10QSB 1 t301838.txt THINKPATH INC UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____________ TO ________________ COMMISSION FILE NUMBER __________ THINKPATH INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) ONTARIO 52-209027 ------------------------- -------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 201 WESTCREEK BOULEVARD BRAMPTON, ONTARIO L6T 5S6 --------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (905) 460-3040 ------------------- (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_| AS OF MAY 20, 2005 THERE WERE 21,667,024,425 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING. THINKPATH INC. MARCH 31, 2005 QUARTERLY REPORT ON FORM 10-QSB TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Number Item 1. Financial Statements Interim Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004.................................................. Interim Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004...................................... Interim Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2005 and the year ended December 31, 2004.................................................. Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004...................................... Notes to Interim Consolidated Financial Statements................. Item 2. Management's Discussion and Analysis or Plan of Operation............ Item 3. Controls and Procedures.............................................. PART II - OTHER INFORMATION Item 1. Legal Proceedings ................................................... Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......... Item 3. Defaults Upon Senior Securities ..................................... Item 4. Submission of Matters to a Vote of Security Holders ................. Item 5. Other Information ................................................... Item 6. Exhibits and Reports on Form 8-K .................................... ITEM 1. FINANCIAL STATEMENTS THINKPATH INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2005 (UNAUDITED) (AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 31-Mar-05 31-Dec-04 $ $ ASSETS CURRENT ASSETS Cash 224,636 180,121 Accounts receivable 2,716,921 2,243,513 Prepaid expenses 179,157 88,403 --------- --------- 3,120,714 2,512,037 PROPERTY AND EQUIPMENT 565,958 494,003 GOODWILL 3,967,243 3,748,732 OTHER ASSETS 151,112 61,562 --------- --------- 7,805,027 6,816,334 ========== ========= The accompanying notes are an integral part of these interim consolidated financial statements.
THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 31-Mar-05 31-Dec-04 $ $ LIABILITIES CURRENT LIABILITIES Receivable Discount Facility 1,025,637 723,995 Bank indebtedness 57,803 -- Accounts payable 1,495,981 1,257,799 Current portion of long-term debt 114,146 85,099 12% Convertible Debentures 433,278 566,653 --------- --------- 3,126,845 2,633,546 LONG-TERM DEBT 155,537 182,837 --------- --------- 3,282,382 2,816,383 ========= ========= COMMITMENTS AND CONTINGENCIES (NOTE 20) STOCKHOLDERS' EQUITY CAPITAL STOCK 50,204,682 49,531,299 DEFICIT (44,350,023) (44,204,935) ACCUMULATED OTHER COMPREHENSIVE LOSS (1,332,014) (1,326,413) ----------- ---------- 4,522,645 3,999,951 ----------- ---------- 7,805,027 6,816,334 =========== ========== The accompanying notes are an integral part of these interim consolidated financial statements.
THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 2005 2004 $ $ REVENUE 3,602,939 3,056,700 COST OF SERVICES 2,330,770 2,057,428 --------- --------- GROSS PROFIT 1,272,169 999,272 --------- --------- EXPENSES Administrative 584,498 573,405 Selling 368,034 312,916 Depreciation and amortization 81,538 142,265 Write down of property and equipment 3,851 -- --------- --------- 1,037,921 1,028,586 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES 234,248 (29,314) Interest Charges 362,763 748,944 --------- --------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (128,515) (778,258) Income Taxes 7,440 1,268 --------- --------- LOSS FROM CONTINUING OPERATIONS (135,955) (779,526) LOSS FROM DISCONTINUED OPERATIONS (9,133) (12,704) NET LOSS (145,088) (792,230) --------- --------- WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING BASIC AND DILUTED 18,428,447,908 3,261,427,500 ============== ============= LOSS FROM CONTINUING OPERATIONS PER WEIGHTED AVERAGE COMMON STOCK BASIC AND DILUTED (0.00) (0.00) ============== ============= The accompanying notes are an integral part of these interim consolidated financial statements.
THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND THE YEAR ENDED DECEMBER 2004 (AMOUNTS EXPRESSED IN US DOLLARS) COMMON STOCK ACCUMULATED NUMBER OF CAPITAL OTHER SHARES STOCK OMPREHENSIVE COMPREHENSIVE AMOUNTS DEFICIT LOSS LOSS --------------- ----------- ------------ ---------------- --------------- 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 convertible 634,917,670 44,813 -- debentures Common stock and warrants issued for 250,197,488 175,336 -- services Warrants issued for cash 377,053,570 1,548,120 -- Beneficial conversion on issuance of -- 3,806,832 -- convertible debt --------------- ----------- ------------ --------------- Balance as of December 31, 2004 13,602,462,378 49,531,299 (44,204,935) (1,326,413) =============== =========== ============ =============== Net loss for the period -- -- (145,088) (145,088) Other comprehensive loss, net of tax: Foreign currency translation (5,601) (5,601) -------------- Comprehensive loss (150,689) ============== Conversion of 12% senior secured 6,175,500,000 133,375 -- convertible debentures Interest on 12% senior secured convertible 656,976,500 21,448 -- debentures Common stock issued for investment 1,232,250,000 246,609 -- Beneficial conversion on issuance of -- 271,951 -- convertible debt --------------- ----------- ------------ --------------- Balance as of March 31, 2005 21,667,188,878 50,204,682 (44,350,023) (1,332,014) =============== =========== ============ =============== The accompanying notes are an integral part of these interim consolidated financial statements.
THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 2005 2004 $ $ Cash flows from operating activities Net loss (145,088) (792,230) -------- -------- Adjustments to reconcile net loss to net cash used in operating activities: Amortization 81,538 153,460 Beneficial conversion on issuance of convertible debt 271,951 624,211 Interest on 12% senior secured convertible debentures 21,448 11,114 Write down of property and equipment 3,851 -- Increase in accounts receivable (462,788) (321,761) Increase in prepaid expenses (90,729) (13,775) Increase (decrease) in accounts payable 241,449 (424,759) Common stock and warrants issued for services -- 336 -------- -------- Net cash used in operating activities (78,368) (763,404) -------- -------- Cash flows from investing activities Purchase of property and equipment (134,702) (41,488) -------- -------- Net cash used in investing activities (134,702) (41,488) -------- -------- Cash flows from financing activities Proceeds from (repayment of) receivable discount facility 300,614 (62,928) Repayment of notes payable -- (3,566) Repayment of long-term debt (42,512) (18,806) Proceeds from issuance of common stock -- 193,500 Proceeds from issuance of debentures and warrants -- 475,000 -------- -------- Net cash provided by financing activities 258,102 583,200 -------- -------- Effect of foreign currency exchange rate changes (517) (34,626) -------- -------- Net increase (decrease) in cash 44,515 (256,318) Cash Beginning of year 180,121 483,443 -------- -------- End of year 224,636 227,125 ======== ======== SUPPLEMENTAL CASH ITEMS: Interest paid 73,947 125,859 ======== ======== Income taxes paid 12,037 2,031 ======== ======== The accompanying notes are an integral part of these interim consolidated financial statements.
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (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 March 31, 2005, the Company had a working capital deficiency of $6,131 and a deficit of $44,350,023 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 March 31, 2005, the balance on the receivable discount facility was $1,025,637. 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 May 20, 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. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (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 THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (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. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (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. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (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 effective for annual reporting periods that begin after December 15, 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. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations". FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations", refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application of interim financial information is permitted but is not required. The Company does not believe that the adoption of FIN 47 will have an impact, if any, on its results of operations or financial position. u) Advertising Costs Advertising costs are expensed as incurred. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (AMOUNTS EXPRESSED IN US DOLLARS) 3. STOCK OPTION PLANS
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------- -------------- a) Options outstanding at December 31, 2004 559,500 ======= Options forfeited during the period -- Options expired during the period (82,500) 3.07 ------- Options outstanding at March 31, 2005 477,000 ======== Options exercisable December 31, 2004 559,500 1.22 Options exercisable March 31, 2005 477,000 0.92 Options available for future grant December 31, 2004 7,810,500 Options available for future grant March 31, 2005 7,893,000 b) Range of Exercise Prices at March 31, 2005 Options Weighted Outstanding Weighted Outstanding Average Average Options Average Options Remaining Life Exercise Price Exercisable Exercise Price ------- -------------- -------------- ----------- -------------- $3.25 42,000 0.74 3.25 42,000 3.25 $0.67-$0.70 435,000 1.07 0.70 435,000 0.70
