UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER __________
THINKPATH INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
ONTARIO 52-209027
------------------------- --------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
55 UNIVERSITY AVENUE, SUITE 400
TORONTO, ONTARIO, CANADA M5J 2H7
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(416) 364-8800
--------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES |X| NO |_|
AS OF AUGUST 19, 2002 THERE WERE 28,602,791 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
THINKPATH INC.
JUNE 30, 2002 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2002,
December 31, 2001...................... ............................5,6
Interim Consolidated Statements of Income for the three and six months ended
June 30, 2002 and 2001 ...............................................7
Interim Consolidated Statements of Stockholders' Equity for the three and six
months ended June 30, 2002............................................8
Interim Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 200 1............. .................................9
Notes to Interim Consolidated Financial Statements............................10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................27
Item 2. Changes in Securities and Use of Proceeds ...........................28
Item 3. Defaults Upon Senior Securities .....................................28
Item 4. Submission of Matters to a Vote of Security Holders .................28
Item 5. Other Information ...................................................29
Item 6. Exhibits and Reports on Form 8-K ....................................29
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002 (UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
June 30, December 31,
2002 2001
---- ----
$ $
ASSETS
CURRENT ASSETS
Cash 56,330 482,233
Accounts receivable 5,167,076 5,502,113
Inventory 39,003 40,057
Income taxes receivable 162,100 431,817
Prepaid expenses 877,514 345,341
---------- ----------
6,302,024 6,801,561
CAPITAL ASSETS 2,522,697 2,859,340
GOODWILL 5,128,991 5,128,991
INVESTMENT IN NON-RELATED COMPANIES 1,013,926 1,013,926
LONG-TERM RECEIVABLE 83,450 83,450
OTHER ASSETS 436,390 1,287,710
---------- ----------
15,487,477 17,174,978
========== ==========
-5-
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
June 30, December 31,
2002 2001
---- ----
$ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 4,478,367 5,039,171
Accounts payable 3,667,110 4,073,444
Deferred revenue 242,045 365,023
Current portion of long-term debt 607,010 528,285
Current portion of notes payable 230,000 150,000
----------- -----------
9,224,532 10,155,923
DEFERRED INCOME TAXES 150,380 150,380
LONG-TERM DEBT 398,284 582,432
NOTES PAYABLE 2,185,000 2,340,000
LIABILITIES PAYABLE IN CAPITAL STOCK 225,000 699,297
----------- -----------
12,183,196 13,928,032
----------- -----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK 27,906,817 26,571,481
DEFICIT (23,780,992) (22,719,044)
ACCUMULATED OTHER COMPREHENSIVE LOSS (821,544) (605,491)
----------- -----------
3,304,281 3,246,946
----------- -----------
15,487,477 17,174,978
=========== ===========
The accompanying notes are an integral part of
these interim consolidated financial statements.
