right at any time between the twelfth and fifteenth month anniversary of the effective date, to exercise its right to purchase the shares at a set price of $250,000. The parties also agreed that the effective date of the transaction be changed from November 1, 2004 to January 17, 2005. On January 31, 2005, the Company held its Annual General Meeting of Shareholders to elect the Board of Directors for the ensuing year, ratify the appointment of the Company's independent auditors, and to vote upon the proposal to approve certain executive compensation. The Company failed to achieve a quorum and the meeting was adjourned and a new meeting date has been set for April 22, 2005. At the Annual General Meeting of Shareholders to be held on April 22, 2005, the shareholders will elect the Board of Directors for the ensuing year, ratify the appointment of the Company's independent auditors, vote upon the proposal to approve certain executive compensation, vote upon the proposal to approve a reverse stock split of 5,000 to 1 of the Company's outstanding common shares and ratify the adoption of the Company's 2005 Stock Option Plan. Subsequent to December 31, 2004, the Company has issued an additional 6,824,914,000 shares of its common stock to the convertible debenture holders upon the conversion of $321,900 of debentures and accrued interest. 22. DEBT FORGIVENESS Debt forgiveness is comprised of the following: 2004 2003 ---- ---- $ $ Note payable to R. Walters (Note 12) 239,741 -- Note payable to D. Dunne-Fushi (Note 12) 427,492 -- Settlement with SITQ National Inc. (Note 20) 471,878 -- --------- ---- 1,139,111 -- ========= ==== 23. 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 Although the Company had one significant customer representing 31% of total revenue, the Company continues to actively expand its customer base. The Company's revenue is derived from customers of various industries and geographic locations reducing its credit risk. Where exposed to credit risk, the Company mitigates this risk by routinely assessing the financial strength of its customers, establishing billing arrangements and monitoring the collectibility of the account on an ongoing basis. c) Interest Risk The long-term debt bears interest rates that approximate the interest rates of similar loans. Consequently, the long-term debt risk exposure is minimal. F-25 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004 AND 2003 (AMOUNTS EXPRESSED IN US DOLLARS) d) Fair Value of Financial Instruments The carrying values of the accounts receivable and of the accounts payable on acquisition of subsidiary company approximates their fair values because of the short-term maturities of these items. The carrying amount of the long-term assets approximates the fair value of these assets. The fair value of the Company's long-term debt is based on the estimated quoted market prices for the same or similar debt instruments. The fair value of the long-term debt approximates the carrying value. 24. COMPARATIVE FIGURES Certain figures in the December 31, 2003 financial statements have been reclassified to conform with the basis of presentation used at December 31, 2004. F-26 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have had no changes in or disagreements with our accountants. ITEM 8A. 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 90 days prior to the filing date of this Form 10-KSB filed for the year ended December 31, 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. ITEM 8B. OTHER INFORMATION PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT Our officers and directors, and further information concerning each of them, are as follows as at the date of this Annual Report on Form 10-K: Name Age Position with the Company Position Held Since ---- --- ------------------------- ------------------- Declan A. French 60 Chairman of the Board of 1994 Directors, Chief Executive Officer and President Kelly Hankinson 35 Chief Financial Officer 2000 Secretary/Treasurer Arthur S. Marcus* 40 Director 2000 Lloyd MacLean 51 Director 2003 Patrick Power 44 Director Nominee 2004 *Mr. Marcus informed the Company on December 15, 2004 that he does not intend to stand for re-election to the Board of Directors. Set forth below is a biographical description of each of our officers, directors and director nominees based on information supplied by each of them: DECLAN A. FRENCH has served as our Chairman of the Board of Directors, Chief Executive Officer and President since our inception in February 1994. Prior to founding Thinkpath, Mr. French was President and Chief Executive Officer of TEC Partners Ltd., an information technology recruiting firm in Toronto, Canada. Mr. French has a diploma in Psychology and Philosophy from the University of St. Thomas in Rome, Italy. KELLY HANKINSON has served as our Chief Financial Officer since May 2000, as a member of our Board of Directors from June 2000 until February 14, 2003 and as Secretary and Treasurer since March 2001. Ms. Hankinson served as our Vice President, Finance