-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FGYLueKy0xfqtz3wl3Tqcz+QqLu9AscvBITjFfwStwH85+SikBKPXSYkLSTN0XlF h/u5qxkCINYuwmBvxwSVPg== 0000909012-07-000847.txt : 20070521 0000909012-07-000847.hdr.sgml : 20070521 20070521155029 ACCESSION NUMBER: 0000909012-07-000847 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070521 DATE AS OF CHANGE: 20070521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THINKPATH INC CENTRAL INDEX KEY: 0001070630 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 52209027 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-14813 FILM NUMBER: 07867894 BUSINESS ADDRESS: STREET 1: 55 UNIVERSITY AVE STE 505 STREET 2: TORONTO, ONTARIO, CANADA CITY: M5J 2H7 BUSINESS PHONE: 4163648800 MAIL ADDRESS: STREET 1: 55 UNIVERSITY AVE STE 505 STREET 2: TORONTO, ONTARIO, CANADA CITY: MCJ 2H7 FORMER COMPANY: FORMER CONFORMED NAME: THINKPATH COM INC DATE OF NAME CHANGE: 20000414 FORMER COMPANY: FORMER CONFORMED NAME: IT STAFFING LTD DATE OF NAME CHANGE: 19980917 10QSB 1 t303461.txt 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, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____________ TO ________________ COMMISSION FILE NUMBER 001-14813 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.) 16 FOUR SEASONS PLACE, SUITE 215, TORONTO, ONTARIO, CANADA M9B 6E5 --------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (416) 622-5200 ------------------- (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 |_| INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT) YES | | NO |X| AS OF MAY 21, 2007 THERE WERE 6,010,262 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES | | NO |X| THINKPATH INC. MARCH 31, 2007 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, 2007 and December 31, 2006.............................................. 4-5 Interim Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006.................................. 6 Interim Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2007 and the year ended December 31, 2006.............................................. 7 Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006.................................. 8 Notes to Interim Consolidated Financial Statements............ 9-30 Item 2. Management's Discussion and Analysis or Plan of Operation........ 31-46 Item 3. Controls and Procedures............................................ 46 PART II - OTHER INFORMATION Item 1. Legal Proceedings ................................................. 46 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 47 Item 3. Defaults Upon Senior Securities ................................... 47 Item 4. Submission of Matters to a Vote of Security Holders ............... 47 Item 5. Other Information ................................................. 47 Item 6. Exhibits and Reports on Form 8-K .................................. 47 Signatures ........................................................ 48 ITEM 1. FINANCIAL STATEMENTS THINKPATH INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007 (UNAUDITED) AND DECEMBER 31, 2006 (AMOUNTS EXPRESSED IN US DOLLARS) 3/31/2007 12/31/2006 --------- ---------- $ $ ASSETS CURRENT ASSETS Cash 68,265 114,041 Accounts receivable (note 5) 2,764,510 2,150,413 Prepaid expenses 121,321 132,814 --------- ---------- 2,954,096 2,397,268 PROPERTY AND EQUIPMENT (note 6) 546,342 590,283 GOODWILL (note 7) 2,359,318 2,359,318 OTHER ASSETS (note 8) 273,681 302,508 --------- ---------- 6,133,437 5,649,377 ========= ========== The accompanying notes are an integral part of these interim consolidated financial statements.
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THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007 (UNAUDITED) AND DECEMBER 31, 2006 (AMOUNTS EXPRESSED IN US DOLLARS) 3/31/2007 12/31/2006 ----------- ----------- $ $ LIABILITIES CURRENT LIABILITIES Laurus revolving note (note 9) 3,208,938 2,921,792 Accounts payable (note 10) 1,890,724 1,493,223 Current portion of long-term debt (note 11) 940,662 824,709 ----------- ----------- 6,040,324 5,239,724 LONG-TERM DEBT (note 11) 651,595 730,976 CONVERTIBLE FINANCING - DERIVATIVES (note 9) 770,137 817,303 ----------- ----------- 7,462,056 6,788,003 =========== =========== COMMITMENTS AND CONTINGENCIES (note 17) STOCKHOLDERS' EQUITY (DEFICIENCY) CAPITAL STOCK (note 12) 42,266,530 42,266,530 DEFICIT (42,565,783) (42,376,656) ACCUMULATED OTHER COMPREHENSIVE LOSS (1,029,366) (1,028,500) ----------- ----------- (1,328,619) (1,138,626) ----------- ----------- 6,133,437 5,649,377 =========== =========== The accompanying notes are an integral part of these interim consolidated financial statements.
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THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (AMOUNTS EXPRESSED IN US DOLLARS) Three months ended March 31, 2007 2006 --------- --------- $ $ REVENUE 3,851,932 2,910,314 COST OF SERVICES 2,482,925 2,088,930 --------- --------- GROSS PROFIT 1,369,007 821,384 --------- --------- EXPENSES Administrative 664,985 605,426 Selling 467,944 473,816 Depreciation and amortization 103,250 87,932 Write down of property and equipment 3,443 -- Financing costs and mark-to-market adjustments 4,031 (124,208) --------- --------- 1,243,653 1,042,966 --------- --------- INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES 125,354 (221,582) Interest Charges 310,940 142,231 --------- --------- LOSS BEFORE INCOME TAXES (185,586) (363,813) Income Taxes (note 13) 3,541 7,843 --------- --------- NET LOSS (189,127) (371,656) ========= ========= WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING BASIC AND DILUTED 9,826,082 4,369,147 ========= ========= NET LOSS PER WEIGHTED AVERAGE COMMON STOCK BASIC AND DILUTED (0.02) (0.09) ========= ========= The accompanying notes are an integral part of these interim consolidated financial statements.
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THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND THE YEAR ENDED DECEMBER 31, 2006 (AMOUNTS EXPRESSED IN US DOLLARS) COMMON PREFERRED ACCUMULATED STOCK STOCK CAPITAL OTHER NUMBER OF NUMBER OF STOCK COMPREHENSIVE COMPREHENSIVE SHARES SHARES AMOUNTS DEFICIT LOSS LOSS -------------------------------------------------------------------------------------- Balance as of December 31, 2005 4,738,322 40,486,219 (37,518,943) (949,673) =========== =========== =========== =========== =========== Net loss for the year -- -- (4,857,713) (4,857,713) Other comprehensive loss, net of tax: Foreign currency translation adjustments (78,827) (78,827) ----------- Comprehensive loss (4,936,540) =========== Common stock issued for acquisition 3,685,751 763,000 -- Preferred stock issued for acquisition 700 699,687 -- Common stock issued for services 200,000 68,000 -- Accrued liabilities settled through the issuance of common stock 1,202,009 249,624 -- ----------- ----------- ----------- ----------- ----------- Balance as of December 31, 2006 9,826,082 700 42,266,530 (42,376,656) (1,028,500) =========== =========== =========== =========== =========== Net loss for the period -- -- (189,127) (189,127) Other comprehensive loss, net of tax: Foreign currency translation adjustments (866) (866) ----------- Comprehensive loss (189,993) =========== ----------- ----------- ----------- ----------- ----------- Balance as of March 31, 2007 9,826,082 700 42,266,530 (42,565,783) (1,029,366) =========== =========== =========== =========== =========== The accompanying notes are an integral part of these interim consolidated financial statements.
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THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (AMOUNTS EXPRESSED IN US DOLLARS) $ $ Cash flows from operating activities Net loss (189,127) (371,656) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 103,250 87,932 Amortization of deferred financing costs 115,655 142,105 Mark-to-market of derivatives (280,407) (266,313) Loss on extinguishment of debt 168,783 -- Write down of property and equipment 3,443 -- Decrease (increase) in accounts receivable (612,489) 31,172 Decrease in prepaid expenses 11,542 22,913 Increase in accounts payable 398,234 148,283 -------- --------- Net cash (used in) provided by operating activities (281,116) (205,564) -------- --------- Cash flows from investing activities Purchase of property and equipment (16,473) (5,470) Net cash used in investing activities (16,473) (5,470) -------- --------- Cash flows from financing activities Proceeds from revolving financing facility 318,888 -- Proceeds from convertible financing facility -- 165,891 Deferred financing costs incurred (17,500) -- Repayment of long-term debt (46,415) (20,072) -------- --------- Net cash provided by financing activities 254,973 145,819 -------- --------- Effect of foreign currency exchange rate changes (3,160) 38,134 -------- --------- Net decrease in cash (45,776) (27,081) Cash Beginning of year 114,041 123,056 -------- --------- End of year 68,265 95,975 ======== ========= SUPPLEMENTAL CASH ITEMS: Interest paid 310,940 142,231 ======== ========= Income taxes paid 3,541 7,843 ======== ========= The accompanying notes are an integral part of these interim consolidated financial statements.