-6-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
(AMOUNTS EXPRESSED IN US DOLLARS)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
$ $ $ $
REVENUE 7,377,052 9,740,937 14,782,729 20,239,138
COST OF SERVICES 5,622,032 6,585,033 11,120,434 13,453,559
----------- ----------- ----------- -----------
GROSS PROFIT 1,755,020 3,155,904 3,662,295 6,785,579
----------- ----------- ----------- -----------
EXPENSES
Administrative 875,058 2,254,873 2,026,133 2,925,818
Selling 926,000 1,606,838 1,967,162 3,196,378
Financing Expenses -- (51,111) -- 573,525
Depreciation and amortization 307,430 471,902 605,585 951,218
Restructuring costs -- 62,006 -- 303,457
----------- ----------- ----------- -----------
2,108,488 4,344,508 4,598,879 7,950,396
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES (353,468) (1,188,604) (936,584) (1,164,817)
Interest Charges 232,892 241,787 468,471 474,493
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (586,360) (1,430,391) (1,405,055) (1,639,310)
Income taxes 110 200,030 (25,300) 403,992
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (586,470) (1,630,421) (1,379,755) (2,043,302)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
(INCLUDING GAIN ON DISPOSAL OF $497,579) 79,165 11,387 372,980 (66,028)
----------- ----------- ----------- -----------
NET INCOME (LOSS) (507,305) (1,619,034) (1,006,775) (2,109,330)
PREFERRED STOCK DIVIDEND REQUIREMENTS 31,493 438,231 55,173 664,731
EARNINGS APPLICABLE TO COMMON STOCK (538,798) (2,057,265) (1,061,948) (2,774,061)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND FULLY DILUTED 24,511,005 14,713,383 21,182,368 13,869,253
=========== =========== =========== ===========
INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON STOCK BEFORE PREFERRED DIVIDENDS
(0.02) (0.11) (0.05) (0.15)
BASIC AND FULLY DILUTED
=========== =========== =========== ===========
INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON STOCK AFTER PREFERRED DIVIDENDS
BASIC AND FULLY DILUTED (0.02) (0.14) (0.05) (0.20)
=========== =========== =========== ===========
The accompanying notes are an integral part of
these interim consolidated financial statements.
-7-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND THE YEAR ENDED DECMEBER 31, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED
COMMON STOCK PREFERRED STOCK CAPITAL OTHER
NUMBER OF NUMBER OF SHARES STOCK RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES A B C AMOUNTS EARNINGS INCOME (LOSS) INCOME (LOSS)
----------- --------- -------- -------- ------------ ------------- ------------
Balance as of December 31, 2000 11,915,138 1,050 750 -- 23,759,415 (12,306,862) (653,547)
Net loss for the year -- -- -- -- -- (9,683,442) (9,683,442)
-----------
Other comprehensive income (loss),
net of tax:
Foreign currency translation -- -- -- -- -- -- 209,506
Adjustment to market value -- -- -- -- -- -- (161,450)
-----------
Other comprehensive income 48,056 48,056
-----------
Comprehensive loss (9,635,386)
===========
Issuance of common stock for cash 525,000 -- -- -- 400,000 --
Issuance of preferred stock -- -- -- 1,230 1,230,000 --
Options exercised 22,122 -- -- -- 1 --
Common stock and warrants issued
in consideration of services 714,267 -- -- -- 519,994 --
Reduction in common stock payable 596,667 -- -- -- 709,005
Dividend on preferred stock -- -- -- -- 414,848 (444,647)
Conversion of preferred stock to
common stock 3,864,634 (1,050) (750) (285) -- --
Beneficial conversion on
Issuance of preferred stock -- -- -- -- 284,093 (284,093)
Debt settled through the issuance
of common stock 93,883 -- -- -- 44,125 --
Allowance for deferred taxes
recoverable on issue expenses -- -- -- -- (790,000) --
---------- -------- ------- ------- --------- -----------
Balance as of December 31, 2001 17,731,711 -- -- 945 26,571,481 (22,719,044) (605,491)
========== ======== ======= ======= ========== =========== =========
Net loss for the period -- -- -- -- -- (499,470) (499,470)
-----------
Other comprehensive income (loss),
net of tax:
Foreign currency translation -- -- -- -- -- -- (277,058)
Adjustment to market value -- -- -- -- -- -- --
-----------
Other comprehensive income (277,058) (277,058)
-----------
Comprehensive loss (776,528)
===========
Reduction in common stock payable 1,756,655 -- -- -- 474,297 --
Dividend on preferred stock -- -- -- -- 21,617 (21,617)