and Administration and Group Controller from February 1994 to May 2000. Ms. Hankinson has a Masters Degree and a Bachelors Degree from York University. Ms. Hankinson resigned from the Board of Directors on February 14, 2003. ARTHUR S. MARCUS has served on our Board of Directors since April 2000. Mr. Marcus is a partner at the New York law firm of Gersten, Savage, Kaplowitz, Wolf and Marcus, LLP, our United States securities counsel. Mr. Marcus joined Gersten, Savage & Kaplowitz, LLP in 1991 and became a partner in 1996. Mr. Marcus specializes in the practice of United States Securities Law and has been involved in approximately 50 initial public offerings and numerous mergers and acquisitions. Mr. Marcus received a Juris Doctorate from Benjamin N. Cardozo School of Law in 1989. LLOYD MACLEAN has served on our Board of Directors since February 14, 2003. Mr. MacLean served as our Chief Financial Officer and a Director from September 1997 until May 2000, at which time he departed to pursue other business opportunities. Mr. MacLean is the sole officer and director of Globe Capital Corporation. From 1996 to 1997, Mr. MacLean was Vice-President and Chief Financial Officer of ING Direct Bank of Canada. From 1994 until 1996, he was Vice-President and Chief Financial Officer of North American Trust, Inc., where he also served as a Vice President from 1990 until 1994. Mr. MacLean has an MBA from Harvard University and is a member of the Canadian Institute of Chartered Accountants. PATRICK POWER, director nominee, is Director of Business Development for Thinkpath Training LLC, a Microsoft partner for Learning Solutions in New York. In 1997, Mr. Power opened the New York IT recruitment office of Thinkpath Inc. where he served as Business Development Manager from 1997 until 2001. In 2001 Mr. Power was transferred to Thinkpath's New York training division. In 2002 Thinkpath sold this division, to Thinkpath Training, LLC, a privately held independent company. Mr. Power has a National Diploma in Civil Engineering (NDEA) from The Waterford Institute of Technology in Ireland. Mr. Power is the nephew of Mr. French, our Chief Executive Officer. COMMITTEES OF THE BOARD OF DIRECTORS In July 1998, the Company's Board of Directors formalized the creation of a Compensation Committee, which is currently comprised of Arthur S. Marcus, Lloyd MacLean and Patrick Power. The Compensation Committee has: (i) full power and authority to interpret the provisions of, and supervise the administration of, the Company's 1998 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock Option Plan and 2002 Stock Option Plan, as well as any stock option plans adopted in the future; and (ii) the authority to review all compensation matters relating to the Company. The Compensation Committee has not yet formulated compensation policies for senior management and executive officers. However, it is anticipated that the Compensation Committee will develop a company-wide program covering all employees and that the goals of such program will be to attract, maintain, and motivate the Company's employees. It is further anticipated that one of the aspects of the program will be to link an employee's compensation to his or her performance, and that the grant of stock options or other awards related to the price of the shares of our common stock will be used in order to make an employee's compensation consistent with shareholders' gains. It is expected that salaries will be set competitively relative to the information technology and engineering services and consulting industry and that individual experience and performance will be considered in setting such salaries. In July 1998, the Company's Board of Directors also formalized the creation of an Audit Committee, which currently consists of Lloyd MacLean and Patrick Power. The Audit Committee is charged with reviewing the following matters and advising and consulting with the Company's entire Board of Directors with respect thereto: (i) the preparation of the Company's annual financial statements in collaboration with the Company's chartered accountants; (ii) annual review of the Company's financial statements and annual reports; and (iii) all contracts between the Company and the Company's officers, directors and other of the Company's affiliates. The Audit Committee, like most independent committees of public companies, does not have explicit authority to veto any actions of our entire Board of Directors relating to the foregoing or other matters; however, the Company's senior management, recognizing their own fiduciary duty to the Company and the Company's shareholders, is committed not to take any action contrary to the recommendation of the Audit Committee in any matter within the scope of its review. The Company has established an Executive committee, comprised of certain of the Company's executive officers and key employees, which allows for the exchange of information on industry trends and promotes "best practices" among the Company's business