-8- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (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, 2007, the Company had a deficit of $42,565,783 and has suffered recurring losses from operations. With insufficient working capital from operations, the Company's primary source of cash is a $4,000,000 financing facility with Laurus Master Fund, Ltd. ("Laurus"). At March 31, 2007, the balance on the facility was $3,706,218 (note 9). The facility consists of a revolving line of credit based on 90% of eligible accounts receivable which matures on June 27, 2008 and bears interest at an annual rate equal to The Wall Street Journal prime rate plus 3%. As at May 18, 2007, management's plans to mitigate and alleviate its operating losses and working capital deficiencies include: a) Raise additional working capital via convertible debt b) Ongoing cost cutting measures as required to restore each office to profitability c) Continued focus on securing customers with high growth potential, such as those in the aerospace and defense industries; d) Complement organic growth with the acquisition of profitable engineering companies; and 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 financing facility with Laurus Master Fund, Ltd., 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) 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.) and The Multitech Group Inc. provides engineering, design, technical publications and staffing services to enhance the resource performance of clients. In addition, the Company owns 100% (unless otherwise noted) of 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.), TidalBeach Inc. and TBM Technologies Inc. -9- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) c) 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. d) 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 approximate fair values because of the short maturity of those instruments. e) 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. f) 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. g) 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. h) 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 12 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. The outstanding options and warrants as detailed in note 12 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. i) Revenue The Company recognizes revenue under engineering service contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collection of the contract price is considered probable and can be reasonably estimated. Revenue is earned under time-and-materials, fixed-price and cost-plus contracts. -10- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) The Company recognizes revenue on time-and-materials contracts to the extent of billable rates times hours delivered, plus expenses incurred. For fixed price contracts within the scope of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), revenue is recognized on the percentage of completion method using costs incurred in relation to total estimated costs or upon delivery of specific products or services, as appropriate. For fixed price-completion contracts that are not within the scope of SOP 81-1, revenue is generally recognized as earned according to contract terms as the service is provided. The Company provides its customers with a number of different services that are generally documented through separate negotiated task orders that detail the services to be provided and the compensation for these services. Services rendered under each task order represent an independent earnings process and are not dependent on any other service or product sold. The Company recognizes revenue on cost-plus contracts to the extent of allowable costs incurred plus a proportionate amount of the fee earned, which may be fixed or performance-based. The Company considers fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract, which generally corresponds to the timing of contractual billings. The Company records provisions for estimated losses on uncompleted contracts in the period in which those losses are identified. The Company considers performance-based fees under any contract type to be earned only when it can demonstrate satisfaction of a specific performance goal or it receive contractual notification from a customer that the fee has been earned. In all cases, the Company recognizes revenue only when pervasive evidence of an arrangement exists services have been rendered, the contract price is fixed or determinable, and collection is reasonably assured. Contract revenue recognition inherently involves estimation. From time to time, facts develop that requires the Company to revise the total estimated costs or revenues expected. In most cases, these changes relate to changes in the contractual scope of the work, and do not significantly impact the expected profit rate on a contract. The Company records the cumulative effects of any revisions to the estimated total costs and revenues in the period in which the facts become known. j) 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. At December 31, 2006, the Company recorded a charge of $2,043,496 for the impaired goodwill of the Technical Publications and Engineering unit based on reduced cash flow estimates. At December 31, 2005, the Company recorded a charge of $1,459,691 for the impaired goodwill of the Technical Publications and Engineering unit based on reduced cash flow estimates. On an ongoing basis, absent any impairment indicators, the Company will perform a goodwill impairment test as of the end of the fourth quarter of every year. k) 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. -11- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) l) 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. m) 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. Estimates are used when recording accruals of expenses and revenue, allowance for doubtful accounts, and valuations of long-lived assets, goodwill and convertible financing derivatives. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become known. n) 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. o) 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. p) Accounting for Stock-Based Compensation Effective January 1, 2006, the Company's stock based employee compensation plans are accounted for in accordance with the recognition and measurement provisions of Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"). See note 3 (c) for further details. q) 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. -12- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) r) Recent Pronouncements In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections", applying to all voluntary accounting principle changes as well as the accounting for and reporting of such changes. SFAS No. 154 requires voluntary changes in accounting principle be retrospectively applied to financial statements from previous periods unless such application is impracticable. SFAS No. 154 requires that changes in depreciation, amortization, or depletion methods for long-lived, non-financial assets must be accounted for as a change in accounting estimate due to a change in accounting principle. By enhancing the consistency of financial information between periods, the requirements of FASB 154 improves financial reporting. FASB 154 replaces APB Opinion No. 20 and FASB 3. FASB 154 carries forward many provisions of Opinion 20 and FASB 3 without change including those provisions related to reporting a change in accounting estimate, a change in reporting entity, correction of an error and reporting accounting changes in interim financial statements. FASB 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" ("SFAS 155"). SFAS 155 allows any hybrid financial instrument that contains an embedded derivatives that otherwise would require bifurcation under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" to be carried at fair value in its entirety, with changes in fair value recognized in earnings. In addition, SFAS 155 requires that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or contain an embedded derivative. SFAS 155 also eliminates a prior restriction on the types of passive derivatives that a qualifying special purpose entity is permitted to hold. SFAS 155 is applicable to new or modified financial instruments in fiscal years beginning after September 15, 2006, though the provisions related to fair value accounting for hybrid financial instruments can also be applied to existing instruments. Early adoption, as of the beginning of an entity's fiscal year, is also permitted, provided interim financial statements have not yet been issued. The company is currently evaluating the potential impact, if any, that the adoption of SFAS 155 will have on its consolidated financial statements. In March 2006, the FASB issued SFAS 156, "Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140". This statement amends FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement: (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: (a) a transfer of the servicer's financial assets that meets the requirements for sale accounting, (b) a transfer of the servicer's financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", (c) an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates; (2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; (3) permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: (a) Amortization method-Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date, or (b) Fair value measurement method-Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur; (4) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt this statement as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of this Statement is the date an entity adopts the requirements of this statement. In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements the benefit of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 become effective as of the beginning of our 2008 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The company is currently evaluating the impact that FIN 48 will have on its financial statements. -13- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" (FAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of FAS 157 become effective as of the beginning of the 2009 fiscal year. The company is currently evaluating the impact that FAS 157 will have on its financial statements. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108), which addresses how to quantify the effect of financial statement errors. The provisions of SAB 108 become effective as of the end of the 2007 fiscal year. The company does not expect the adoption of SAB 108 to have a significant impact on its financial statements. In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158") which requires an employer to recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in its consolidated balance sheet. Under SFAS 158, actuarial gains and losses and prior service costs or credits that have not yet been recognized through earnings as net periodic benefit cost will be recognized in other comprehensive income, net of tax, until they are amortized as a component of net periodic benefit cost. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006 and shall not be applied retrospectively. The company is currently evaluating the impact that the adoption of SFAS 158 will have on its consolidated financial statements. In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration Payment Arrangements." This FASB Staff Position ("FSP") addresses an issuer's accounting for registration payment arrangements. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in this FSP amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities , and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , and FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , to include scope exceptions for registration payment arrangements. This FSP further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles ("GAAP") without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of this FSP. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this FSP, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Early adoption of this FSP for interim or annual periods for which financial statements or interim reports have not been issued is permitted. Early adoption of this FSP for interim or annual periods for which financial statements or interim reports have not been issued is permitted. In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115" (FAS 159). FAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The provisions of FAS 159 become effective as of the beginning of the 2008 fiscal year. The company is currently evaluating the impact that FAS 159 will have on its financial statements. s) Advertising Costs Advertising costs are expensed as incurred. -14- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) 3. STOCK OPTION PLANS
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------- -------------- a) Options outstanding at December 31, 2005 1,864,659 $.19 ========= Options forfeited during the year (25,000) $0.27 Options expired during the year (87) $3,470 Options granted during the year -- -- Options outstanding at December 31, 2006 1,839,572 $.19 ========= Options forfeited during the period -- Options expired during the period -- Options granted during the period -- -- Options outstanding at March 31, 2007 1,839,572 $.19 ========= Options exercisable December 31, 2006 1,839,572 $.19 Options exercisable March 31, 2007 1,839,572 $.19 Options available for future grant December 31, 2006 162,102 Options available for future grant March 31, 2007 162,102
b) Range of Exercise Prices at March 31, 2007 OUTSTANDING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE OPTIONS REMAINING LIFE EXERCISABLE EXERCISE PRICE ------- -------------- ----------- ---------------- $0.01 1,839,572 8.57 1,839,572 $0.19 c) Change in Accounting Policy and Pro-forma net income At December 31, 2006, the Company has five stock-based employee compensation plans, which are described more fully in note 12(d). Effective January 1, 2006, the Company's plans are accounted for in accordance with the recognition and measurement provisions of Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"), which replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. FAS 123(R) requires compensation costs related to share-based payment transactions, including employee stock options, to be recognized in the financial statements. In addition, the Company adheres to the guidance set forth within Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's views regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides interpretations with respect to the valuation of share-based payments for public companies. Prior to January 1, 2006, the Company accounted for similar transactions in accordance with APB No. 25 which employed the intrinsic value method of measuring compensation cost. Accordingly, compensation expense was not recognized for fixed stock options if the exercise price of the option equaled or exceeded the fair value of the underlying stock at the grant date. -15- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) While FAS No. 123 encouraged recognition of the fair value of all stock-based awards on the date of grant as expense over the vesting period, companies were permitted to continue to apply the intrinsic value-based method of accounting prescribed by APB No. 25 and disclose certain pro-forma amounts as if the fair value approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123, was issued, which, in addition to providing alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation, required more prominent pro-forma disclosures in both the annual and interim financial statements. The Company complied with these disclosure requirements for all applicable periods prior to January 1, 2006. In adopting FAS 123(R), the Company applied the modified prospective approach to transition. Under the modified prospective approach, the provisions of FAS 123(R) are to be applied to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro-forma disclosures under FAS 123. There was no stock compensation expense for employee options recorded under FAS 123(R) in the Consolidated Statement of Operations for the three months ended March 31, 2007 and 2006. There was no stock compensation expense for employee options recorded under APB No. 25 in the Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006. The Company previously accounted for options granted to its non-employee consultants using the fair value cost in accordance with FAS 123 and EITF No. 96-18. The adoption of FAS 123(R) and SAB 107 as of January 1, 2006, had no material impact on the accounting for non-employee awards. The Company continues to consider the additional guidance set forth in EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees" ("EITF 96-18"). There was no stock compensation expense related to non-employee options for the three months ended March 31, 2007 and 2006. On February 28, 2007, the exercise price of 379,572 options issued to Laurus Master Fund, Ltd on June 27, 2005 was amended from $.0001 to $0.01 per share. The options are exercisable at any time and in any amount and expire on June 27, 2015. There have been no options granted since 2005. 