c) Pro-forma net income At March 31, 2005, 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. Three Months Three Months Ended Ended March 31, 2005 March 31, 2004
Three Months Three Months Ended Ended March 31, 2005 March 31, 2004 Net loss as reported (145,088) (792,230) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of - (1,895) related tax effects Pro forma net loss (145,088) (794,125) ======== ======== Loss per share: Basic and diluted loss per share, as reported 0.00 (0.00) Pro forma loss per share 0.00 (0.00)
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (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 three months ended March 31, 2005. There were no option grants in the year ended December 31, 2004. 4. ACQUISITIONS On January 17, 2005, the Company acquired TBM Technologies Inc., an Ontario Corporation which provides design engineering services. Pursuant to the Share Purchase Agreement, the Company purchased TBM for approximately $246,600 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 closing. In the event that the vendors seek to sell their shares in an open market transaction within the two years following closing and the bid price is less than the price of the shares on issuance, the Company will be obligated to issue additional shares of unregistered common stock with a value equal to the difference up to a maximum of $246,600. The acquisition was accounted for by the purchase method and the operations have been included in the consolidated operations from January 17, 2005. The net acquired assets have been valued as follows: Current assets $23,616 Property and equipment 11,240 Other assets 100,900 Liabilities assumed (107,667) Consideration 246,600 -------- Goodwill $218,511 ======== 5. ACCOUNTS RECEIVABLE
March 31, 2005 December 31, 2004 -------------- ----------------- $ $ Accounts receivable 2,915,100 2,423,161 Less: Allowance for doubtful accounts (198,179) (179,648) --------- --------- 2,716,921 2,243,513 ========= ========= Allowance for doubtful accounts Balance, beginning of period 179,648 186,847 Provision 18,530 25,738 Recoveries -- (32,937) --------- --------- Balance, end of period 198,179 179,648 ========= =========
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (AMOUNTS EXPRESSED IN US DOLLARS) 6. PROPERTY AND EQUIPMENT
March 31, 2005 December 31, 2004 ------------------------------------------- ------------------ ACCUMULATED COST AMORTIZATION NET NET $ $ $ $ Furniture and equipment 168,257 134,958 33,299 35,245 Computer equipment and software 3,538,104 3,018,757 519,347 448,773 Leasehold improvements 45,079 31,767 13,312 9,985 3,751,440 3,185,482 565,958 494,003 Assets under capital lease 243,363 134,287 109,076 90,689
Amortization of property and equipment for the three months ended March 31, 2005 amounted to $68,849 including amortization of assets under capital lease of $15,255. 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. 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:
March 31, December 31, 2005 2004 ACCUMULATED ACCUMULATED IMPAIRMENT COST AMORTIZATION LOSSES NET NET ---------- ----------------- ---------------- ------------ --------------- $ $ $ $ $ Technical Publications & Engineering (CadCam Inc. and TBM Technologies Inc.) 5,757,369 535,164 1,234,962 3,967,243 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. 8. OTHER ASSETS
March 31, 2005 December 31, 2004 -------------- ----------------- $ $ Cash surrender value of life insurance 62,901 61,562 Customer Lists 88,211 - Total 151,112 61,562
Amortization of other assets amounted to $12,689 for the three months ended March 31, 2005 and nil for the year ended December 31, 2004. 9. RECEIVABLE DISCOUNT FACILITY i) March 31, 2005 At March 31, 2005, the Company had a receivable discount facility in the amount of $1,025,637 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 24% per annum. ii) 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. 10. BANK INDEBTEDNESS At March 31, 2005, the Company had $57,803 outstanding on a revolving line of credit with the Royal Bank of Canada. This liability was assumed by the Company on January 17, 2005 as a result of the acquisition of TBM Technologies Inc. The line bears interest at 7% per annum. Subsequent to March 31, 2005, the line of credit was paid in full by the Company. 11. CONVERTIBLE DEBENTURE During the year ended December 31, 2004, the Company sold $2,050,000 in convertible debentures with 8,702,424,370 warrants to various investors. The debentures will become due twelve months from the date of issuance at various conversion prices and the warrants are exercisable at any time and in any amount for a period of seven years from closing at various purchase prices as outlined below:
Original # of New Date of Debenture Conversion # of Exercise Warrants Exercise Issuance Amount Price Warrants Price Repriced Price Issued -------------- ------------- -------------- ---------------- ------------ ---------------- -------- 1/8/04 $25,000 $.0175* 1,428,571 $.0175 1,428,571 $.0004 3/25/04 $350,000 $.0175* 924,000,000 $.000417 84,000,000 $.00025 840,000,000 $.0002 3/29/04 $100,000 $.0175* 250,000,000 $.0004 -- -- 5/20/04 $150,000 $.0175* 582,352,942 $.00025 529,411,766 $.0002 5/24/04 $100,000 $.0175* 357,142,857 $.00028 -- -- 6/18/04 $250,000 $.0175* 1,100,000,000 $.00025 1,000,000,000 $.0002 6/18/04 $200,000 $.0175* 800,000,000 $.00025 -- -- 11/12/04 $875,000 $.0002** 4,687,500,000 $.0002 -- -- -------------- ------------- -------------- ---------------- ------------ ---------------- -------- $2,050,000 8,702,424,370 2,454,840,337 ============== ============= ============== ================ ============ ================ ========
* Conversion price is 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. **Conversion price is the lesser of $.0002 or 80% of the average of the three lowest prices on three separate trading days during the twenty-day trading period prior to conversion. The proceeds of $2,050,000 received by the Company were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $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. At March 31, 2005, the value of the beneficial conversion feature on all issued convertible debentures was determined to be $235,833 which was credited to paid in capital and charged to earnings as interest expense. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (AMOUNTS EXPRESSED IN US DOLLARS) 12. LONG-TERM DEBT i) March 31, 2005 At March 31, 2005, the Company had a loan balance of $218,968 with Terry Lyons with monthly payments of $10,000. The loan bears interest at US prime plus 14%. ii) 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%.
March 31, 2005 December 31, 2004 $ $ 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 218,968 227,951 Financial Services Limited Various capital leases with various payment terms and interest rates 50,715 39,985 269,683 267,936 Less: current portion 114,146 85,099 Total 155,537 182,837
b) Future principal payments obligations as at March 31, 2005, were as follows: 2005 83,944 2006 126,119 2007 59,260 2008 -- 2009 -- --------- $ 269,683 ========= c) Interest expense related to long-term debt was $15,621 for the three months ended March 31, 2005 and $69,037 for the year ended December 31, 2004. 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 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. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (AMOUNTS EXPRESSED IN US DOLLARS) On January 17, 2005, the Company issued 1,232,250,000 shares of its common stock, no par value per share, to the Vendors of TBM Technologies Inc. for a total consideration of $246,600. During the three months ended March 31, 2005, the Company issued 6,832,476,500 shares of its common stock upon the conversion of 12% Senior Secured Convertible Debentures in the amount of $321,900. c) Warrants For each of the periods 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 March 31, 2005 December 31, 2004 Exercise price per Expiry date share --------------- ----------------------- ------------------- ------------- -- -- $3.24 2004 475,000 975,000 $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 -- -- $.00075 2009 -- -- $.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 166,666,667 166,666,667 $.00075 2010 -- -- $.0004 2010 45,414,297 45,414,297 $.00025 2010 167,244,016 167,244,016 $.0002 2010 250,000,000 250,000,000 $.0004 2011 257,142,857 257,142,857 $.00028 2011 1,876,941,177 1,876,941,177 $.00025 2011 6,216,911,765 6,216,911,765 $.0002 2011 --------------- ----------------------- ------------------- ------------- 9,056,442,698 9,056,942,698 --------------- ----------------------- --------------------------------- A summary of changes to number of issued warrants is as follows: Outstanding at December 31, 2004 9,056,942,698 Issued -- Exercised -- Expired (500,000) ------------- Outstanding at March 31, 2005 9,056,442,698 ============= 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. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (AMOUNTS EXPRESSED IN US DOLLARS) 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. 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:
March 31, 2005 December 31, 2004 $ $ Losses available to offset future income taxes 4,628,000 4,678,000 Share issue costs 357,000 357,000 Property and equipment 872,000 877,000 5,857,000 5,912,000 Less: valuation allowance 5,857,000 5,912,000 -- --
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:
March 31, 2005 December 31, 2004 $ $ Amounts calculated at Federal and Provincial (51,406) (1,503,170) statutory rates Permanent differences 113,846 763,040 Valuation allowance (55,000) 758,000 58,846 1,521,040 Current income taxes 7,440 17,870
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (AMOUNTS EXPRESSED IN US DOLLARS) 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 March 31, 2005. As at the completion of the March 31, 2005 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. 15. COMPREHENSIVE INCOME (LOSS)
Three Months Ended Year Ended March 31, 2005 December 31, 2004 -------------- ----------------- $ $ Net loss (145,088) (4,205,224) Other comprehensive loss Foreign currency translation adjustments (5,601) (10,724) Comprehensive income (loss) (150,689) (4,215,948)
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. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (AMOUNTS EXPRESSED IN US DOLLARS) The following table presents the revenues, loss from operations and other components attributable to the discontinued operations of Njoyn Software Incorporated, TidalBeach Inc., Thinkpath Training Inc. and Thinkpath Training US Inc. and the IT recruitment division:
Three Months Ended Three Months Ended March 31, 2005 March 31, 2004 -------------- -------------- $ $ Revenues -- -- Loss from operations before income taxes (4,536) (12,404) Provision for Income Taxes 4,597 300 Loss from discontinued operations (9,133) (12,704) 17. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The Company issued common shares and warrants for the following: Three Months Ended Year Ended March 31, 2005 December 31, 2004 -------------- ----------------- $ $ Services rendered -- 175,336 Accounts payable -- -- -- 175,336 18. SEGMENTED INFORMATION a) Sales by Geographic Area Three Months Ended Three Months Ended March 31, 2005 March 31, 2004 -------------- -------------- $ $ Canada 296,644 222,837 United States of America 3,306,295 2,833,863 3,602,939 3,056,700 b) Net Income (Loss) by Geographic Area Three Months Ended Three Months Ended March 31, 2005 March 31, 2004 -------------- -------------- $ $ Canada (678,096) (988,208) United States of America 533,008 195,978 (145,088) (792,230) c) Identifiable Assets by Geographic Area March 31, 2005 December 31, 2004 -------------- ----------------- $ $ Canada 925,437 499,483 United States of America 6,879,590 6,316,851 7,805,027 6,816,334
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (AMOUNTS EXPRESSED IN US DOLLARS) d) Revenue and Gross Profit by Operating Segment
Three Months Ended Three Months Ended March 31, 2005 March 31, 2004 -------------- -------------- $ $ Revenue Tech Pubs and Engineering 3,574,559 2,972,921 Gross Profit Tech Pubs and Engineering 1,265,715 985,327
No other segment represents 10% of the Company's revenues, operating losses or total assets. e) Revenues from Major Customers and Concentration of Credit Risk The consolidated entity had the following revenues from major customers: For the three months ended March 31, 2005, one customer had sales of $1,385,218 representing approximately 38% of total revenue. For the three months ended March 31, 2004, one customer had sales of $710,109, representing approximately 23% 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.
Three Months Ended Three Months Ended March 31, 2005 March 31, 2004 -------------- -------------- $ $ Numerator Loss from continuing operations (135,955) (779,526) Loss from discontinued operations (9,133) (12,704) ------------- ------------ Net income (loss) (145,088) (792,230) ============= ============ Denominator Weighted Average common stock outstanding 18,428,447,908 3,261,427,500 ============= ============ Basic and diluted loss per common share from continuing (0.00) (0.00) operations ============= ============ Basic and diluted loss per common share after discontinued (0.00) (0.00) operations ============= ============ Average common stock outstanding 18,428,447,908 3,261,427,500 Average common stock issuable -- -- -------------- ------------- Average common stock outstanding assuming dilution 18,428,447,908 3,261,427,500 ============= ============
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 May 20, 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. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (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 March 31, 2005, for the next five years are as follows: 2005 $273,970 2006 171,326 2007 171,326 2008 87,189 2009 45,120 Thereafter 3,760 -------- $752,691 ======== 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 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. 21. SUBSEQUENT EVENTS At the Annual General Meeting of Shareholders held on April 22, 2005, the Company's shareholders elected the Board of Directors for the ensuing year, ratified the appointment of the Company's independent auditors, approved certain executive compensation, approved a reverse stock split of 5,000 to 1 of the Company's outstanding common shares and ratified the adoption of the Company's 2005 Stock Option Plan. 22. FINANCIAL INSTRUMENTS a) Credit Risk Management The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce its credit risk, the Company has adopted credit policies, which include the analysis of the financial position of its customers and the regular review of their credit limits. In some cases, the Company requires bank letters of credit or subscribes to credit insurance. b) Concentration of Credit Risk Although the Company had one significant customer representing 38% 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. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2005 (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. 23. COMPARATIVE FIGURES Certain figures in the March 31, 2004 financial statements have been reclassified to conform with the basis of presentation used at March 31, 2005. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. The following discussion and analysis should be read in conjunction with the financial statements and notes thereto and the other historical financial information of Thinkpath Inc. contained elsewhere in this Form 10-QSB. The statements contained in this Form 10-QSB that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended including statements regarding Thinkpath Inc.'s expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include Thinkpath Inc.'s statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included in this Form 10-QSB are based on information available to Thinkpath Inc. on the date hereof, and Thinkpath Inc. assumes no obligation to update any such forward-looking statement. It is important to note that Thinkpath Inc.'s actual results could differ materially from those in such forward-looking statements. All dollar amounts stated throughout this Form 10-QSB are in United States dollars unless otherwise indicated. Unless otherwise indicated, all reference to "Thinkpath," "us," "our," and "we," refer to Thinkpath Inc. and its subsidiaries. OVERVIEW 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. This year 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 as well as through acquisitions over the next year. Acquisitions will be limited to profitable engineering companies, which must have an immediate accretive impact. STATEMENTS OF OPERATIONS--PERCENTAGES FOR THE THREE MONTHS ENDED MARCH 31, 2005 2004 ---- ---- REVENUE 100 % 100 % ---- ---- COST OF SERVICES 65 % 67 % ---- ---- GROSS PROFIT 35 % 33 % ---- ---- EXPENSES Administrative 16 % 19 % Selling 10 % 10 % Depreciation and amortization 2 % 5 % Write down of property and equipment -- % -- % ---- ---- Operating income (loss) from continuing operations 7 % (1)% before interest charges Interest charges 10 % 25 % ---- ---- Loss from continuing operations before income taxes (3)% (26)% Income taxes -- % -- % ---- ---- Loss from continuing operations (3)% (26)% Loss from discontinued operations -- % -- % Net Loss (3)% (26)% ---- ---- RESULTS OF OPERATIONS THE THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004 REVENUE For the three months ended March 31, 2005, we derived 93% of our revenue in the United States which is consistent with the same period in 2004. Our primary source of revenue was engineering services including engineering design and build, technical publications and documentation and on-site engineering support. Engineering services represented 99% of total revenue for the three months ended March 31, 2005 compared to 97% for the same period last year. No other operating segment represented more than 10% of our consolidated revenues. Consolidated revenues for the three months ended March 31, 2005 increased by $540,000 or 18%, to $3,600,000 as compared to $3,060,000 for the three months ended March 31, 2004. 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 38% of our consolidated revenues for the three months ended March 31, 2005. The same customer had sales of approximately 23% of our consolidated revenues for the same period last year. COST OF SERVICES The cost of services for the three months ended March 31, 2005 increased by $270,000, or 13%, to $2,330,000, as compared to $2,060,000 for the same period in 2004. This increase is consistent with the increase in revenue. However, as a percentage of revenue, the cost of services for the three months ended March 31, decreased from 67% in 2004 to 65% in 2005. 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 35% for the three months ended March 31, 2005 compared to 33% for the same period in 2004. This increase is attributable to the focus on higher margin time and material projects versus fixed cost projects which often result in unforeseen costs. No other operating segment represented more than 10% of our consolidated gross profit. Consolidated gross profit for the three months ended March 31, 2005 increased by $270,000, or 27%, to $1,270,000 compared to $1,000,000 for the same period in 2004. As a percentage of revenue, gross profit for the three months ended March 31, 2005 was 35% compared to 33% in 2004. 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 three months ended March 31, 2005 increased by $10,000, or 1%, to $1,040,000 compared to $1,030,000 for the three months ended March 31, 2004. ADMINISTRATIVE EXPENSES Administrative expenses increased by $10,000 or 2% to $580,000 for the three months ended March 31, 2005 compared to $570,000 for the three months ended March 31, 2004. As a percentage of revenue, administrative expenses have decreased from 19% for the three months ended March 31, 2004 to 16% for the same period in 2005. SELLING EXPENSES Selling expenses increased by $60,000, or 19%, to $370,000 for the three months ended March 31, 2005 compared to $310,000 for the same period in 2004. 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 three months ended March 31, 2005 are 10% which is consistent with the same period last year. DEPRECIATION AND AMORTIZATION For the three months ended March 31, 2005, depreciation and amortization expenses decreased by $60,000, or 42%, to $80,000 from $140,000 for the three months ended March 31, 2004. As a percentage of revenue, depreciation and amortization expenses have decreased from 5% for the three months ended March 31, 2004 to 2% for the same period in 2005. WRITE DOWN OF PROPERTY AND EQUIPMENT At March 31, 2005, we wrote down property and equipment in the amount of $4,000. 