units. Currently, the Executive Committee consists of Declan A. French, Kelly Hankinson, and Robert Trick. During the year ended December 31, 2004, the Board of Directors met four times on the following dates: April 13, 2004, May 17, 2004, August 20, 2004 and November 15, 2004 at which all of the directors were present; and acted by written consent in lieu of a meeting three times on the following dates: March 8, 2004, May 26, 2004 and November 12, 2004. During the year ended December 31, 2004, the Compensation Committee met on December 3, 2004, the Audit Committee met on April 14, 2004 and the Executive Committee met monthly. BOARD AUDIT COMMITTEE REPORT The Audit Committee has reviewed and discussed the Company's audited financial statements for the fiscal year ended December 31, 2004 with management and has received the written disclosures and the letter from Schwartz Levitsky Feldman llp, the Company's independent auditors, required by Independence Standards Board Standard No. 1 (Independent Discussions with Audit Committee). The Audit Committee has also discussed with Schwartz Levitsky Feldman llp the Company's audited financial statements for the fiscal year ended December 31, 2004, including among other things the quality of the Company's accounting principles, the methodologies and accounting principles applied to significant transactions, the underlying processes and estimates used by management in its financial statements and the basis for the auditor's conclusions regarding the reasonableness of those estimates, and the auditor's independence, as well as the other matters required by Statement on Auditing Standards No. 61 of the Auditing Standards Board of the American Institute of Certified Public Accountants. Based on these discussions with Schwartz Levitsky Feldman llp and the results of the audit of the Company's financial statements, the Audit Committee members recommended unanimously to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004. The members of the Audit Committee are Lloyd MacLean and Patrick Power. Each of the above named Audit Committee members is an independent director as defined by Rule 4200 (a)(15) of the National Association of Securities Dealers, Inc. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Board of Directors has a Compensation Committee comprised of Arthur S. Marcus, Lloyd MacLean and Patrick Power. Each of Lloyd MacLean and Patrick Power are independent pursuant to Rule 4200 (a)(15) of the National Association of Securities Dealers, Inc. Arthur Marcus is a partner in the Law Firm of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, the Company's outside U.S. securities counsel. BOARD COMPENSATION REPORT EXECUTIVE COMPENSATION POLICY Thinkpath's executive compensation policy is designed to attract, motivate, reward and retain the key executive talent necessary to achieve our business objectives and contribute to our long-term success. In order to meet these goals, Thinkpath's compensation policy for our executive officers focuses primarily on determining appropriate salary levels and providing long-term stock-based incentives. To a lesser extent, Thinkpath's compensation policy also contemplates performance-based cash bonuses. Thinkpath's compensation principles for the Chief Executive Officer are identical to those of Thinkpath's other executive officers. CASH COMPENSATION. In determining its recommendations for adjustments to officers' base salaries for Fiscal 2004, we focused primarily on the scope of each officer's responsibilities, each officer's contributions to Thinkpath's success in moving toward its long-term goals during the fiscal year, the accomplishment of goals set by the officer and approved by the Board for that year, our assessment of the quality of services rendered by the officer, comparison with compensation for officers of comparable companies and an appraisal of our financial position. In certain situations, relating primarily to the completion of important transactions or developments, we may also pay cash bonuses, the amount of which will be determined based on the contribution of the officer and the benefit to Thinkpath of the transaction or development. EQUITY COMPENSATION. The grant of stock options to executive officers constitutes an important element of long-term compensation for the executive officers. The grant of stock options increases management's equity ownership in us with the goal of ensuring that the interests of management remain closely aligned with those of our stockholders. The Board believes that stock options in Thinkpath provide a direct link between executive compensation and stockholder value. By attaching vesting requirements, stock options also create an incentive for executive officers to remain with us for the long term. CHIEF EXECUTIVE OFFICER COMPENSATION. As indicated above, the factors and criteria upon which the compensation of Declan French, our Chief Executive Officer, is based are identical to the criteria used in evaluating the compensation packages of the