4. ACQUISITIONS On June 30, 2006, the Company acquired The Multitech Group Inc. (TMG), an engineering services firm located in New Jersey, effective April 1, 2006. The purchase price of $2,798,750 was based on five times the audited 2005 EBIT of TMG and was payable as follows: thirty percent in cash for a total of $839,625; twenty per cent in a two year subordinated note of $559,750 bearing annual interest at US prime, payable quarterly and guaranteed by the Company; twenty-five per cent in the Company's common shares for a total consideration of $699,688 or 3,369,188 common shares; and, twenty-five per cent in the Company's preferred shares for a total consideration of $669,688 or 700 preferred shares which will be convertible into common shares after June 30, 2007. The acquisition was accounted for by the purchase method and the operations have been included in the consolidated operations from April 1, 2006. The net acquired assets were valued as follows: Current assets $965,977 Property and equipment 378,715 Cash surrender value of life insurance 13,291 Customer lists 123,934 Contracts 489,294 Liabilities assumed (762,933) --------- 1,208,278 Less: consideration including acquisition costs 3,103,540 --------- Goodwill $1,895,262 ========== At December 31, 2006, the Company wrote off the goodwill of $1,895,262 allocated to the acquisition of TMG, for impairment based on reduced cash flow estimates. -16- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) 5. ACCOUNTS RECEIVABLE 3/31/07 12/31/06 ------- -------- $ $ Accounts receivable 2,965,542 2,366,916 Less: Allowance for doubtful accounts (201,032) (216,503) --------- --------- 2,764,510 2,150,413 ========= ========= Allowance for doubtful accounts Balance, beginning of period 216,503 201,876 Provision 5,921 92,662 Recoveries (21,392) (78,035) -------- -------- Balance, end of period 201,032 216,503 ======= ======= 6. PROPERTY AND EQUIPMENT
3/31/07 12/31/06 ---------------------------------------- ---------- ACCUMULATED COST AMORTIZATION NET NET $ $ $ $ Furniture and equipment 215,002 161,563 53,439 56,997 Computer equipment and software 4,015,605 3,533,198 482,407 518,130 Leasehold improvements 45,091 34,595 10,495 15,156 Automobile 43,425 43,425 -- -- ------ ------ ------- ------- 4,319,123 3,772,781 546,342 590,283 ========= ========= ======= ======= Property and equipment under capital lease included in the above 126,092 97,008 29,084 37,105 ======= ====== ====== ======
Amortization of property and equipment for the three months ended March 31, 2007 amounted to $56,894, including amortization of property and equipment under capital lease of $8,022. Amortization of property and equipment for the year ended December 31, 2006 amounted to $312,189, including amortization of property and equipment under capital lease of $25,759. 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:
3/31/07 12/31/06 ------- -------- ACCUMULATED ACCUMULATED IMPAIRMENT COST AMORTIZATION LOSSES NET NET ---------- ------------- -------------- ---------- ------------ $ $ $ $ $ Technical Publications & Engineering (Thinkpath US Inc., TBM Technologies Inc. and The Multitech Group Inc.) 7,851,142 535,164 4,956,660 2,359,318 2,359,318 --------- ------- --------- --------- ---------
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. 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. Effective April 1, 2006, the Company acquired goodwill in the amount of $1,895,262 in connection to its acquisition of TMG (note 4) which has been allocated to the Technical Publications and Engineering reporting unit. -17- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) At December 31, 2006, the Company performed its annual impairment test for goodwill by first comparing the carrying value of the net assets to the fair value of the Technical Publications and Engineering unit. The fair value was determined to be less than the carrying value, and therefore a second step was performed to compute the amount of the impairment. In this process, a fair value for goodwill was estimated, based in part on the fair value of the operations, and was compared to its carrying value. The shortfall of the fair value below carrying value was $2,043,496 which represents the amount of goodwill impairment. 8. OTHER ASSETS 3/31/07 12/31/06 ------- -------- $ $ Cash surrender value of life insurance -- -- Deferred Financing Costs 191,061 209,559 Customer Lists 82,620 92,949 ------ ------ Total 273,681 302,508 ======= ======= Included in Other Assets are deferred financing costs related to the Laurus Convertible Financing Facility to be amortized over the three-year term of the debt, beginning July 1, 2005. Also included in Other Assets are customer lists related to the acquisition of The Multitech Group Inc. (note 4) to be amortized over three years, beginning April 1, 2006. Amortization of other assets for the three months ended March 31, 2007 amounted to $46,356. Amortization of other assets for the year ended December 31, 2006 amounted to $322,630. Previously included in Other Assets were contracts related to the acquisition of the The Multitech Group Inc. (note 4) which were being amortized over two years. At December 31, 2006, the contracts asset balance in the amount of $305,811 was determined to be impaired and written off. During the year ended December 31, 2006, the Company received cash of $77,594 on the surrender value of life insurance policies held on two employees. 9. LAURUS REVOLVING NOTE (CONVERTIBILE FINANCING) FACILITY On June 27, 2005, the Company closed a $3,500,000 convertible financing facility with Laurus Master Fund, Ltd. ("Laurus"). The facility consisted of a secured convertible note ("Minimum Borrowing Note") based on 90% of eligible accounts receivable which matured on June 27, 2008 and bore interest at an annual rate equal to The Wall Street Journal prime rate plus 3% ("contract rate") but never less than 8%. At closing, the Company received $2,100,000 in proceeds from the facility based on its eligible accounts receivable ("formula amount") and an additional $1,000,000 ("overadvance") granted in excess of the formula amount. The overadvance bore interest at the prime rate as published by the Wall Street Journal plus 2% and held an expiration date of December 27, 2005. In the event that the overadvance was not repaid in full by this date, the interest rate was to increase by an additional 1% per month. Laurus had the option to convert into common stock at anytime all or any portion of the principal and interest and fees payable at a fixed conversion price as follows: - first $1,000,000 in principal convertible at a fixed price of $0.40 (80% of the average price for 10 days prior to closing of debt); - next $1,000,000 in principal convertible at a fixed price of $0.50 (100% of the average price for 10 days prior to closing of debt); - and, any remaining principal convertible at a fixed price of $0.53 (105% of the average price for 10 days prior to closing of debt). Should the Company complete a subsequent financing at a lower price than the original issue, the conversion prices of the three tranches above would be adjusted to 80%, 100% and 105% of the new lower price. This feature would modify the number of shares that the Company would issue on conversion of the notes. The Company had the option of prepaying the note at any time by paying to the holder a sum of money equal to 130% of the principal amount of the note. -18- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) In connection with the financing, the Company issued warrants to purchase up to 2,100,000 shares of its common stock with 1,050,000 at an exercise price of $0.55 per share and 1,050,000 at an exercise price of $0.60 per share. The warrants vested immediately and expire on June 27, 2011. The Company also issued options to purchase up to 379,572 shares of its common stock, no par value per share, at an exercise price of $.0001 per share. The options vested immediately and expire on June 27, 2015. On February 28, 2007 the option price was amended from $0.0001 per share to $0.01 per share. The financing included a Registration Rights Agreement which prescribes that the Company shall have caused a registration statement to be filed with the SEC, in respect of the securities covered by the Minimum Borrowing Note, Warrants and Options within 30 days of closing and to cause the registrations to become effective within 90 days of closing. In the event that the Company failed to file such registration statement, the agreement also provided that the Company shall pay liquidated damages and interest to Laurus. The Company determined that the conversion option embedded in the note and the warrants and options attached to the note qualify as embedded derivatives under the guidance of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" and as such should be accounted for separately at inception at their fair value and subsequently marked to market. The total of the embedded derivatives was separated from the debt based on the initial amount of $3,100,000. The initial value of the derivatives and "embedded derivatives" is offset against the Laurus financing and is being amortized over a 3-year period subject to the expected availability. The conversion right and interest adjustment clause found in the note were considered one embedded derivative and the warrants and options were each considered separate derivatives. As the embedded derivatives were not standard and are not publicly quoted, a combination of Black-Scholes methodologies and Monte Carlo simulations were used. Valuations were performed at each quarter end and the conversion option, warrants and options were each valued separately. For the valuation as of December 31, 2006 an assumption of 100% volatility was used and for the valuation at March 31, 2007, an assumption of 94.65% volatility was used. CONVERSION OPTION As the issue was a floating rate note, it was inferred that it would substantially always be equal to par ($3,100,000 USD). The implied number of conversion options would be derived by dividing the notional by the average conversion price. As shown in the table below, the conversion price was calculated using the weighted average conversion price for each tranche. This option was valued using a standard Black-Scholes model. WEIGHTED TRANCHE NOTIONAL CONVERSION PRICE AVERAGE ------- -------- ---------------- ------- Tranche 1 1,000,000 0.4 0.1290 Tranche 2 1,000,000 0.5 0.1613 Tranche 3 1,100,000 0.53 0.1881 ----------- --------------- Total 3,100,000 0.4784 =========== =============== The interest rate adjustment clause contained in the conversion option set that if the stock price exceeded the prevailing conversion price by a certain level, interest payments on the floating rate note would be reduced. This clause diminished the conversion options fair value as the holder would be penalized when the conversion option was in the money. The fair value for this clause is dependant on the expected behaviour of the prime rate and the Company's stock price. This clause was valued using a Monte Carlo simulation model using a mean reversion process to simulate the prime rate and a standard Geometric Brownian motion process for the Company's stock price. The 8% floor on interest rate clause contained in the conversion option was valued using a Monte Carlo simulation model with a mean reversion process to simulate the prime rate. As the value of the floor option was determined to be relatively insignificant ($29,000 liability as of December 31, 2005 and $500 liability as of June 30, 2006 representing an impact on the fair value of 0.2% and .015% respectively for the valuations), it was ignored in the valuation of the conversion option. The 5% limitation upon issuance of shares was ignored in this valuation based on the assumption that it is a liquidity feature that would not significantly impact the valuation. WARRANTS AND OPTIONS Valuation of the warrants and options were performed separately using standard Black-Scholes methodology. As the Company would be required to issue new shares for these instruments it used a valuation with a dilution effect. -19- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) AMENDMENTS On December 8, 2005, the Company and Laurus entered into an amendment of the Security Agreement pursuant to which Laurus agreed to waive (i) any event of default by the Company relating to the Company's non-payment of any liquidated damages associated with its non-filing of its Registration Statement and (ii) any liquidated damages associated with its non-filing of its Registration Statement that had accrued and were due and payable as of the date of December 8, 2005. In addition, the filing and effective dates for the Registration Statement were extended to January 31, 2006 and March 30, 2006, respectively. The Company failed to file and cause to be effective a registration statement by March 30, 2006. Laurus agreed to waive the event of default and associated liquidated damages and to extend the filing deadline until July 1, 2006. On January 26, 2006, the Company and Laurus executed an Overadvance Side Letter whereby Laurus increased the overadvance amount on the revolving note to $1,200,000 ("Second Overadvance"). The second overadvance bore interest at the prime rate as published by the Wall Street Journal plus 2%. The second overadvance was to expire on July 27, 2006. In the event that the overadvance was not repaid in full by this date, the interest rate was to be increased by an additional 1% per month. In consideration of the Second Overadvance, the Company issued 500,000 additional common stock purchase warrants with an exercise price of $0.01 per share which expire on January 26, 2012. Using the standard Black-Scholes methodology, these warrants were valued to be $98,588 which is being offset against the Laurus financing and is being amortized over the remaining term of the debt. On March 30, 2007, the expiration date of these warrants was amended to January 26, 2026. On June 30, 2006, Laurus modified the terms of the convertible financing facility and removed the convertibility option, the interest adjustment clause and the conversion adjustment clause. In addition, the Registration Rights Agreement was modified so that the liquidated damages that may be charged for failure to file a registration statement at 2% per day shall no longer exceed 20% of the total debt owed to Laurus. Further, the Registration Rights Agreement was modified such that there must be an effective registration statement for the common stock issued upon the exercise of options and warrants since the convertibility option has been removed. The Company evaluated the modifications to the convertible financing facility under EITF Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments" and EITF Issue No. 05-07, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues". ETIF Issue No. 96-19 requires the debtor to determine whether