Conversion of preferred stock to
common stock 541,593 -- -- (65) -- --
Beneficial conversion on
Issuance of preferred stock -- -- -- -- 2,063 (2,063)
Debt settled through the issuance
of common stock 1,253,752 -- -- -- 226,956 --
---------- -------- ------- ------- ---------- ----------- ----------
Balance as of March 31, 2002 21,283,711 -- -- 880 27,296,414 (23,242,194) (882,549)
========== ======== ======= ======= ========== ========== ==========
Net loss for the period -- -- -- -- -- (507,305) (507,305)
----------
Other comprehensive income (loss),
net of tax:
Foreign currency translation -- -- -- -- -- -- 61,005
Adjustment to market value -- -- -- -- -- -- --
----------
Other comprehensive income 61,005 61,005
----------
Comprehensive loss (446,300)
===========
Common stock and warrants issued
in consideration of services 3,681,818 -- -- -- 578,910 --
Dividend on preferred stock -- -- -- -- 7,842 (7,842)
Conversion of preferred stock to
common stock 3,253,534 -- -- (280) -- --
Beneficial conversion on
Issuance of preferred stock -- -- -- -- 23,651 (23,651)
Debt settled through the issuance
of common stock -- -- --
---------- -------- ------- ------- ---------- ----------- ----------
Balance as of June 30, 2002 28,219,063 -- -- 600 27,906,817 (23,780,992) (821,544)
========== ======== ======= ======= ========== ========== ==========
The accompanying notes are an integral part of
these interim consolidated financial statements.
-8-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(AMOUNTS EXPRESSED IN US DOLLARS)
2002 2001
---- ----
$ $
Cash flows from operating activities
Net income (loss) 1,006,775) (2,109,330)
Adjustments to reconcile net loss to net cash (used in) --------- ----------
provided by operating activities:
Amortization 692,134 1,123,705
Decrease (increase) in accounts receivable 483,589 840,226
Decrease (increase) in prepaid expenses (599,840) (50,568)
Increase (decrease) in accounts payable (512,012) 167,969
Decrease (increase) in deferred income taxes -- 397,362
Decrease (increase) in inventory 1,122 30,472
Increase (decrease) in deferred revenue (124,036) (44,685)
Increase in income taxes payable (receivable) 269,699 --
Common stock and warrants issued for services 578,909 354,682
Long-term investment received for services -- (205,242)
Gain on disposal of subsidiary (497,579) --
--------- ----------
Total adjustments 291,986 2,613,921
--------- ----------
Net cash used in operating activities (714,789) 504,591
--------- ----------
Cash flows from investing activities
Purchase of capital assets (246,570) (214,691)
Disposal (purchase) of other assets 16,156 (294,202)
Increase in long-term receivable -- (188,626)
Proceeds on disposal of subsidiary 1,320,786 --
--------- ----------
Net cash used in investing activities 1,090,372 (697,519)
--------- ----------
Cash flows from financing activities
Repayment of notes payable (75,000) (192,164)
Repayment of long-term debt (390,768) (475,845)
Cash received (paid) on long-term debt 259,350 225,000
Proceeds from issuance of common stock -- 400,000
Proceeds from issuance of preferred stock -- 1,100,000
Increase (decrease) in bank indebtedness (617,516) (812,515)
--------- ----------
Net cash provided by financing activities (823,934) 244,476
--------- ----------
Effect of foreign currency exchange rate changes 22,448 (51,548)
--------- ----------
Net increase (decrease) in cash and cash equivalents (425,903) --
Cash and cash equivalents
-Beginning of period 482,233 --
--------- ----------
-End of period 56,330 --
========= ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 476,838 300,434
========= ==========
Income taxes paid (recovered) (25,300) 3,992
========= ==========
SUPPLEMENTAL NON-CASH ITEM:
Preferred stock dividend 55,173 664,731
Common shares issued for liabilities 701,253 --
========= ==========
The accompanying notes are an integral part of
these interim consolidated financial statements.
-9-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the company's ability to continue as
a going concern for a reasonable period of time. These conditions and events
include significant operating losses, working capital deficiencies, and
violation of certain loan covenants. At June 30, 2002, the Company had a
working capital deficiency of $2,920,000, a deficit of $23,780,992 and has
suffered recurring losses from operations.