other executive officers of Thinkpath. The Chief Executive Officer's individual contributions to Thinkpath include his leadership role in establishing and retaining a strong management team, developing and implementing our business plans and attracting investment capital to Thinkpath. In addition, we have reviewed compensation levels of chief executive officers at comparable companies within our industry. RESPECTFULLY SUBMITTED: BY THE MEMBERS OF THINKPATH'S COMPENSATION COMMITTEE ARTHUR MARCUS, LLOYD MACLEAN AND PATRICK POWER INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's By-laws provide that the Company shall indemnify to the fullest extent permitted by Canadian law the Company's directors and officers (and former officers and directors). Such indemnification includes all costs and expenses and charges reasonably incurred in connection with the defense of any civil, criminal or administrative action or proceeding to which such person is made a party by reason of being or having been the Company's officer or director if such person was substantially successful on the merits in his or her defense of the action and he or she acted honestly and in good faith with a view to the Company's best interests, and if a criminal or administrative action that is enforced by a monetary penalty, such person had reasonable grounds to believe his or her conduct was lawful. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted, the Company's directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, the Company has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses, incurred or paid by one of the Company's directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain information regarding compensation paid by us during each of the last three fiscal years to our Chief Executive Officer and to each of our executive officers who earned in excess of $100,000 during the year ended December 31, 2004: SUMMARY COMPENSATION TABLE
Name and Restricted Principal Annual Stock Other Position Year Salary Bonus Awards Options/SARs Compensation -------- ---- ------ ----- ------ ------------ -------------- Declan A. French 2004 150,000 100,000(1) -0- -0- 100,000 CEO, President and 2003 150,000 100,000(2) -0- -0- -0- Chairman of the Board 2002 150,000 100,000(3) -0- -0- -0-
(1) This reflects a cash bonus of $100,000 accrued but not paid as at December 31, 2004 pursuant to Mr. French's employment agreement. (2) This reflects a cash bonus of $40,000 accrued but not paid as at December 31, 2004 pursuant to Mr. French's employment agreement. (3) This reflects the dollar value of 3,571,429 shares of common stock issued to Mr.French in lieu of a cash bonus for the fiscal year 2002. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with Declan A. French whereby he will serve as Chairman of the Board, Chief Executive Officer and President for a period of two years commencing on November 28, 2001. The agreement shall continue upon a year-to-year basis unless terminated by either the Company or Mr. French upon ninety days written notice. Under the terms of the agreement, Mr. French shall be paid a base salary of $150,000 and a bonus to be determined by the Company's EBITDA (earnings before interest, taxes, depreciation and amortization) as a percentage of annual gross revenue with a minimum guaranteed bonus of $100,000. The bonus will be paid in cash or shares at the Company's discretion. At December 31, 2004, the Company's accounts payable include $140,000 in bonuses relating to 2004 and 2003 which are payable to Mr. French. On December 3, 2004, the Compensation Committee determined that it was in the Company's best interests to award Mr. French an additional $100,000 payable in shares of the Company's common stock in consideration of various personal guarantees and indemnifications provided by Mr. French on the Company's behalf. The Compensation Committee adopted a resolution unanimously approving the issuance of $100,000 worth of shares of the Company's common stock to Mr. French and the board has agreed to submit such proposal for the consideration of the shareholders at the Annual Meeting of Shareholders to be held on April 22, 2005. In January 2003, the Company issued an aggregate of 12,427,535 shares of its common stock to Mr. French for extinguishment of certain indebtedness of the company to Mr. French pursuant to the amendment to his employment agreement dated January 27, 2003. This included 3,571,429 shares as payment in full for the bonus due for the fiscal year ended 2002. In April 2002, the Company issued 588,235 shares of its common stock to Mr. French as payment in full for the bonus due for the fiscal year 2001. Mr. French continues to serve as Chairman, Chief Executive Officer and President. On March 1, 2001, the Company entered into an employment agreement with Kelly Hankinson whereby she will serve as Chief Financial Officer. Ms. Hankinson shall be paid an annual salary of $100,000. The employment agreement is for an indeterminate period of time. In 2003, Ms. Hankinson