the present value of the cash flows, including changes in the fair value of an embedded conversion option upon modification of a convertible debt instrument, under the terms of the new debt instrument is at least 10% different from the present value of the remaining cash flows under the terms of the original instrument. Moreover, this EITF specifies that changes in the fair value of embedded conversion options should be incorporated in this analysis. This is reiterated in EITF Issue No. 05-7. Using the methodology proposed in EITF Issue No. 96-19, the fair value as of June 30, 2006 of the embedded conversion option was $388,264 (value of the embedded conversion option less value of the interest adjustment clause) and the present value of the "old" and "new" financing was $1,726,425 and $1,451,862 respectively. The Company concluded that the difference in cash flows was 16% and therefore that the "old" financing was extinguished. EITF Issue No. 96-19 requires that the new debt be recorded at fair value and that amount should be used to determine the debt extinguishment gain or loss to be recognized and effective rate of the new debt. Using an effective rate of 20%, the fair value of the new facility was determined to be $2,351,271 which results in a loss of $689,858 on extinguishment of debt based on the book value of the old facility of $1,661,413. This loss was included in financing costs at December 31, 2006 in the consolidated statement of operations. As the conversion right of the convertible financing facility was eliminated, the entire embedded derivative pertaining to the conversion option was reversed, resulting in a gain of $388,264. This gain was included in financing costs at December 31, 2006 in the consolidated statement of operations. The Company also evaluated the modifications to the Registration Rights Agreement, specifically the 2% liquidated damages clause under EITF Issue No. 00-19 to determine whether the warrants and options issued with the debt should be reclassed into equity from liabilities. According to EITF Issue No. 00-19, paragraph 16 "If a settlement alternative includes a penalty that would be avoided by a company under other settlement alternatives, the uneconomic settlement alternative should be disregarded in classifying the contract. In the case of delivery of unregistered shares, a discount from the value of the corresponding registered shares that is a reasonable estimate of the difference in fair values between registered and unregistered shares (that is, the discount reflects the fair value of the restricted shares determined using commercially reasonable means) is not considered a penalty." The Company concluded that the 20% cap added to the liquidated damages clause does not represent an economically reasonable difference between registered and unregistered shares as the cap is based on the notional amount of financing outstanding which no longer has a convertibility feature and therefore has no relation to the shares that could be issued upon the exercise of options and warrants. Moreover, the maximum potential penalty that could arise under this clause based on the total debt outstanding to Laurus at June 30, 2006 was approximately $980,000 which is significant as compared to the total value of the shares that could be issued under the outstanding warrants and options June 30, 2006 of approximately $960,000. -20- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) Under the Security Agreement, the Company is also subject to a 2% penalty (with no cap) if its stock would stop trading for failure to make timely filings with the SEC. In consideration of this penalty, which could be interpreted as a form of net cash settlement, and the assessment of the liquidated damages clause, the Company concluded that the criteria for reclassification to equity in EITF 00-19 was not met and therefore the warrants and options would remain embedded derivatives. On November 15, 2006, the Company executed an Omnibus Amendment No. 1 with Laurus Master Fund, Inc., whereby Laurus agreed to postpone the December and January principal payments on the Term Note (note 12) to be paid instead on the Maturity Date of June 30, 2009. In addition, they agreed to increase the overadvance by $43,000 and extend the overadvance until December 31, 2007 with a repayment schedule beginning July 1, 2007. In consideration of these modifications, the Company issued 940,750 common stock purchase warrants to Laurus with an exercise price of $0.23 per share which expire on November 15, 2013. Laurus also agreed to waive any penalties for failure to file and effect a registration statement registering the shares underlying their common stock purchase warrants until March 1, 2007. The fair value of the warrants issued on November 15, 2006 was determined to be $190,848 and were allocated as follows: 368,904 warrants as compensation for the deferral of the two principal payments on the term loan ($74,839 in fair value) and 571,846 warrants for the increase in and extension of the over advance ($116,009 in fair value). The Company considered the additional modifications to the revolving credit facility and term loan and whether they should be accounted for under EITF 96-19 or EITF 98-14. EITF 96-19 requires that modifications be evaluated by comparing the present value of the cash flows under the old debt with the present value of the cash flows under the new debt - both discounted at the effective interest rate of the old debt. The fair value of the additional warrants issued on the term loan ($74,839) is considered as a cash flow at inception of the new debt and as the difference was only 5% this modification was not considered an extinguishment of the old debt. As a result, there were no changes in the accounting required and the fair value of the additional warrants will be amortized over the remaining life of the term loan using the effective interest method. The revolving line of credit was modified such that the total borrowing capacity has been increased. Under EITF 98-14, the debtor should compare the product of the remaining term and the maximum available credit of the old arrangement with the borrowing capacity of the new arrangement. If the borrowing capacity of the new arrangement is greater than or equal to the borrowing capacity of the old arrangement, then any unamortized deferred costs, any fees paid to the creditor, and any third-party costs incurred should be associated with the new arrangement. Since the total borrowing capacity has increased as a result of the modifications, the fair value of the warrants associated with the overadvance would be deferred and amortized over the remaining term of the facility. In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration Payment Arrangements." This FASB Staff Position ("FSP") addresses an issuer's accounting for registration payment arrangements. This FSP can significantly modify the accounting treatment for instruments that are subject to registration rights agreements such as the Company's warrants. The FSP essentially states that registration rights agreements that contain contingent obligations to make payments should be evaluated as a contingency under FAS 5. Furthermore, the FSP states that: "a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement." Prior to the application of this FSP, the Company determined the appropriate accounting for the warrants by considering both its ability to settle the warrants by issuing unregistered shares and to pay the liquidated damages. Considering both elements together, the Company concluded that because the registration rights agreement contained a 2% per month liquidated damages clause if the underlying shares were not registered with the SEC, that the provision of EITF 00-19 paragraph 14 could not be met since it would be uneconomical to issue unregistered shares and to pay the penalty. Therefore, the warrants were considered liability instruments under EITF 00-19 and accounted for at fair value. Under the FSP, the Company had to evaluate whether the warrants could be settled in unregistered shares and that the 2% penalty payable in the event that the Company's shares are delisted is included in the scope of the FSP, then an impediment to classifying the warrants as equity instruments under FAS 133/EITF 00-19 would be removed. The next step in the analysis was to consider whether the warrants met the definition of a derivative under FAS 133. In order for the warrants not to be considered an embedded derivative then they must a) be indexed to the Company's own stock and b) classified in stockholders' equity. The Company determined that since its functional currency is Canadian and the warrants are exercisable in US dollars, the warrants should be considered indexed to both the company's share price and the exchange rate. As the warrants do not qualify for the exemption in paragraph 11 (a) of FAS 133, they should continue to be recorded as liabilities at fair value, with the variations recorded in earnings. -21- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) On February 28, 2007, the Company executed an Omnibus Amendment No. 2 with Laurus Master Fund, Inc., whereby Laurus amended the terms of the term loan (Note 11), increased the over advance to $1,690,000 and increased the stated amount of the revolver note to $3,650,000. The agreement also amended the exercise price of the options issued in June 2005 and the warrants issued in June 2006 from $0.0001 to $0.01. On March 21, 2007, the Company executed an Omnibus Amendment No. 3 with Laurus Master Fund, Inc., whereby the revolver note was increased to $4,000,000. Any principal indebtedness outstanding on the revolver in excess of $3,650,000 will bear interest at an annual rate equal to The Wall Street Journal prime rate plus 23% ("contract rate") but never less than 8%. In consideration of these modifications to the revolving facility, the Company issued 1,213,435 common stock purchase warrants to Laurus with an exercise price of $0.01 per share which expire on February 28, 2027. In accordance with EITF 98-14, the Company compared the product of the remaining term and the maximum available credit of the old arrangement with the borrowing capacity of the new arrangement. As the borrowing capacity of the new arrangement is greater than the borrowing capacity of the old arrangement, the fair value of the warrants associated with the revolver and over advance would be deferred and amortized over the remaining term of the facility. During the three months ended March 31, 2007, the Company amortized $115,655 of the initial value of the derivatives and embedded derivatives which are included in financing costs. During the year ended December 31, 2006, the Company amortized $465,471 of the initial value of the derivatives and embedded derivatives which are included in financing costs. VALUATION RESULTS DERIVATIVE 3/31/07 12/31/06 ---------- ------- --------- Warrants $730,889 $747,848 Options $39,248 $69,455 ------- ------- $770,137 $817,303 ======== ======== The mark to market of the derivatives including the embedded derivatives at March 31, 2007 was credited to financing costs in the amount of $280,407. The mark to market of the derivatives including the embedded derivatives at the end of each period was credited to financing costs in the amount of $293,822. At the end of each period, the balance on the Laurus facility was as follows: 3/31/07 12/31/06 ------- -------- $ $ Principal balance revolving note 3,706,218 3,387,330 Deferred Financing Costs (497,280) (465,538) --------- --------- Total 3,208,938 2,921,792 ========= ========= 10. ACCOUNTS PAYABLE Included in accounts payable at the end of each period are the following: 3/31/07 12/31/06 ------- -------- $ $ Trade payables 362,946 410,912 Accrued payroll and payroll liabilities 626,421 369,455 Accrued bonuses 104,927 75,987 Accrued professional fees 331,486 361,269 Other 464,944 275,600 ------- ------- 1,890,724 1,493,223 ========= ========= -22- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) 11. LONG-TERM DEBT i) March 31, 2007 On February 28, 2007, the Company executed an Omnibus Amendment No. 2 with Laurus Master Fund, Inc. (note 9), whereby Laurus agreed to postpone the March 2007 through to August 2007 principal payments with the postponed principal to be amortized equally over the remaining term of the loan beginning September 1, 2007. In addition, the exercise price of the warrants issued with the loan in June 2006 was amended from $0.0001to $0.01 per share. In consideration of these modifications, the Company issued warrants to purchase up to 1,213,435 shares of the Company's common stock at $0.01 per share. The warrants expire on February 28, 2027. The warrants were valued at February 28, 2007 using standard Black-Scholes methodology with a dilution effect and determined to have a value of $116,641. (Risk free interest rate of 4.75%; volatility of 96.5%; weighted average expected life of 20 years; weighted average fair value per share of $0.155). In accordance with APB 14, the value of these warrants should be extracted from the total cash received and the difference ascribed to the secured debt and amortized over the remaining term of the loan. In accordance with EITF 96-19, these modifications to the debt have been evaluated by comparing the present value of the cash flows under the old debt with the present value of the cash flows under the new debt, both discounted at the effective interest rate of the old debt. For purposes of this calculation, the remaining cash flows as at February 28, 2007 on the original term loan issued on June 30, 2006 were compared to modified cash flows on the term loan modified as of February 28, 2007. In this case, the allocated fair value of the additional warrants issued in November 15, 2006 and on February 28, 2007 ($74,839 and $116,641, respectively) were considered as a cash flow at inception of the new term loan. As the difference of 27% was greater than 10%, the modifications resulted in an extinguishment of the old debt. As a result, the modification is to be accounted for in the same manner as a debt extinguishment and all fees paid to or received from Laurus are to be associated with the extinguishment of the old debt instrument and included in determining the debt extinguishment gain or loss. In accordance with EITF 96-19, the new debt must be accounted for at fair value. In order to fair value the new term loan, the effective rate of the convertible debenture issued by the Company on May 10, 2007 was calculated and the conversion option was extracted in order to obtain an effective rate of approximately 24%. The resulting loss of $168,784 including the write off of the value attributed to the warrants as of February 28, 2007 is included in financing costs in the consolidated statement of operations for the three months ended March 31, 2007. At March 31, 2007, the Company had five unsecured promissory notes outstanding to the shareholders of TMG totaling $559,750 with quarterly payments of $69,969 which were to start September 30, 2006. The notes bear interest at an annual rate equal to the Wall Street Journal prime rate and mature on June 30, 2008. The Company has not made any scheduled principal payments on the notes due to cash flow constraints. Included in interest expense in the consolidated statement of operations for the three months ended March 31, 2007 is $15,561 in accrued but unpaid interest and default penalties on the promissory notes. At March 31, 2007, the Company held various capital leases in the amount of $3,234 secured by property and equipment with various payment terms and interest rates ranging from 10-22%. These leases mature between April 2007 and July 2007. ii) December 31, 2006 On June 30, 2006, the Company reached a settlement with W. Terry Lyons with respect to the secured loan outstanding to him in the amount of $178,062 including accrued interest. In consideration of a monetary payment by the Company of $100,000 and execution of a Full and Final Release, Lyons released the Company of all rights and debt held by him and forgave the balance of the loan of $78,062 