With insufficient working capital from operations, the Company's primary
sources of cash have been a revolving line of credit with Bank One and
proceeds from the sale of equity securities. At June 30, 2002, the revolving
line of credit was $4,400,000 including an overdraft of approximately
$300,000. Eligible receivables allowed for a maximum borrowing of
$4,100,000. The revolving line of credit agreement requires the Company to
meet various restrictive covenants, including a senior debt to EBITDA ratio,
debt service coverage ratio, debt to tangible net worth ratio and certain
other covenants. At June 30, 2002 and thereafter, the company did not comply
with the covenants contained in the revolving line of credit agreement.
On July 1, 2002 and as amended on August 1, 2002 and August 15, 2002, the
company entered into a Forbearance and Modification Agreement with its
senior lender, Bank One whereby the Bank agreed to forebear from exercising
its rights and remedies against the company as a result of its violation of
certain loan covenants, until the period ending August 31, 2002. In the
event that the company defaults under the agreement including the failure to
make payment when due, the Bank is entitled to exercise any and all of its
security rights including foreclosing on collateral.
On August 13, 2002, the company received a commitment from Morrison
Financial Services Limited for a syndicated financing arrangement that will
provide the funding necessary to purchase Bank One's debt and security. The
partners in the syndicate are Maple Partners America Inc., Morrison
Financial Services Limited and MFI Export Finance Inc. Bank One has agreed
to extend the expiration of the Forbearance and Modification Agreement until
August 31, 2002 to allow the syndicate to complete the financing
arrangement.
As at August 19, 2002, management's plans to mitigate and alleviate these
adverse conditions and events include:
A. Commitment from a new lender to purchase Bank One's debt and security.
B. Ongoing restructuring of debt obligations and settlement of
outstanding claims.
C. Ongoing restructuring of operations relating to the closure of
non-profitable offices, termination of redundant staff and the
institution of other cost cutting measures. See Note 14. Although
there can be no assurances, it is anticipated that continued cash flow
improvements will be sufficient to cover current operating costs and
will permit partial payments to vendors and interest payments on all
debt.
D. Ongoing efforts to procure cash through a private placement of debt,
equity or warrant securities.
E. Settlement of an outstanding insurance claim related to the loss of
assets and business for two offices impacted by the terrorist events
of September 11, 2001.
F. Focus on growth in the technical publications, e-learning and
engineering services divisions.
G. Sale of non-profitable and non-complimentary business units.
Despite its negative working capital and deficit, the company believes that
its management has developed a business plan that if successfully
implemented could substantially improve the company's operational results
and financial condition. However, the company can give no assurances that
its current cash flows from operations, if any, borrowings available under
its revolving line of credit, and proceeds from the sale of securities, will
be adequate to fund its expected operating and capital needs for the next
twelve months. The adequacy of cash resources over the next twelve months is
primarily dependent on its operating results, the bank's continued
forbearance, the closing of new financing, and settlement of its insurance
claim, all of which are subject to substantial uncertainties. Cash flows
from operations for the next twelve months will be dependent, among other
things, upon the effect of the current economic slowdown on sales, the
impact of the restructuring plan and management's ability to implement its
business plan. The failure to return to profitability and optimize operating
cash flows in the short term, and to successfully procure forbearance from
the bank and close alternate financing, could have a material adverse effect
on the company's liquidity position and capital resources.