was paid approximately $75,000. In the event Ms. Hankinson is terminated for any reason, including but not limited to, the acquisition of Thinkpath, Ms. Hankinson shall be entitled to a severance payment equal to one year's salary. No other officer or director has an employment contract with the Company. COMPENSATION OF DIRECTORS Effective August 28, 2002, each non-employee member of the Company's Board of Directors shall receive the following annual compensation in consideration for services rendered as a director: (i) 5 year option to purchase up to 50,000 shares of our common stock exercisable at a price equal to fair market value of our common stock as of the date of grant; (ii) a cash amount of $4,000 per annum, paid on a quarterly basis; and, (iii) reimbursement of reasonable and ordinary expenses in connection with such member's attendance at Board or committee meetings. Directors who receive a salary from the company shall not be entitled to receive any additional compensation for their services as a member of the Company's Board of Directors. Board of Directors and shareholders have adopted the 1998 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock Option Plan, and 2002 Stock Option Plan, pursuant to which options have been or may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide their skills and expertise to the Company. OPTIONS, WARRANTS OR RIGHTS No options were issued to any of the Company's officers or directors during 2004 and 2003. CONSULTING AGREEMENTS On May 26, 2004, we entered into a consulting agreement with Jeffrey Flannery who was to provide marketing and business development consulting services for a period of one year. In consideration for such services in the amount of $175,000, we issued 250,000,000 shares of common stock, no par value per share. On February 7, 2003, we entered into a consulting agreement with Rainery Barba who was to provide legal and advisory services for a period of one year. In consideration for such services we issued and registered 4,000,000 shares of our common stock, no par value per share. On February 7, 2003, we entered into a consulting agreement with Dailyfinancial.com Inc., who was to perform corporate consulting services in connection with mergers and acquisitions, corporate finance and other financial services. In consideration for such services we issued 4,200,000 shares of our common stock, no par value per share. STOCK OPTION PLANS THE 1998 STOCK OPTION PLAN The 1998 Stock Option Plan is effective for a period for ten years, expiring in 2008. Options to acquire 435,000 shares of our common stock may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide us with their skills and expertise. As of April 12, 2005, there are outstanding 82,500 options to purchase shares of our common stock underlying the 1998 Stock Option Plan which have been issued to certain of our directors, employees and consultants and 352,500 such options available for future grant. THE 2000 STOCK OPTION PLAN The 2000 Stock Option Plan is effective for a period for ten years, expiring in 2010. Options to acquire 435,000 shares of our common stock may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide us with their skills and expertise. As of April 12, 2005, there are outstanding 42,000 options to purchase shares of our common stock underlying the 2000 Stock Option Plan which have been issued to certain of our directors, employees and consultants and 393,000 such options available for future grant. THE 2001 STOCK OPTION PLAN The 2001 Stock Option Plan is effective for a period for ten years, expiring in 2011. Options to acquire 1,000,000 shares of our common stock may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide us with their skills and expertise. As of April 12, 2005, there are outstanding 435,000 options to purchase shares of our common stock underlying the 2001 Stock Option Plan which have been issued to certain of our directors, employees and consultants and 565,000 such options available for future grant. THE 2002 STOCK OPTION PLAN The 2002 Stock Option Plan is effective for a period for ten years, expiring in 2012. Options to acquire 6,500,000 shares of our common stock may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide us with their skills and expertise. As of April 12, 2005, we have not issued any options to purchase shares of our common stock underlying the 2002 Stock Option Plan to certain of our directors, employees and consultants and 6,500,000 such options are available for future grant. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of April 12, 2005, the names and beneficial ownership of the Company's common stock beneficially owned, directly or indirectly, by: (i) each person who is a director or executive officer of the Company; (ii) all directors and executive officers of the Company as a group; and (iii) all holders of 5% or more of the outstanding shares of the common stock of the Company: Name and Address of Amount and Nature of Percentage of Shares Beneficial Owner (1) Beneficial Ownership (2) Outstanding -------------------- ------------------------ ----------- Declan A. French 2,910,684 (3) * Kelly Hankinson 180,167 (4) * Lloyd MacLean -- * Arthur S. Marcus 30,500 (5) * Patrick Power -- * Alpha Capital 896,136,471 (6) 6.8% Bristol Investment Fund 1,834,618,490 (7) 8.5% Tazbaz Holdings Limited 896,136,471 (8) 4.9% All Directors and Officers as a Group (6 persons) (3 - 7) 3,121,351 * * Less than 1%. (1) Except as set forth above, the address of each individual is 201 Westcreek Boulevard, Brampton, Ontario, Canada, L6T 5S6 (2) Based upon information furnished to us by the directors and executive officers or obtained from our stock transfer books. We have been informed that these persons hold the sole voting and dispositive power with respect to the common stock except as noted herein. For purposes of computing "beneficial ownership" and the percentage of outstanding common stock held by each person or group of persons named above as of April 12, 2005 or, 21,667,204,400 shares, any security which such person or group of persons has the right to acquire within 60 days after such date is deemed to be outstanding for the purpose of computing beneficial ownership and the percentage ownership of such person or persons, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (3) Includes 101,333 shares of common stock issuable upon the exercise of options granted to Declan A. French that are currently exercisable or exercisable within the next 60 days. Also includes 2,809,351 shares of common stock issued to Declan A. French pursuant to an amendment of his employment agreement dated January 27, 2003. (4) Includes 1,333 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within the next 60 days. (5) Includes 27,500 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within the next 60 days. Excludes 347,902 shares of common stock issued in the name of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, our United States legal counsel, of which Mr. Marcus is a partner. (6) Does not include up to 1,700,696,397 of warrants that may be exercised upon 60 days prior notice. Pursuant to the warrant agreement, in no event shall the holder be permitted to exercise outstanding warrants to the extent that the number of shares of common stock owned by such holder will be equal to or exceed 4.9% of the number of shares of common stock then issued and outstanding. Does not include shares of common stock issuable upon the conversion of $362,500 principal amount convertible debentures. (7) Does not include up to 4,099,155,781 of warrants that may be exercised upon 60 days prior notice. Pursuant to the warrant agreement, in no event shall the holder be permitted to exercise outstanding warrants to the extent that the number of shares of common stock owned by such holder will be equal to or exceed 4.9% of the number of shares of common stock then issued and outstanding. Does not include shares of common stock issuable upon the conversion of $745,200 principal amount convertible debentures. (8) Includes 781,275,469 shares of common stock issuable upon the exercise of warrants. Pursuant to the warrant agreement, in no event shall the holder be permitted to exercise outstanding warrants to the extent that the number of shares of common stock owned by such holder will be equal to or exceed 4.9% of the number of shares of common stock then issued and outstanding. Does not include up to 1,775,867,388 of warrants that may be exercised upon 60 days prior notice or shares of common stock issuable upon the conversion of $55,000 principal amount convertible debentures.
Number of securities to Weighted-average Number of securities be issued upon exercise exercise price of remaining available of outstanding options, outstanding options, for future issuance warrants and rights warrants and rights under equity compensation plans ----------------------- -------------------- ------------------- Equity compensation plans 559,500 1.22 7,810,500 approved by security holders Equity compensation plans not approved by security holders -- -- -- Total 559,500 1.22 7,810,500
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS During the fiscal years ended December 31, 2004 and 2003, the Company paid to Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, the Company's United States legal counsel, approximately $41,000 and $96,000 respectively for legal services rendered. Included in the Company's accounts payables at December 31, 2004 and 2003 are the amounts of $22,000 and $20,000, respectively which are outstanding to Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP. Arthur S. Marcus, one of the Company's directors, is a partner of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP. All future transactions between the Company and the Company's officers, directors or 5% shareholders, and their respective affiliates, will be on terms no less favorable than could be obtained from unaffiliated third parties. In the event that the Company's enters into future affiliated transactions, they will be approved by the Company's independent directors who do not have an interest in the transactions and who have access, at the Company's expense, to the Company's counsel or independent legal counsel. ITEM 13. EXHIBITS (a) Financial Statements. See pages F-1 through to F-28. (b) Reports on Form 8-K. (c) Exhibits. 