which is included in debt forgiveness in the consolidated statement of operations at December 31, 2006. On June 30, 2006, the Company repaid the balance owing on an SBA loan held by TMG in the amount of $84,083 pursuant to the purchase agreement. This loan was personally guaranteed by the principal shareholders of TMG and collateralized by their personal residence and TMG's accounts receivables. On June 30, 2006, the Company repaid an Officer's Loan to the vendors of TMG in the amount of $349,624 with a cash payment of $100,000 and 1,202,009 shares of the Company's common stock, no par value per share, for consideration of $249,624. -23- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) On June 30, 2006, Laurus Master Fund Ltd. issued the Company a secured term loan in the amount of $1,400,000 of which the proceeds were used to fund the acquisition of TMG. The loan is payable monthly starting October 1, 2006 in the amount of $42,424 per month. The loan bears interest at an annual rate equal to the Wall Street Journal prime rate plus 2%. The loan matures June 30, 2009. In connection with the financing, the Company issued Laurus a warrant to purchase up to 1,810,674 shares of the Company's common stock at $.0001 per share. Laurus is prohibited from selling any of the warrants until June 30, 2007 and thereafter is prohibited from selling an amount of shares in excess of 15% of the daily volume of trading of the Company's common stock on any day. The warrants issued with the term loan are subject to the modified Registration Rights Agreement (note 9) including the 2% liquidated damages clause and therefore are classified as embedded derivatives under EITF 00-19. The warrants were valued as $304,763 as of June 30, 2006 using standard Black-Scholes methodology with a dilution effect. (Risk free interest rate of 5.38%; volatility of 142%; weighted average expected life of 10 years; weighted average fair value per share of $0.17). In accordance with APB 14, the value of these warrants should be extracted from the total cash received and the difference ascribed to the secured debt. Beginning July 1, 2006, the Company began amortizing the initial value of the embedded derivative over the three year term of the loan. On November 15, 2006, the Company executed an Omnibus Amendment No. 1 with Laurus Master Fund, Inc. (note 9), whereby Laurus agreed to postpone the December and January principal payments on the term note to be paid instead on the Maturity Date of June 30, 2009. The fair value of the warrants issued in consideration of this amendment was determined to be $74,839 and will be amortized over the remaining life of the term loan using the effective interest method. On June 30, 2006, the Company issued five unsecured promissory notes to the shareholders of TMG totaling $559,750 with quarterly payments of $69,969 starting September 30, 2006. The notes bear interest at an annual rate equal to the Wall Street Journal prime rate and mature on June 30, 2008. At December 31, 2006, the Company had failed to make any scheduled principal payments on the notes due to cash flow constraints. Included in interest expense in the consolidated statement of operations at December 31, 2006, is $31,121 in accrued but unpaid interest and default penalties on the promissory notes. On June 30, 2006, the Company assumed a motor vehicle loan as a result of the acquisition of TMG in the amount of $11,160 with monthly payments of $372 for 36 months starting January 14, 2006. The loan was secured by the motor vehicle and bore interest at 7.5% per annum. The loan was to mature on January 14, 2009. In July 2006, this liability was assumed by a TMG employee. At December 31, 2006, the Company held various capital leases in the amount of $7,178 secured by property and equipment with various payment terms and interest rates ranging from 10-22%. 3/31/07 12/31/06 ------- -------- $ $ a) Included therein: Laurus Term Loan 1,272,727 1,315,151 Promissory Notes - TMG 559,750 559,750 Capital Leases 3,234 7,178 ----- ----- 1,835,711 1,882,079 Less: deferred financing costs on Laurus Term Loan 243,454 326,394 Less: current portion 940,662 824,709 ------- ------- 651,595 730,976 ======= ======= b) Future principal payment obligations as at March 31, 2007, were as follows: 2007 782,285 2008 648,549 2009 404,877 2010 -- 2011 -- --------- 1,835,711 ========= c) Interest expense related to long-term debt for the three months ended March 31, 2007 was $48,788. Interest expense related to long-term debt for the year ended December 31, 2006 was $140,612. -24- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) 12. CAPITAL STOCK a) Authorized Shares Unlimited Common stock, no par value 1,000,000 Preferred stock, issuable in series, rights to be determined by the Board of Directors Effective June 29, 2005, the Company implemented a one-for-five thousand reverse split of its common stock. At the time of the reverse stock split, each five thousand shares of the Company's issued and outstanding common stock were combined into one share of its common stock. The reverse stock split did not change the number of authorized shares of the Company's common stock. The one-for-five thousand reverse split was approved by the Company's shareholders at its Annual General Meeting on April 22, 2005, and subsequently approved by its Board of Directors. All common share and per share amounts throughout these financial statements have been adjusted to give effect to this reverse stock split. b) Issued Shares At December 31, 2005, the Company had a total of 4,738,322 shares of common stock issued and outstanding. On June 30, 2006, the Company issued 3,369,188 shares of its common stock, no par value per share, to the selling shareholders of TMG for a total consideration of $699,687. The Company also issued 1,202,009 shares of its common stock, no par value per share, to the Vendors of TMG as repayment of an Officer's Loan in the amount $249,624. On June 30, 2006, the Company issued 316,563 shares of its common stock, no par value per share, to Leventis Investments for a total consideration of $63,313 as partial payment of a buyer's fee for the TMG acquisition. On July 1, 2006, the Company issued 162,000 shares of its common stock, no par value, with "piggyback" registration rights to Financial Media Relations, LLC (FMR), a California company, for the purpose of developing and implementing a marketing and investor relations program and the provision of business development and strategic advisory services. The term of the agreement is six months beginning July 1, 2006 and also includes a monthly cash fee of $5,000. Subsequent to December 31, 2006, the Company notified FMR that it was terminating the contract and canceling the 162,000 shares for FMR's failure to deliver any services. On July 21, 2006, the Company issued 200,000 shares of its common stock, no par value, as director compensation. At December 31, 2006, the Company had a total of 9,826,082 shares of common stock issued and outstanding. There were no shares of common stock issued during the three months ended March 31, 2007. 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 Exercise price 3/31/07 12/31/06 per share Expiry date ------------ ----------------- ------------------ ------------------- 500,000 500,000 $0.41 2007 100,000 100,000 $1.20 2007 124 124 $200.00 2009 2,400 2,400 $87.50 2009 229 229 $1.25 2009 1,714 1,714 $87.50 2010 2,857 2,857 $43.75 2010 13,333 13,333 $3.75 2010 9,083 9,083 $1.25 2010 47,388 47,388 $1.25 2011 62,500 62,500 $1.00 2011 1,050,000 1,050,000 $0.55 2011 1,050,000 1,050,000 $0.60 2011 940,750 940,750 $0.23 2013 1,810,674 1,810,674 $0.01 2016 500,000 500,000 $0.01 2026 2,426,870 -- $0.01 2027 ------------ ----------------- ------------------ ------------------- 8,517,922 6,091,052 ------------ ----------------- ------------------ ------------------- -25- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) A summary of changes to number of issued warrants is as follows: Outstanding at December 31, 2005 2,839,861 ----------- Issued 3,251,424 Cancelled -- Exercised -- Expired (233) ----------- Outstanding at December 31, 2006 6,091,052 =========== Issued 2,426,870 Cancelled -- Exercised -- Expired -- ----------- Outstanding at March 31, 2007 8,517,922 =========== As disclosed in note 9, on January 26, 2006, the Company issued 500,000 additional common stock purchase warrants to Laurus Master Fund, Ltd. with an exercise price of $0.01 per share and expire on January 26, 2012. On March 30, 2007, the expiration date of these warrants was amended to January 26, 2026. As disclosed in note 11, on June 30, 2006, the Company issued 1,810,674 common stock purchase warrants to Laurus Master Fund, Ltd. with an exercise price of $.0001 per share and which expire on June 30, 2016. Laurus is prohibited from selling any of the warrants until June 30, 2007 and thereafter is prohibited from selling an amount of shares in excess of 15% of the daily volume of trading of the Company's common stock on any day. On February 28, 2007 the exercise price of these warrants was amended to $0.01 per share. As disclosed in note 9, on November 15, 2006, the Company issued 940,750 common stock purchase warrants to Laurus Master Fund, Ltd with an exercise price of $.23 per share and which expire on November 15, 2013. As disclosed in note 9, on February 28, 2007, the Company issued 2,426,870 common stock purchase warrants to Laurus Master Fund, Ltd with an exercise price of $.01 per share and which expire on February 28, 2027. 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, 2002 Stock Option Plan and 2005 Stock Option Plan. Under the plans, a total of 2,001,674 options were authorized to be granted to officers, directors, consultants, key employees, advisors and similar parties who provide their skills and expertise to the Company. At March 31, 2007, 1,839,572 options remain outstanding and 162,102 options are available for future grant. At December 31, 2006, 1,839,572 options remain outstanding and 162,102 options are available for future grant. 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 to employees 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. On February 28, 2007, the exercise price of 379,572 options issued to Laurus Master Fund, Ltd on June 27, 2005 was amended from $.0001 to $0.01 per share. -26- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) e) Preferred Stock On June 30, 2006, the Company issued 700 shares of Series D preferred stock to the Vendors of TMG for a total consideration of $669,689. The Series D preferred stock is convertible into common stock at the option of the holder, one year from issuance by dividing $669,689 by the market price of the Company's common stock prior to conversion. 13. DEFERRED INCOME TAXES AND INCOME TAXES a) Deferred Income Taxes The components of the deferred tax liability benefit by source of temporary differences that gave rise to the benefit are as follows: 3/31/07 12/31/06 ------- -------- $ $ Losses available to offset future income taxes 7,665,000 7,543,000 Deferred costs and customer lists 33,000 33,000 Share and debt issue costs 15,000 12,000 Property and equipment 1,009,000 999,000 --------- ------- 8,722,000 8,587,000 Less: valuation allowance 8,722,000 8,587,000 --------- --------- -- -- ========= ========= b) Current Income Taxes Current income taxes consist of: 3/31/07 12/31/06 ------- -------- $ $ Amounts calculated at statutory rates (74,234) (1,938,583) -------- ----------- Permanent differences (56,879) 1,063,826 Valuation allowance 134,654 886,000 ------- ------- 77,775 1,949,826 ------ --------- Current income taxes 3,541 11,243 Deferred income taxes -- -- ----- ------ Income taxes 3,541 11,243 ===== ====== Issue expenses totaling approximately $237,000 may be claimed at the rate of 20% per year until 2010. 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 $19,162,000, nor a capital loss totaling $750,000 in the future as a deferred tax asset as at March 31, 2007. As at the completion of the March 31, 2007 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. 14. COMPREHENSIVE LOSS 3/31/07 12/31/06 ------- -------- $ $ Net loss (189,127) (4,857,713) Other comprehensive loss Foreign currency translation adjustments (866) (78,827) ----- -------- Comprehensive loss (189,993) (4,936,540) ========= =========== 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. -27- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) 15. SEGMENTED INFORMATION a) Revenue and Gross Profit by Geographic Area Three Months Ended March 31, 2007 2006 ---- ---- $ $ Revenue Canada 271,638 432,910 United States of America 3,580,294 2,477,404 --------- --------- 3,851,932 2,910,314 ========= ========= Gross Profit Canada 119,962 166,133 United States of America 1,249,045 655,251 --------- ------- 1,369,007 821,384 ========= ======= b) Net Loss by Geographic Area Three Months Ended March 31, 2007 2007 ---- ---- $ $ Canada (440,097) (153,010) United States of America 250,970 (218,646) ------- --------- (189,127) (371,656) ========= ========= c) Identifiable Assets by Geographic Area 3/31/07 12/31/06 ------- -------- $ $ Canada 477,085 606,087 United States of America 5,656,352 5,043,290 --------- --------- 6,133,437 5,649,377 ========= ========= d) 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, 2007, one customer had sales of $984,142, representing approximately 26% of total revenue. For the three months ended March 31, 2006, one customer had sales of $412,614, representing approximately 14% of total revenue. e) Purchases from Major Suppliers There were no significant purchases from major suppliers. 16. 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, 2007, for the next five years are as follows: 2007 236,016 2008 213,256 2009 140,477 2010 99,112 2011 -- ------- 688,861 ======= The lease commitments do not include an operating lease for premises in New York that the Company sub leased to Thinkpath Training LLC, the purchaser of the United States training division. Thinkpath Training LLC is a non-related company and its principal officer is the daughter of the Company's Chief Executive Officer, Declan French. -28- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) In April 2006, the Company was notified by the purchaser that they had failed to meet their rent obligations and had accumulated rent arrears of approximately $80,000. The lessor filed a claim against Thinkpath Training LLC, the sub tenant, and the Company demanding that the rent arrears be paid and the premises vacated immediately. On June 1, 2006, a default judgment was awarded to the lessor and entered against the Company. On July 7, 2006, the Company's motion to vacate the default judgment was denied. On July 27, 2006, the court agreed to the Company's motion to renew and reargue its prior motion seeking to vacate the default judgment on August 23, 2006. Upon reargue on September 7, 2006, the court vacated the judgment and dismissed the petition. On September 21, 2006, the Company received notice from the landlord demanding payment of the current arrears of approximately $360,000 in unpaid rent and additional charges and its intent to commence legal proceedings against the Company in the event that such payment is not made. In March 2007, the Lessor filed a motion for summary judgment. The Company was granted an extension until May 2007, to have a hearing on this motion. The Company continues to defend this claim vigorously, although it is also working to reach a settlement with the Lessor. At March 31, 2007, the Company has accrued $100,000 related to this claim. The lease commitments do not include an operating lease for premises located in Brampton, Ontario that were vacated in February 2007. The Company has not made any payments on this lease since November 2006 and will attempt to negotiate a settlement with the landlord for early termination. The Company may be liable for a lease balance of $173,913 which expires April 2008. The Company relocated its Canadian operations to Toronto, Ontario and entered a short-term sub lease which expires June 30, 2007 with an option to renew for an indeterminate period. At March 31, 2007, the Company has accrued $45,000 in rent expense to cover the period from November 2006 until February 2007. In February 2007, the Company provided the landlord of its Cincinnati office the required 120 days notice of its intent to terminate the lease. b) On November 3, 2005, the Company terminated the service agreement of the vendors of TBM Technologies Inc., acquired on January 17, 2005, for what it believes is a material breach of the agreement by the vendors. The vendors are seeking termination pay from the Company in the amount of approximately $40,000. The Company has filed a counterclaim for losses suffered as well as jeopardy to its reputation by the actions of the vendors. The Company has not accrued any costs related to this claim. 