-10-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Going Concern
These interim consolidated financial statements have been prepared on the
going concern basis, which assumes the realization of assets and
liquidation of liabilities and commitments in the normal course of
business. The application of the going concern concept is dependent on
the Company's ability to generate sufficient working capital from
operations and external investors. These interim consolidated financial
statements do not give effect to any adjustments should the Company be
unable to continue as a going concern and, therefore, be required to
realize its assets and discharge its liabilities in other than the normal
course of business and at amounts differing from those reflected in the
interim consolidated financial statements. Management plans to obtain
sufficient working capital from operations and external financing to meet
the Company's liabilities and commitments as they become payable over the
next twelve months. There can be no assurance that management's plans
will be successful. Failure to obtain sufficient working capital from
operations and external financing will cause the Company to curtail
operations. These interim consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
b) Change of Name
The company changed its name from IT Staffing Ltd. to Thinkpath.com Inc.
on February 24, 2000. On June 6, 2001, the company changed its name from
Thinkpath.com Inc. to Thinkpath Inc.
c) Principal Business Activities
Thinkpath Inc. is an information technology and engineering services
company which, along with its subsidiaries Thinkpath US Inc. (formerly
Cad Cam Inc.), Thinkpath Michigan Inc. (formerly Cad Cam of Michigan
Inc.), Thinkpath Technical Services Inc. (formerly Cad Cam Technical
Services Inc.), Thinkpath Training US Inc.(formerly ObjectArts US Inc.),
MicroTech Professionals Inc., and TidalBeach Development Inc., provides
engineering, staffing, training and technology services to enhance the
resource performance of clients.
d) Basis of interim consolidated financial statement presentation
The interim consolidated financial statements include the accounts of the
company and its controlled subsidiaries. The earnings of the subsidiaries
are included from the date of acquisition for acquisitions accounted for
using the purchase method. For subsidiaries accounted for by the pooling
of interest method their earnings have been included for all periods
reported. All significant inter-company accounts and transactions have
been eliminated.
e) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts to banks, and any
other highly liquid investments purchased with a maturity of three months
or less. The carrying amount approximates fair value because of the short
maturity of those instruments.
f) Other Financial Instruments
The carrying amount of the company's other financial instruments
approximate fair value because of the short maturity of these instruments
or the current nature of interest rates borne by these instruments.
g) Long-Term Financial Instruments
The fair value of each of the company's long-term financial assets and
debt instruments is based on the amount of future cash flows associated
with each instrument discounted using an estimate of what the company's
current borrowing rate for similar instruments of comparable maturity
would be.
-11-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
h) Capital Assets
Property and equipment are recorded at cost and are amortized over the
estimated useful lives of the assets principally using the declining
balance method.
The company's policy is to record leases, which transfer substantially
all benefits and risks incidental to ownership of property, as
acquisition of assets and to record the occurrences of corresponding
obligations as long-term liabilities. Obligations under capital leases
are reduced by rental payments net of imputed interest.
i) Net Income (Loss) and Fully Diluted Net Income (Loss) Per Weighted
Average Common Stock
Net income (Loss) per common stock is computed by dividing net income
(loss) for the year by the weighted average number of common stock
outstanding during the year.
Fully diluted net income (loss) per common stock is computed by dividing
net income for the year by the weighted average number of common stock
outstanding during the year, assuming that all convertible preferred
stock, stock options and warrants as described in note 13 were converted
or exercised. Stock conversions stock options and warrants which are
anti-dilutive are not included in the calculation of fully diluted net
income (loss) per weighted average common stock.
j) Inventory
Inventory is valued at the lower of cost and the net realizable value.
k) Revenue
1) The company provides the services of engineering and information
technology staff on a project basis. The services provided are defined
by guidelines to be accomplished by milestone and revenue is
recognized upon the accomplishment of the relevant milestone. As
services are rendered, the costs incurred are reflected as Work in
Progress. Revenue is recognized upon the persuasive evidence of an
agreement, delivery has occurred, the fee is fixed or determinable and
collection reasonably assured.
2) The company provides the services of information technology
consultants on a contract basis and revenue is recognized as services
are performed.
3) The company places engineering and information technology
professionals on a permanent basis and revenue is recognized upon
candidates' acceptance of employment. If the company receives
non-refundable upfront fees for "retained searches", the revenue is
recognized upon candidates' acceptance of employment.
4) The company provides advanced training and certification in a variety
of technologies and revenue is recognized on delivery.