1.1 Form of Underwriting Agreement(1) 3.1 Bylaws of Thinkpath Inc. (IT Staffing Ltd.) enacted September 10, 1998 (15) 3.2 Articles of Incorporation dated February 11, 1994(1) 3.3 Articles of Amendment dated February 15, 1996(1) 3.4 Articles of Amendment dated April 15, 1998(1) 3.5 Articles of Amendment dated August 6, 1998(1) 3.6 Articles of Amendment dated January 19, 1999(1) 4.2 Form of Underwriters' Warrant(1) 4.3 Specimen Common Share Certificate(1) 10.1 Form of Financial Consulting Agreement(1) 10.2 1998 Stock Option Plan(1) 10.3(a) Lease of Thinkpath Inc.'s headquarters in Toronto, Ontario(1) 10.3(b) Lease of Thinkpath Inc.'s office in New York, New York(1) 10.3(c) Lease of Thinkpath Inc.'s office in Etobicoke, Ontario(1) 10.3(d) Lease of Thinkpath Inc.'s office in Scarborough, Ontario(1) 10.3(e) Lease of Thinkpath Inc.'s office in Ottawa, Ontario(1) 10.4 Employment Agreement between Thinkpath Inc. and Declan French dated August 1998(1) 10.5 Employment Agreement between Thinkpath Inc. and John A. Irwin dated May 18, 1998(1) 10.6 Employment Agreement between Thinkpath Inc. and John R. Wilson dated February 8, 1998(1) 10.7 Employment Agreement between Thinkpath Inc. and Roger Walters dated September 16, 1999(2) 10.8 Form of consulting agreement for Thinkpath Inc.'s independent contractors(1) 10.9 Form of services agreement for Thinkpath Inc.'s customers(1) 10.10 Agreement for the acquisition of the capital stock of International Career Specialists Ltd.(1) 10.11 Agreement for the acquisition of the capital stock of Systemsearch Consulting Services Inc. and Systems PS Inc.(1) 10.12 Agreement for the acquisition of the capital stock of Cad Cam, Inc.(2) 10.13 License Agreement between Thinkpath Inc. and International Officer Centers Corp. dated August 1, 1998(2) 10.13 License Agreement between Thinkpath Inc. and International Officer Centers Corp. dated August 1, 1998(1) 10.14 Consulting Agreement between Thinkpath Inc. and Robert M. Rubin(1) 10.15 Form of Employment Agreement with Confidentiality Provision(1) 10.16 Asset Purchase Agreement between Thinkpath Inc. and Southport Consulting Company(1) 10.17 2000 Stock Option Plan(3) 10.18 Share Purchase Agreement between Thinkpath Inc. and MicroTech Professionals, Inc. dated April 25, 2000(4) 10.19 Non-Binding Letter of Intent between Thinkpath Inc. and Aquila HoldingsLimited dated October 4, 2000(4) 10.20 Share Purchase Agreement between Thinkpath Inc. and TidalBeach Inc. dated October 31, 2000(5) 10.21 Consulting Agreement between Thinkpath Inc., and Tsunami Trading Corp. d/b/a Tsunami Financial Communications and International Consulting Group, Inc. dated December 14, 2000(5) 10.23 Share Purchase Agreement by and among Cognicase Inc. and Thinkpath nc. dated March 1, 2002 (7) 10.24 Employment Agreement between Thinkpath Inc. and Declan French dated November 28, 2001 (8) 10.25 Employment Agreement between Thinkpath Inc. and Laurie Bradley dated January 29, 2001 (8) 10.26 Employment Agreement between Thinkpath Inc. and Tony French dated arch 1, 2001 (8) 10.27 Employment Agreement dated between Thinkpath Inc. and Kelly Hankinson dated March 1, 2001 (8) 10.28 Agreement between Thinkpath Inc. and entrenet(2) Capital Advisors, LLC dated November 5, 2001. 10.29 Agreement between Thinkpath Inc. and Olgivie Rothchild Inc. dated January 9, 2002 (8) 10.30 Agreement between Thinkpath Inc. and Dave Wodar dated January 15, 2002 (8) 10.31 Consulting Agreement between Thinkpath Inc. and Mark Young dated June 24, 2002. (9) 10.32 Consulting Agreement between Thinkpath Inc. and George Georgiou dated June 24, 2002 (9) 10.33 Consulting Agreement between Thinkpath Inc. and Peter Benz dated October 1, 2002. (10) 10.34 Consulting Agreement between Thinkpath Inc. and George Furla dated October 1, 2002. (10) 10.35 Consulting Agreement between Thinkpath Inc. and Owen Naccarato dated October 1, 2002. (10) 10.36 Consulting Agreement between Thinkpath Inc. and Michael Rudolph dated October 1, 2002. (10) 10.37 Consulting Agreement between Thinkpath Inc. and Karim Souki dated October 1, 2002. (10) 10.38 Consulting Agreement between Thinkpath Inc. and Howard Schraub dated October 1, 2002. (10) 10.39 Agreement between Thinkpath Inc. and Declan French dated January 27, 2003. (11) 10.40 Agreement between Thinkpath Inc. and Rainery Barba dated February 12, 2003. (12) 10.41 Agreement between Thinkpath Inc. and Brainhunter.com dated June 27, 2003 (13) 10.42 2005 Stock Option Plan (14) 10.43 Share Purchase Agreemetn between Thinkpath Inc. and TBM Technologies Inc. dated December 23, 2004 (15) 10.44 First Amendment Agreement between Tinkkpath Inc. and TBM Technologies dated January 24, 2005 (15) 10.45 Second Amendment Agreement between Thinkpath Inc. and TBM Technologies dated _____________, 2005 (15) 10.46 Receivable Discounting Facility Amendment between Thinkpath Inc. and Morrison Financial Services Limited dated January 18, 2005 (15) 23 Consent of Schwartz, Levitsky, Feldman LLP, Independent Auditors (15) 31. Rule 13a-14(a)/15d-14(a) Certifications. (15) 32.1 Certification by the Chief Executive Officer Relating to a Periodic Report Containing Financial Statements.