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. 17. SUBSEQUENT EVENTS On April 19, 2007, the Company executed an agreement with John and Cecelia Kennedy which amends certain elements of the provision governing merger consideration in Section 2.7 of the Agreement and Plan of Merger dated as of June 29, 2006 among the Company, The Multitech Group, Inc., the Kennedy's and other parties. Pursuant to the terms of the agreement, the Kennedy's will return for cancellation 4,065,820 common shares, 595 preferred shares and non-negotiable promissory notes in the aggregate amount of $475,788 issued upon execution of the Merger Agreement. In consideration of these events, the Company issued a promissory note in the amount of $800,000 payable over 60 months beginning January 2008 and bearing interest at annual rate of 6%. On May 10, 2007, the Company entered into a Securities Purchase Agreement with Trafalgar Capital Specialized Investment Fund, Luxembourg with respect to the purchase of up to $8,000,000 in 12% convertible debentures convertible into common shares pursuant to Regulation "S". The first debenture of $400,000 was issued by the Company on May 10, 2007 and is convertible at a 10% discount to the lowest of the daily volume weighted average price during the preceding 10 days and becomes due 2 years from its date of issuance. The Company also issued a Convertible Compensation Debenture Agreement, dated May 10, 2007 with respect to a debenture in the amount of $160,000 as a facility fee convertible under the same terms and also due 2 years from its date of issuance. In the event that Trafalgar fails to raise an additional minimum amount of $600,000 in convertible debentures, the Convertible Compensation Debenture Agreement will be cancelled. The Company also issued 250,000 shares of common stock, no par value, in consideration of a $40,000 facility fee. On May 14, 2007, the Company entered into a Service Agreement with ROI Group LLC, a Delaware corporation for the provision of investor relations services on behalf of the Company for a period of twelve months. Pursuant to the agreement, the Company is required to issue 240,000 shares of its common stock and provide cash payments of $10,000 per month for the duration of the agreement. On May 14, 2007, Blair Taylor resigned from the Company's Board of Directors which resignation was accepted in a resolution adopted during a meeting of the Board of Directors held on that day. Mr. Taylor did not have any disagreements with the Company or its Board of Directors. To fill the vacancy created, the directors appointed Judd Bedford until the next annual meeting of shareholders. -29- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT MARCH 31, 2007 (AMOUNTS EXPRESSED IN US DOLLARS) 18. FINANCIAL INSTRUMENTS a) Credit Risk Management The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce its credit risk, the Company has adopted credit policies, which include the analysis of the financial position of its customers and the regular review of their credit limits. In some cases, the Company requires bank letters of credit or subscribes to credit insurance. b) Concentration of Credit Risk The Company'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. 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. The fair value of the Company's debt instruments with embedded derivatives are measured separately at the end of each period using a combination of Black-Scholes methodologies and Monte Carlo simulations. As the Company has no public rating or no public debt, it is very difficult to estimate the potential change of the credit spread between the issue date and valuation dates. Moreover, there is no evidence of any material event that could change significantly the credit spread of the issue. A constant credit spread equal to 300 basis points as per the issue date was therefore assumed in the valuation and current volatility rates were used. Changes in the fair value of derivates are charged to current earnings. 19. COMPARATIVE FIGURES Certain figures in the March 31, 2006 financial statements have been reclassified to conform to the basis of presentation used at March 31, 2007. -30- 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, material handling, healthcare 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 16 Four Seasons Place, Toronto, Ontario, Canada and our website is WWW.THINKPATH.COM. PLAN OF OPERATION We are focused on building relationships with customers in high growth industries such as defense and aerospace. We believe we are poised to benefit from the increased demand generated by aerospace and defense-related customers who we expect 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 intend to 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. -31- STATEMENTS OF OPERATIONS--PERCENTAGES FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 Three Months Ended March 31, 2007 2006 % % REVENUE 100 100 COST OF SERVICES 64 72 --- --- GROSS PROFIT 36 28 EXPENSES ADMINISTRATIVE 17 21 SELLING 12 16 DEPRECIATION AND AMORTIZATION 3 3 WRITE DOWN OF PROPERTY AND EQUIPMENT 0 0 FINANCING COSTS 0 (4) --- --- INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES 3 (8) INTEREST CHARGES 8 5 --- --- LOSS BEFORE INCOME TAXES (5) (13) INCOME TAXES 0 0 --- --- NET LOSS (5) (13) === === -32- RESULTS OF OPERATIONS THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2006 REVENUE Our revenue is comprised of engineering services including the complete planning, staffing, development, design, implementation and testing of a project. It can also involve enterprise-level planning and project anticipation. Our specialized engineering services include: design, build and drafting, technical publications and documentation. We outsource our technical publications and engineering services on both a time and materials and project basis. For the three months ended March 31, 2007 we derived 93% of our revenue in the United States compared to 85% for the three months ended March 31, 2006. This increase is a result of both the new sales from the TMG acquisition which is US based and acquired effective April 1, 2006 and the decline in project sales in Canada during the first quarter of 2007. Consolidated revenues for the three months ended March 31, 2007 increased by $940,000 or 32% to $3,850,000 as compared to $2,910,000 for the same period last year. This increase is largely attributable to the acquisition of TMG which contributed $620,000 in revenue in the first quarter of 2007. In addition, sales from one major customer increased from $410,000 or 14% of total revenue to $980,000 or 26% of total revenue. COSTS OF SERVICES The direct costs of engineering services include wages, benefits, software training and project expenses. Costs of services for the three months ended March 31, 2007 increased by $390,000 or 19% to $2,480,000 as compared to $2,090,000 for the three months ended March 31, 2006. This increase is related to the aforementioned increase in revenue. As a percentage of revenue, the cost of services for the three months ended March 31, 2007 was 64% compared to 72% for the three months ended March 31, 2006. GROSS PROFIT Gross profit is calculated by subtracting all direct costs from net revenue. Gross profit for the three months ended March 31, 2007 increased by $550,000 or 67%. This increase is related to the increase in revenue. As a percentage of revenue, gross profit for the three months ended March 31, 2007 is 36% compared to 28% for the three months ended March 31, 2006. This increase is a result of significant overtime hours during the first quarter of 2007 which are charged to the customer at higher rates as well as the collection of a direct hardware/software fee on some projects. EXPENSES Total expenses for the three months ended March 31, 2007 increased by 19% or $200,000 to $1,240,000 compared to $1,040,000 for the three months ended March 31, 2006. ADMINISTRATIVE EXPENSES Administrative expenses increased by $60,000 or 10% to $665,000 for the three months ended March 31, 2007 compared to $605,000 for the three months ended March 31, 2006. This increase is largely attributable to the acquisition of TMG and the related administrative salaries, office expenses and insurance premiums. These costs were not included in the first quarter of 2006 as the effective date of the transaction was April 1, 2006. As a percentage of revenue, administrative expenses for the three months ended March 31, 2007 were 17% compared to 21% for the three months ended March 31, 2006. This decline is largely due to cost reductions that were implemented in February 2007 including a 20% salary reduction of the executive officers. -33- SELLING EXPENSES Selling expenses for the three months ended March 31, 2007 were $470,000 which is consistent with 2006. As a percentage of revenue, selling expenses for the three months ended March 31, 2007 were 12% compared to 16% for the three months ended March 31, 2006. This decrease, despite the addition of the new TMG sales salaries, is largely due to a 10% salary reduction of all the general managers as part of the aforementioned cost reductions implemented in February 2007. DEPRECIATION AND AMORTIZATION For the three months ended March 31, 2007, depreciation and amortization expenses increased by $10,000, or 11%, to $100,000 compared to $90,000 for the three months ended March 31, 2006. The increase is largely attributable to the amortization of $60,000 on additional capital assets and other assets including contracts and customer lists acquired with the TMG acquisition. This increase was offset by the decrease in depreciation expense on property and equipment as many assets have either been fully amortized or written off as impaired at December 31, 2006. As a percentage of revenue, depreciation and amortization expense for the three months ended March 31, 2007 was 3%, which is consistent with the same period in 2006. WRITE DOWN OF PROPERTY AND EQUIPMENT At March 31, 2007, we wrote down property and equipment in the amount of approximately $3,000. 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. FINANCING COSTS AND MARK-TO-MARKET ADJUSTMENTS During the three months ended March 31, 2007, we amortized $115,000 of the initial value of the derivatives and embedded derivatives attached to the Laurus Master Fund, Ltd. revolving debt facility and term loan. At March 31, 2007, the fair value of the derivatives and embedded derivatives were marked-to-market with $280,000 credited to financing costs. -34- On February 28, 2007, we executed an Omnibus Amendment No. 2 with Laurus Master Fund, Inc., whereby Laurus agreed to postpone the March 2007 through to August 2007 principal payments on the term loan with the postponed principal to be amortized equally over the remaining term of the loan beginning September 1, 2007, increased the revolver over advance to $1,690,000 and increased the stated amount of the revolver note to $3,650,000. The agreement also amended the exercise price of the options issued in June 2005 and the warrants issued in June 2006 from $0.0001 to $0.01. On March 21, 2007, we executed an Omnibus Amendment No. 3 with Laurus Master Fund, Inc., whereby the revolver note was increased to $4,000,000. Any principal indebtedness outstanding on the revolver in excess of $3,650,000 will bear interest at an annual rate equal to The Wall Street Journal prime rate plus 23% ("contract rate") but never less than 8%. In consideration of these modifications to the revolving facility, we issued to 2,426,870 common stock purchase warrants to Laurus with an exercise price of $0.01 per share which expire on February 28, 2027. The warrants were valued at February 28, 2007 using standard Black-Scholes methodology with a dilution effect and determined to have a value of $233,282. In accordance with APB 14, the value of these warrants should be extracted from the total cash received and the difference ascribed to the secured debt and amortized over the remaining term of the loan. In accordance with EITF 96-19, these modifications to the debt have been evaluated by comparing the present value of the cash flows under the old debt with the present value of the cash flows under the new debt, both discounted at the effective interest rate of the old debt. To assess the revisions to the term loan, the remaining cash flows as at February 28, 2007 on the original term loan issued on June 30, 2006 were compared to modified cash flows on the term loan modified as of February 28, 2007. In this case, the allocated fair value of the additional warrants issued on November 15, 2006 and on February 28, 2007 were considered as a cash flow at inception of the new term loan. As the difference of 27% was greater than 10%, the modifications resulted in an extinguishment of the old debt. As a result, the modification is to be accounted for in the same manner as a debt extinguishment and all fees paid to or received from Laurus are to be associated with the extinguishment of the old debt instrument and included in determining the debt extinguishment gain or loss. In accordance with EITF 96-19, the new debt must be accounted for at fair value. In order to fair value the new term loan, the effective rate of the convertible debenture issued to Trafalgar on May 10, 2007 was calculated and the conversion option was extracted in order to obtain an effective rate of approximately 24%. The resulting loss of $168,784 including the write off of the value attributed to the warrants as of February 28, 2007 is included in financing costs in the consolidated statement of operations for the three months ended March 31, 2007. -35- To assess the revisions to the revolver, we compared the product of the remaining term and the maximum available credit of the old arrangement with the borrowing capacity of the new arrangement. As the borrowing capacity of the new arrangement is greater than the borrowing capacity of the old arrangement, the fair value of the warrants associated with the revolver and over advance would be deferred and amortized over the remaining term of the facility. During the three months ended March 31, 2006, we amortized $142,105 of the initial value of the derivatives and embedded derivatives attached to the Laurus Master Fund, Ltd. convertible debt financing closed on June 27, 2005. At March 31, 2006, the fair value of the derivates and embedded derivatives were marked-to-market with a total of $266,313 credited to financing costs. INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES For the three months ended March 31, 2007, income before interest charges and income taxes increased by $345,000 to income of $125,000, compared to a loss of $220,000 for the three months ended March 31, 2006. INTEREST CHARGES For the three months ended March 31, 2007, interest charges increased by $170,000, or 121%, to $310,000, from $140,000 for the three months ended March 31, 2006. Included in interest charges for the three months ended March 31, 2007 is $180,000 paid to Laurus Master Fund, Ltd. on the term loan and revolver facility, $15,000 in interest and penalties on the outstanding TMG promissory notes and $15,000 in interest on capital leases and miscellaneous charges. Also included at March 31, 2007 is approximately $100,000 in accrued interest and penalties for failure to file and effect a registration agreement underlying the options and warrants of Laurus Master Fund, Ltd. as per the