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. INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES For the three months ended March 31, 2005, we had income of $230,000 from continuing operations before interest charges compared to a loss of $30,000 for the three months ended March 31, 2004. INTEREST CHARGES For the three months ended March 31, 2005, interest charges decreased by $390,000, or 52%, to $360,000 from $750,000 for the three months ended March 31, 2004. This decrease is largely attributable to the reduced interest expense of $271,951 on the beneficial feature recognized on the convertible debentures compared to an expense of $624,211 in 2004. LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES For the three months ended March 31, 2005 we had a loss from continuing operations before income taxes of $130,000 compared to $780,000 for the same period in 2004. INCOME TAXES Income tax expense for the three months ended March 31, 2005 increased by $6,000 or 600% to $7,000 compared to $1,000 for the three months ended March 31, 2004. LOSS FROM CONTINUING OPERATIONS Loss from continuing operations for the three months ended March 31, 2005 decreased by $640,000 or 82% to a loss of $140,000 compared to a loss of $780,000 for the three months ended March 31, 2004. INCOME (LOSS)FROM DISCONTINUED OPERATIONS Operations of the technology, training and IT recruitment divisions have been reported as discontinued for the three months ended March 31, 2005 and 2004. 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 three months ended March 31, 2005 and 2004. The net loss for the three months ended March 31, 2005 was $4,500 compared to $1,000 for the three months ended March 31, 2004. 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 three months ended March 31, 2005 and 2004. The net loss from the training division for the three months ended March 31, 2005 was $4,500 and $11,000 for the three months ended March 31, 2004. Effective June 27, 2003, we signed an agreement with Brainhunter.com Ltd., an Ontario company, for the purchase of certain assets of the Toronto IT recruitment division for a nominal amount of cash and the assumption of all employee liabilities. As of May 20, 2005, a promissory note which was payable by June 27, 2004 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 or income for the three months ended March 31, 2005 and 2004. NET LOSS For the three months ended March 31, 2005 we had a net loss of $150,000 compared to a net loss of $790,000 for the same period in 2004. 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 March 31, 2005, the balance on the receivable discount facility was $1,025,000 based on 75% of qualifying accounts receivable. At March 31, 2005, we had cash of $220,000 and a working capital deficiency of $6,000. At March 31, 2005, we had a cash flow deficiency from operations of $80,000. At March 31, 2004, we had cash of $230,000 and a working capital deficiency of $1,970,000. At March 31, 2004, we had a cash flow deficiency from operations of $760,000, largely attributable to the increase in accounts receivable of $320,000 and the decrease in accounts payable of $500,000. At March 31, 2005, we had a cash flow deficiency from investing activities of $130,000 related to the purchase of property and equipment. At March 31, 2004, we had a cash flow deficiency from investing activities of $40,000 also related to the purchase of property and equipment. At March 31, 2005 we had cash flow from financing activities of $260,000 largely attributable to an increase in our receivable discount facility of $300,000 which was partially offset by the repayment of long term debt in the amount of $40,000. At March 31, 2004, we had cash flow from financing activities of $580,000 attributable primarily to proceeds of $475,000 from the sale of convertible debentures and $193,500 from the exercise of common stock purchase warrants. At March 31, 2005 we had a loan balance of $218,968 with an individual, Terry Lyons. We are required to make monthly payments of $10,000 until the full amount of the note, including interest is paid in full. The loan bears interest at US prime plus 14% per annum and is subordinated to Morrison Financial Services Limited. At March 31, 2005, we had approximately $50,000 outstanding on various capital leases with various payment terms and interest rates. The average balance on the terms of leases are 12 months and cover primarily the hardware and various software applications required to support our engineering division. On January 17, 2005, we acquired TBM Technologies Inc., an Ontario Corporation which provides design engineering services. Pursuant to the Share Purchase Agreement, we purchased TBM for approximately $246,600 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 closing. In the event that the vendors seek to sell their shares in an open market transaction within the two years following closing and the bid price is less than the price of the shares on issuance, we will be obligated to issue additional shares of unregistered common stock with a value equal to the difference up to a maximum of $246,600. The acquisition was accounted for by the purchase method and the operations have been included in the consolidated operations from January 17, 2005. As a result of the acquisition of TBM Technologies Inc., we acquired a revolving line of credit with the Royal Bank of Canada. At March 31, 2005 the balance on the line of credit was $60,000, and the interest rate was 7% per annum. Subsequent to March 31, 2005, the line of credit was paid in full. 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 an 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 effective for annual reporting periods that begin after December 15, 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. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations". FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations", refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application of interim financial information is permitted but is not required. We do not believe that the adoption of FIN 47 will have an impact, if any, on its results of operations or financial position. 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. 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. 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 3. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 45 days prior to the filing date of this Form 10-QSB filed for the three months ended March 31, 2005 (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting the officers on a timely basis to material information relating to us (including our wholly owned subsidiaries) required to be included in our reports filed or submitted under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are party to the following pending legal proceedings: On March 17, 2004, Johnston & Associates, LLC, a South Carolina corporation, filed a statement against us with the Superior Court of Justice of Ontario, Canada, Court File No. C-294-04, demanding payment of $60,000 pursuant to a consulting agreement entered into April 2002. We intend to defend this claim vigorously. We are not party to any other material litigation, pending or otherwise. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the three months ended March 31, 2005, we sold unregistered securities as described below. There were no underwriters involved in the transactions and there were no underwriting discounts or commissions paid in connection therewith, except as disclosed below. The purchasers of the securities in such transactions represented their intention to acquire the securities for investment purposes only and not with a view to or for sales in connection with any distribution thereof and appropriate legends were affixed to the certificates for the securities issued in such transactions. The purchasers of the securities in the transactions below were each sophisticated investors who were provided information about us and were able to bear the risk of loss of their entire investment. On January 17, 2005, we issued 1,232,250,000 shares of our common stock, no par value per share, to the vendors of TBM Technologies Inc., in consideration of the purchase price of this acquisition of $246,600. We believe all of the above issuances were exempt from registration pursuant to the exemption provided by Section 4(2) of the Securities Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 22, 2005, we held an Annual Meeting of Shareholders at which the shareholders: (i) elected the Board of Directors for the ensuing year; (ii) ratified the appointment of Schwartz, Levitsky, Feldman, LLP, as our Independent Certified Public Accountants for the ensuing year; (iii) approved certain executive compensation; (iv) approved a reverse stock split of 5,000 to 1 of our outstanding common shares; and, (v) ratified the adoption of our 2005 Stock Option Plan. (i) The following directors were elected to the Board of Directors and received the votes indicated: Shares In Favor Shares Withheld --------------- --------------- Declan A. French 5,122,912,462 253,326,046 Lloyd MacLean 5,152,304,842 223,933,666 Patrick Power 5,152,304,842 223,933,666 Set forth below is a biographical description of each of our directors elected at our Annual General Meeting and Special Meeting of Shareholders held on April 22, 2005: 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. 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, is a General Manager at Netlan Technology Center. In 1997, Mr. Power opened our New York IT recruitment office where he served as Business Development Manager from 1997 until 2001. In 2001, Mr. Power was transferred to our New York training division. In 2002 we sold this division, to Thinkpath Training, LLC, a privately held independent company where he was employed as Director of Business Development 2001 until 2004. 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. (ii) The appointment of Schwartz, Levitsky Feldman, LLP, to serve as our independent chartered accountants for the ensuing year was approved by the votes indicated: For Against Withheld 5,151,233,747 224,904,761 100,000 (iii) The resolution to issue certain executive compensation was approved by the votes indicated: For Against Withheld 2,749,337,995 416,805,346 2,210,095,167 (iv) The resolution of a reverse stock split of 5,000 to 1 of our outstanding common shares was approved by the votes indicated: For Against Withheld 5,052,525.907 323,712,601 0 (v) The resolution to adopt the 2005 Stock Option Plan was approved by the votes indicated: For Against Withheld 3,658,517,162 1,797,916,751 9,804,595 No other matters were voted upon. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 31. Rule 13a-14(a)/15d-14(a) Certifications. Exhibit 32.1 Certification by the Chief Executive Officer Relating to a Periodic Report Containing Financial Statements.* Exhibit 32.2 Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.* (b) Reports on Form 8-K. * The Exhibit attached to this Form 10-QSB shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THINKPATH INC. Dated: May 20, 2005 By: /s/ Declan French By: /s/ Kelly Hankinson --------------------- ----------------------- Declan French Kelly L. Hankinson Chief Executive Officer Chief Financial Officer