* 32.2 Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.* ------------ (1) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form SB-2 filed on May 26, 1999. (2) Incorporated by reference to Thinkpath Inc.'s report on Form 8-K filed on October 1, 1999. (3) Incorporated by reference to Thinkpath Inc.'s Proxy Statement on Form Def-14A filed on May 22, 2000. (4) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form SB-2 filed on April 25, 2000. (5) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form SB-2 filed on January 12, 2001. (6) Incorporated by reference to Thinkpath Inc.'s Proxy Statement on Form Def-14A filed on May 21, 2001. (7) Incorporated by reference to Thinkpath Inc.'s report on Form 8-K filed on March 21, 2002. (8) Incorporated by reference to Thinkpath Inc., report on Form 10-KSB filed on April April 15, 2002 (9) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form S-8 filed on June 28, 2002 (10) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form S-8 filed on December 11, 2002 (11) Incorporated by reference to Thinkpath Inc., Registration Statement on Form S-8 filed on January 28, 2003. (12) Incorporated by reference to Thinkpath Inc., Registration Statement on Form S-8 filed on February 14, 2003. (13) Incorporated by reference to Thinkpath Inc., report on Form 10-K filed on April 14, 2004 (14) Incorporated by reference to Thinkpath Inc., Proxy statement on Form DEF-14A filed on April 6, 2005. (15) Included herewith. * The Exhibit attached to this Form 10-KSB 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. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES INDEPENDENT AUDITORS The following summarizes the fees paid to Schwartz Levitsky Feldman, LLP for the years ended December 31, 2004 and 2003: 2004 2003 ---------------------------------------------- Audit $50,000 $45,000 Tax $4,000 $ 5,000 ALL OTHER $12,000 $15,000 ---------------------------------------------- TOTAL FEES $66,000 $65,000 --------------------------------------------- Schwartz Levitsky Feldman, LLP were engaged as our independent auditors in 1999. In connection with the audit of our annual financial statements for each of the fiscal years ended December 31, 2004 and 2003, we paid Schwartz Levitsky Feldman, LLP, $50,000 and $45,000 respectively. Tax fees are primarily attributable to various corporate tax planning activities and preparation of our tax returns for which we were billed by Schwartz Levitsky Feldman, LLP, $4,000 for the fiscal year ended December 31, 2004 and $5,000 for the fiscal year ended December 31, 2003. All other fees are attributable to consultations on accounting standards and other miscellaneous services for which we were billed by Schwartz Levitsky Feldman, LLP, $12,000 and $15,000 respectively, for each of the fiscal years ended December 31, 2004 and 2003. The Audit Committee has considered whether provision of the services described above under "Tax" and "All Other" by Schwartz Levitsky Feldman, LLP, are compatible with maintaining that firm's independence. From and after the effective date of the SEC rule requiring Audit Committee pre-approval of all audit and permissible non-audit services provided by independent auditors, the Audit Committee has pre-approved all audit and permissible non-audit services by Schwartz Levitsky Feldman, LLP. 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. By: /s/ DECLAN A. FRENCH ------------------------------------- Declan A. French Chairman and Chief Executive Officer Dated: April 14, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ DECLAN A. FRENCH --------------------------- Declan A. French (Principal Executive Officer) Chairman and Chief Executive Officer April 14, 2005 /s/ KELLY HANKINSON -------------------------- Kelly Hankinson (Principal Accounting Officer) Chief Financial Officer April 14, 2005 /s/ LLOYD MACLEAN --------------------------- Lloyd MacLean Director April 14, 2005 /s/ PATRICK POWER --------------------------- Patrick Power Director Nominee April 14, 2005 SCHWARTZ LEVITSKY FELDMAN LLP CHARTERED ACCOUNTANTS TORONTO, MONTREAL, OTTAWA CONSENT OF SCHWARTZ LEVITSKY FELDMAN LLP The undersigned, Schwartz Levitsky Feldman llp, hereby consents to the use of our name and the use of our opinion dated April 12, 2005 on the consolidated financial statements of Thinkpath Inc. (the Company)included in its Annual Report on Form 10-KSB being filed by the Company, for the fiscal year ended December 31, 2004. Chartered Accountants Toronto, Ontario April 15, 2005 1167 Caledonia Road Toronto, Ontario M6A 2X1 Tel: 416 785 5353 Fax: 416 785 5663