Registration Rights Agreement executed in June 2005. Accumulated interest and penalties under this agreement had been waived by Laurus Master Fund, Ltd. from the period October 2005 until March 1, 2007. Included in the interest charges for the three months ended March 31, 2006 is $110,000 paid on the revolving convertible note balance and overadvance with Laurus Master Fund, Ltd. and $30,000 on various loans and leases. LOSS BEFORE INCOME TAXES For the three months ended March 31, 2007, loss before income taxes decreased by $175,000, or 49%, to $185,000, as compared to $360,000 for the three months ended March 31, 2006. -36- INCOME TAXES Income taxes for the three months ended March 31, 2007 were $3,500 compared to $8,000 for the same period in 2006. NET LOSS For the three months ended March 31, 2007, net loss decreased by $180,000, or 49%, to a net loss of $190,000, compared to a net loss of $370,000 for the three months ended March 31, 2006. LIQUIDITY AND CAPITAL RESOURCES With insufficient working capital from operations, our primary source of cash is a revolving note facility with Laurus Master Fund, Ltd. On February 28, 2007, we executed an Omnibus Amendment No. 2 with Laurus Master Fund, Inc., whereby the over advance was increased to $1,690,000 and the stated amount of the revolver note was increased to $3,650,000. In consideration of these modifications, the Company issued 2,426,870 common stock purchase warrants to Laurus with an exercise price of $0.01 per share expiring on February 28, 2027. On March 21, 2007, we executed an Omnibus Amendment No. 3 with Laurus Master Fund, Inc., whereby the revolver note was increased to $4,000,000. Any principal indebtedness outstanding on the revolver in excess of $3,650,000 will bear interest at an annual rate equal to The Wall Street Journal prime rate plus 23% ("contract rate") but never less than 8%. At March 31, 2007, the principal balance on the revolving note facility was $3,706,218 including an overadvance position in the amount of $1,237,961. At March 31, 2007, the balance on the term loan with Laurus Master Fund, Ltd. was $1,272,727. Pursuant to the Omnibus Amendment No. 2 with Laurus Master Fund, Inc., Laurus agreed to postpone the March 2007 through to August 2007 principal payments on the term note with the postponed principal to be amortized equally over the remaining term of the loan beginning September 1, 2007. At March 31, 2007, we had outstanding five unsecured promissory notes to the shareholders of TMG totaling $559,750. Quarterly payments on the notes in the amount of $69,969 were to have started September 30, 2006. The notes bear interest at an annual rate equal to the Wall Street Journal prime rate and mature on June 30, 2008. As at March 31, 2007, no principal or interest payments had been made on he notes due to cash flow constraints. At March 31, 2007, we held various capital leases in the amount of $3,234 secured by property and equipment with various payment terms and interest rates ranging from 10-22%. These leases mature between April 2007 and July 2007. At March 31, 2007, we had cash of $70,000, a working capital deficiency of $3,090,000 and a cash flow deficiency from operations of $280,000. At March 31, 2006 we had cash of $95,000, a working capital deficiency of $1,100,000 and cash flow from operations of $205,000. -37- At March 31, 2007, we had a cash flow deficiency from investing activities of $20,000 related to the purchase of property and equipment. At March 31, 2006 we had a cash flow deficiency from investing activities of $5,000 largely related to the purchase of property and equipment. At March 31, 2007 we had cash flow from financing activities of $250,000 largely attributable to proceeds from the revolving facility with Laurus of $320,000 less deferred costs of $20,000 and debt repayment of $50,000. At March 31, 2006, we had cash flow from financing activities of $145,000 attributable primarily to proceeds from the convertible financing facility with Laurus of $165,000 less debt repayment of $20,000. Although we believe that our current working capital and cash flows from continuing operations will be adequate to meet our anticipated cash requirements for the next twelve months, 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 we will be able to close this financing or that additional financing will be available or that 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 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 the effectiveness of a registration statement registering the shares underlying the Laurus warrants 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 May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections", applying to all voluntary accounting principle changes as well as the accounting for and reporting of such changes. SFAS No. 154 requires voluntary changes in accounting principle be retrospectively applied to financial statements from previous periods unless such application is impracticable. SFAS No. 154 requires that changes in depreciation, amortization, or depletion methods for long-lived, non-financial assets must be accounted for as a change in accounting estimate due to a change in accounting principle. By enhancing the consistency of financial information between periods, the requirements of FASB 154 improves financial reporting. FASB 154 replaces APB Opinion No. 20 and FASB 3. FASB 154 carries forward many provisions of Opinion 20 and FASB 3 without change including those provisions related to reporting a change in accounting estimate, a change in reporting entity, correction of an error and reporting accounting changes in interim financial statements. FASB 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. -38- In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" ("SFAS 155"). SFAS 155 allows any hybrid financial instrument that contains an embedded derivatives that otherwise would require bifurcation under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" to be carried at fair value in its entirety, with changes in fair value recognized in earnings. In addition, SFAS 155 requires that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or contain an embedded derivative. SFAS 155 also eliminates a prior restriction on the types of passive derivatives that a qualifying special purpose entity is permitted to hold. SFAS 155 is applicable to new or modified financial instruments in fiscal years beginning after September 15, 2006, though the provisions related to fair value accounting for hybrid financial instruments can also be applied to existing instruments. Early adoption, as of the beginning of an entity's fiscal year, is also permitted, provided interim financial statements have not yet been issued. We are currently evaluating the potential impact, if any, that the adoption of SFAS 155 will have on our results of operations or financial position. In March 2006, the FASB issued SFAS 156, "Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140". This statement amends FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement: (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: (a) a transfer of the servicer's financial assets that meets the requirements for sale accounting, (b) a transfer of the servicer's financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", (c) an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates; (2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; (3) permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: (a) Amortization method-Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date, or (b) Fair value measurement method-Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur; (4) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt this statement as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of this Statement is the date an entity adopts the requirements of this statement. -39- In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements the benefit of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 become effective as of the beginning of our 2008 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact that FIN 48 will have on our financial statements. In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" (FAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of FAS 157 become effective as of the beginning of the 2009 fiscal year. We are currently evaluating the impact that FAS 157 will have on our financial statements. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108), which addresses how to quantify the effect of financial statement errors. The provisions of SAB 108 become effective as of the end of the 2007 fiscal year. We do not expect the adoption of SAB 108 to have a significant impact on our financial statements. In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158") which requires an employer to recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in its consolidated balance sheet. Under SFAS 158, actuarial gains and losses and prior service costs or credits that have not yet been recognized through earnings as net periodic benefit cost will be recognized in other comprehensive income, net of tax, until they are amortized as a component of net periodic benefit cost. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006 and shall not be applied retrospectively. We are currently evaluating the impact that the adoption of SFAS 158 will have on our consolidated financial statements. In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration Payment Arrangements." This FASB Staff Position ("FSP") addresses an issuer's accounting for registration payment arrangements. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in this FSP amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , and FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , to include scope exceptions for registration payment arrangements. This FSP further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles ("GAAP") without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of this FSP. -40- For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this FSP, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Early adoption of this FSP for interim or annual periods for which financial statements or interim reports have not been issued is permitted. Early adoption of this FSP for interim or annual periods for which financial statements or interim reports have not been issued is permitted. In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115" (FAS 159). FAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The provisions of FAS 159 become effective as of the beginning of the 2008 fiscal year. We are currently evaluating the impact that FAS 159 will have on our financial statements. 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. -41- 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. REVENUE RECOGNITION We recognize revenue under engineering service contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collection of the contract price is considered probable and can be reasonably estimated. Revenue is earned under time-and-materials, fixed-price and cost-plus contracts. We recognize revenue on time-and-materials contracts to the extent of billable rates times hours delivered, plus expenses incurred. For fixed price contracts within the scope of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), revenue is recognized on the percentage of completion method using costs incurred in relation to total estimated costs or upon delivery of specific products or services, as appropriate. For fixed price-completion contracts that are not within the scope of SOP 81-1, revenue is generally recognized as earned according to contract terms as the service is provided. We provide our customers with a number of different services that are generally documented through separate negotiated task orders that detail the services to be provided and the compensation for these services. Services rendered under each task order represent an independent earnings process and are not dependent on any other service or product sold. We recognize revenue on cost-plus contracts to the extent of allowable costs incurred plus a proportionate amount of the fee earned, which may be fixed or performance-based. We consider fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract, which generally corresponds to the timing of contractual billings. We record provisions for estimated losses on uncompleted contracts in the period in which those losses are identified. We consider performance-based fees under any contract type to be earned only when it can demonstrate satisfaction of a specific performance goal or it receive contractual notification from a customer that the fee has been earned. In all cases, we recognize revenue only when pervasive evidence of an arrangement exists services have been rendered, the contract price is fixed or determinable, and collection is reasonably assured. -42- Contract revenue recognition inherently involves estimation. From time to time, facts develop that requires us to revise the total estimated costs or revenues expected. In most cases, these changes relate to changes in the contractual scope of the work, and do not significantly impact the expected profit rate on a contract. We record the cumulative effects of any revisions to the estimated total costs and revenues in the period in which the facts become known. CARRYING VALUE OF 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. 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. Effective April 1, 2006, we acquired goodwill in the amount of $1,895,262 in connection to its acquisition of The Multitech Group which has been allocated to the Technical Publications and Engineering reporting unit. At December 31, 2006, we performed our annual impairment test for goodwill by first comparing the carrying value of the net assets to the fair value of the Technical Publications and Engineering unit. The fair value was determined to be less than the carrying value, and therefore a second step was performed to compute the amount of the impairment. In this process, a fair value for goodwill was estimated, based in part on the fair value of the operations, and was compared to its carrying value. The shortfall of the fair value below carrying value was $2,043,496 which represents the amount of goodwill impairment. -43- 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. RISK FACTORS Investors should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing the Company. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or operating results could be seriously impaired. This section should be read in conjunction with the Financial Statements and Notes thereto, and Management's Discussion and Analysis or Plan of Operation contained in this report. If we are unable to compete effectively with existing or new competitors, the loss of our competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability, and loss of market share. If we are unable to manage our inventory, we will not be able to satisfy customer demand. Our reliance on one or a few suppliers for inventory components could delay shipments and increase our costs. Our future operating results depend on our ability to purchase a sufficient amount of components to meet the demands of our customers. Since we may order components from suppliers in advance of receipt of customer orders for our products that include these components, we could face a material inventory risk. Our products may have quality issues that could adversely affect our sales and reputation. We are dependent on significant customers, as noted in the "CUSTOMERS" section set forth in Part I, Item 1 of our Annual Report on Form 10-KSB filed with the SEC on April 17, 2007. We depend on key employees and face competition in hiring and retaining qualified employees. Recent and proposed regulations related to equity compensation could adversely affect our ability to attract and retain key personnel. -44- We expect our quarterly revenues, cash flows and operating results to fluctuate due to the large size and timing of some orders that can materially affect our financial statements from quarter to quarter, either obscuring or presenting trends that do or do not exist. This makes prediction of revenues, earnings and working capital for each financial period especially difficult and uncertain and increases the risk of unanticipated variations in quarterly results and financial condition. Our stock price can be volatile. Our stock price can be affected by many factors such as quarterly increases or decreases in our earnings, speculation in the investment community about our financial condition or results of operations, technological developments, or the loss of key management or technical personnel. RECENT EVENTS On April 19, 2007, we executed an agreement with John and Cecelia Kennedy which amends certain elements of the provision governing merger consideration in Section 2.7 of the Agreement and Plan of Merger dated as of June 29, 2006 among Thinkpath, The Multitech Group, Inc., the Kennedy's and other parties. Pursuant to the terms of the agreement, the Kennedy's will return for cancellation 4,065,820 common shares, 595 preferred shares and non-negotiable promissory notes in the aggregate amount of $475,788 issued upon execution of the Merger Agreement. In consideration of these events, we issued a promissory note in the amount of $800,000 payable over 60 months beginning January 2008 and bearing interest at annual rate of 6%. On May 10, 2007, we entered into a Securities Purchase Agreement with Trafalgar Capital Specialized Investment Fund, Luxembourg with respect to the purchase of up to $8,000,000 in 12% convertible debentures convertible into common shares pursuant to Regulation "S". The first debenture of $400,000 was issued on May 10, 2007 and is convertible at a 10% discount to the lowest of the daily volume weighted average price during the preceding 10 days and becomes due 2 years from its date of issuance. We also issued a Convertible Compensation Debenture Agreement, dated May 10, 2007 with respect to a debenture in the amount of $160,000 as a facility fee convertible under the same terms and also due 2 years from its date of issuance. In the event that Trafalgar fails to raise an additional minimum amount of $600,000 in convertible debentures, the Convertible Compensation Debenture Agreement will be cancelled. We also issued 250,000 shares of common stock, no par value, in consideration of a $40,000 facility fee. On May 14, 2007, we entered into a Service Agreement with ROI Group LLC, a Delaware corporation for the provision of investor relations services for a period of twelve months. Pursuant to the agreement, we are required to issue 240,000 shares of our common stock and provide cash payments of $10,000 per month for the duration of the agreement. -45- On May 14, 2007, Blair Taylor resigned from our Board of Directors which resignation was accepted in a resolution adopted during a meeting of the Board of Directors held on that day. Mr. Taylor did not have any disagreements with us or our Board of Directors. To fill the vacancy created, the directors appointed Judd Bedford until the next annual meeting of shareholders. ITEM 3. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the participation of the Company's Principal Executive Officer and Principal Financial Officer. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summerized and reported, within the time periods specified in the SEC's rules and forms. (b) Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company's business. Except for the following, the Company is currently not aware of nor has any knowledge of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results: -46- In November 2002, we sold certain assets of our training division to Thinkpath Training LLC ("Thinkpath Training"). Pursuant to this agreement, Thinkpath Training assumed certain liabilities including the property lease in New York for this division which expires August 31, 2006. In April 2006, we were notified by the lessor that Thinkpath Training had failed to meet their rent obligations and had rent arrears of approximately $80,000. The lessor filed a claim against Thinkpath Training, the sub tenant, and Thinkpath Inc. demanding that the rent arrears be paid and the premises vacated immediately. On June 1, 2006, a default judgment was awarded to the lessor and entered against us. On July 7, 2006, our motion to vacate the default judgment was denied. On July 27, 2006, the court agreed to our motion to renew and reargue our prior motion seeking to vacate the default judgment on August 23, 2006. Upon reargue on September 7, 2006, the court vacated the judgment and dismissed the petition. On September 21, 2006, we received notice from the landlord demanding payment of the current arrears of approximately $360,000 in unpaid rent and additional charges and its intent to commence legal proceedings against us in the event that such payment is not made. In March 2007, the lessor filed a motion for summary judgment. We were granted an extension until May 2007, to have a hearing on this motion. We continue to defend this claim vigorously, although we are also working to reach a settlement with the lessor. ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 10.62 Service Agreement between Thinkpath Inc and ROI Group, LLC dated May 14, 2007. 31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -47- SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THINKPATH INC. Dated: May 21, 2007 By: /s/ Declan French By: /s/ Kelly Hankinson --------------------- ----------------------- Declan French Kelly L. Hankinson Chief Executive Officer Chief Financial Officer -48- EX-10.62 2 exh10-62.txt SERVICE AGREE. ROI GROUP LLC SERVICE AGREEMENT This Service Agreement is made on May 14, 2007 between Thinkpath Inc., a corporation organized and existing under the laws of Ontario, Canada, with its principal place of business located at 16 Four Seasons Place, Suite 215, Toronto, Ontario, Canada M9B 6E5, hereinafter referred to as "Company" and ROI Group LLC, a Delaware Corporation, with its principal place of business located at 39 Broadway, 24th Floor, New York, NY 10006, hereinafter referred to as "ROI". 1. RECITALS Company provides customized solutions in: Engineering & Design Services, Technical Publishing & Documentation, Computer Aided Design (CAD) and On-site Engineering Support. ROI agrees to perform investor relations services for the Company under the terms and conditions set forth in this Service Agreement. 2. COMPENSATION The Company agrees to pay: 1) The cash component of the fee will be a retainer in the amount of $10,000 / month. PAYMENT IS DUE ON THE FIRST OF EACH MONTH OF SERVICE. THE FIRST AND LAST MONTHS RETAINERS ARE DUE ON THE SIGNING OF THE SERVICE AGREEMENT. THE TOTAL CASH OUTLAY FOR THE FIRST MONTH THEREFORE CONSISTS OF THE FIRST AND LAST MONTH'S FEES FOR A TOTAL OF $20,000. 2) Common Stock & Warrants: We commit not to sell the shares or the shares underlying our warrants as long as we represent the Company. o 240,000 shares of Thinkpath Inc. (THPHF) common stock restricted for one year. * ALL WARRANTS WILL CARRY WITH THEM PIGGYBACK REGISTRATION RIGHTS AND HAVE A CASHLESS EXERCISE FEATURE AS ONE OPTION OF THEIR CONVERSION, AND ARE TO BE DELIVERED AS SOON AS PRACTICABLE FOLLOWING THE EXECUTION OF THE SERVICE AGREEMENT. 3) Regarding any financing efforts, in which we act as finder, our role will be limited to simply introducing you to potential sources of capital. We will not negotiate the terms of any investment, nor will we proactively sell the deal to potential investors. Once we make an introduction, any potential investors will deal directly with the Company, and we will have no role in providing due diligence to potential investors. For introductions that result in the Company obtaining funding in the form of equity, convertible debt or other equity-linked securities, our compensation will be as follows: |X| 15% of the cash proceeds and warrants paid to an intermediary, if placed through an intermediary also receiving a fee; |X| 10% of cash proceeds and 10% of the warrants included in the placement, if placed directly; 39 Broadway, Suite 2410 - New York, NY 10006 - Phone: (212) 495-0200 - Fax: (509) 757-4801 For introductions that result in the Company obtaining funding in the form of senior or mezzanine, or Bank/Commercial Lender Debt, our compensation will be as follows: |X| 15% of the compensation paid to an intermediary, for Debt placed through an intermediary also receiving a fee; |X| 3% for Debt if placed directly; THE ABOVE SCHEDULE OF SUCCESS FEES COVERS ANY TRANSACTION BETWEEN THE COMPANY AND ANY PARTY INTRODUCED BY ROI GROUP LLC, WHICH IS CONCLUDED WITHIN TWO YEARS FROM THE TERMINATION OF THE SERVICE AGREEMENT. THE FEE IS PAYABLE IN CASH AT THE TIME OF THE CLOSING. 3. REIMBURSED EXPENSES The following will be billed monthly and assessed at a rate of 110%: a. Travel Expenses (with Company approval) b. Printing and commercial reproduction c. Mailing and courier services d. Other outsourced professional services 4. INVOICES AND PAYMENTS Invoices for the above expenses will be submitted with the monthly retainer invoice and payment is due at the offices of ROI on the same day each month as the day that this Service Agreement was dated, as set forth above, for each month of service." In the event ROI shall be successful in any law suit for damages for breach of this Service Agreement including but not limited to non-payment of invoices, enforcement of this Service Agreement, or to enjoin the other party from violating this Service Agreement, ROI shall be entitled to recover as part of its damages, its reasonable legal costs and expenses for establishing and maintaining any such action. 5. APPROVALS The Company hereby designates Declan French as its representative, unless otherwise, notified in writing. All material produced by ROI shall be approved in writing by this representative. All work so approved shall be considered to have been accepted by the Company. Any tasks requested by the Company but not included in the proposal dated May 4, 2007 will be considered Additional Work, and will be charged to the Company at the rate of $225 per hour. ROI shall advise the Company before commencing Additional Work and with prior approval of the Company's representative such additional work shall become part of this Service Agreement. 6. TERM The term of this Service Agreement shall commence on May 15, 2007 and extend until May 14, 2008. The agreement sill be for an initial one year term, terminable any time after 90 days, with 30 days notice 7. WARRANTY ROI will perform professional services, obtain findings and prepare recommendations in accordance with generally and currently accepted communications consulting principles and practices. This warranty is in lieu of all other warranties either expressed or implied. 39 Broadway, Suite 2410 - New York, NY 10006 - Phone: (212) 495-0200 - Fax: (509) 757-4801 8. LIMITATION OF LIABILITY With regard to the services to be performed by each party pursuant to the terms of this Service Agreement, neither party shall be liable to one another, or to anyone who may claim any right due to this relationship with the Company, for any acts or omissions in the performance of said services on the part of either party or the agents or employees of either party; except when said acts or omissions of either party are due to its willful misconduct. Accordingly, each party shall hold the other free and harmless from any obligations, costs, claims, judgments, attorney fees and attachments arising from or growing out of the services rendered in connection with this Service Agreement. When such liability shall arise due to the willful misconduct of either party, the limit and all liability or claim for damages, costs of defense or expenses on account of any error, omission or professional negligence to be levied against either party by the other shall not exceed the amount of total fees paid by the Company at that time. 9. CONFIDENTIALITY ROI acknowledges a duty not to disclose with the Company's prior approval during or after its terms of appointment any confidential information relating to the Company or Company's business including that resulting from studies or surveys commissioned and paid for by the Company. The Company in turn acknowledges ROI's right to use any general information regarding Company products or services which it has gained in the course of its appointment and which is to become publicly available for the purpose of providing services to the Company. The Company recognizes that ROI may provide consulting services to third parties. However, ROI is bound by confidentiality provisions of this Service Agreement and ROI may not use the information directly or indirectly for the benefit of third parties. 10. INTELLECTUAL PROPERTY The copyright in all artwork, copy and other work produced by ROI rests initially with ROI. On payment by the Company of the relevant fees and disbursements owed to ROI, the copyright in any material is automatically deemed to be assigned to the Company unless other arrangements are made in writing. 11. MISCELLANEOUS ASSIGNMENT Neither party to this Service Agreement may assign or transfer this Agreement, any interest therein or claim there-under without the written approval of the other party. GOVERNING LAW This Service Agreement shall be binding on and shall be for the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns and shall be governed by the laws of the State of New York. ENTIRE SERVICE AGREEMENT This Service Agreement constitutes the entire Agreement about understanding between ROI and the Company and supersedes any and all other agreements between the parties. No representation or promise, either oral or written, has been made except as specifically set forth herein. Should any part of this Service Agreement be declared invalid, such invalidity shall not affect the remainder of this Agreement without herein including any portion, which may hereafter be declared invalid. 39 Broadway, Suite 2410 - New York, NY 10006 - Phone: (212) 495-0200 - Fax: (509) 757-4801 In witness whereof, the parties have executed this Service Agreement of the day and year first above written. ROI GROUP LLC THINKPATH INC. /s/ Robert J. Giordano /s/ Declan French - -------------------------------- ------------------------ Robert J. Giordano Declan French Partner Chief Executive Officer EX-31.1 3 exh31-1.txt EXHIBIT 31.1 THINKPATH INC. CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Declan French, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Thinkpath Inc. for the period ending March 31, 2007; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 21, 2007 /S/ DECLAN FRENCH - ----------------- Declan French Chief Executive Officer EX-31.2 4 exh31-2.txt EXHIBIT 31.2 THINKPATH INC. CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kelly Hankinson, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Thinkpath Inc. for the period ending March 31, 2007; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 21, 2007 /S/ KELLY HANKINSON - ------------------- Kelly Hankinson Chief Financial Officer EX-32.1 5 exh32-1.txt EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Declan French, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Thinkpath Inc. on Form 10-QSB for the fiscal quarter ended March 31, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents in all material respects the financial condition and results of operations of Thinkpath Inc. Date: May 21, 2007 By: /S/ DECLAN FRENCH ----------------- Name: Declan French Title: Chief Executive Officer EX-32.2 6 exh32-2.txt EXHIBIT 32.2 I, Kelly Hankinson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Thinkpath Inc. on Form 10-QSB for the fiscal quarter ended May 21, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents in all material respects the financial condition and results of operations of Thinkpath Inc. Date: May 21, 2007 By: /S/ KELLY HANKINSON ------------------- Name: Kelly Hankinson Title: Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Thinkpath Inc. and will be retained by Thinkpath Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----