5) The company licenses software in the form of a Human Capital
Management System called Njoyn. The revenue associated with providing
this software consists of an initial set up fee, customization and
training as agreed and an ongoing monthly per user fee. The allocation
of revenue to the various elements is based on the company's
determination of the fair value of the elements if they had been sold
separately. The set-up fee and customization revenue is recognized
upon delivery of access to the software with customization completed
in accordance with milestones determined by the contract. Revenue is
recognized on a percentage of completion basis for contracts with
significant amounts of customization and clearly defined milestones
agreed to by the customer and an enforceable right to invoice and
collect on a partial completion basis. For contracts which require
significant customization, without clearly defined milestones, and an
inability to estimate costs, revenue is reflected on a completed
contract basis. On March 1, 2002 the Company sold its subsidiary,
Njoyn Software Incorporated to Cognicase Inc, a Canadian company. The
net proceeds after broker fees were $1,350,000 of which $800,000 was
received in cash and $550,000 was received in unrestricted common
shares. The shares were sold on March 11, 2002 for value of
$524,673.19. As part of the transaction, Cognicase assumed the entire
staff in the technology division. As a result, the company has had no
further Njoyn revenue.
6) The company also signs contracts for the customization or development
of SecondWave, a web development software in accordance with
specifications of its clients. The project plan defines milestones to
be accomplished and the costs associated. These amounts are billed as
they are accomplished and revenue is recognized as the milestones are
reached. The work in progress for costs incurred beyond the last
accomplished milestone is reflected at the period end. To date these
amounts have not been material and have not been set up at the period
ends. The contracts do not include any post-contract customer support.
Additional customer support services are provided at standard daily
rates, as services are required. After the sale of Njoyn and the
assumption of the technology division, the company has had no further
SecondWave revenue.
-12-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the SEC's view in applying
generally accepted accounting principles to selected revenue recognition
issues. The effects, if any, of applying this guidance must be adopted by
SEC registrants no later than December 31, 2000 and must be reported as a
cumulative effect adjustment as of January 1, 2000, resulting from a
change in accounting principle. Restatement of previously reported
results of the earlier quarters of fiscal 2000, if necessary, is also
required. The adoption of SAB 101 did not have a material effect on the
Company's consolidated financial statements.
l) Goodwill
Goodwill representing the cost in excess of the fair value of net assets
acquired is being amortized on a straight-line basis over a thirty-year
period. The company calculates the recoverability of goodwill on a
quarterly basis by reference to estimated undiscounted future cash flows.
Effective July 1, 2001, the Company changed its amortization period from
30 to 15 years on a prospective basis.
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets." Under the new rules,
goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment. Separable intangible assets
that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company began applying the new accounting rules
effective January 1, 2002.
The Company is currently assessing the financial impact SFAS No. 141 and
No. 142 will have on its Consolidated Financial Statements. Any
transitional impairment loss will be recognized as the cumulative effect
of a change in accounting principle in the Company's statement of
earnings.
m) Income Taxes
The company accounts for income tax under the provision of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statement
or tax returns. Deferred income taxes are provided using the liability
method. Under the liability method, deferred income taxes are recognized
for all significant temporary differences between the tax and financial
statement bases of assets and liabilities.
Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected as adjustments to tax expense in the period of
enactment. Deferred tax assets may be reduced, if deemed necessary based
on a judgmental assessment of available evidence, by a valuation
allowance for the amount of any tax benefits which are more likely, based
on current circumstances, not expected to be realized.
n) Foreign Currency
Assets and liabilities recorded in foreign currencies are translated at
the exchange rate on the balance sheet date. Translation adjustments
resulting from this process are charged or credited to other
comprehensive income. Revenue and expenses are translated at average
rates of exchange prevailing during the year. Gains and losses on foreign
currency transactions are included in financial expenses.
o) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. These
estimates are reviewed periodically and as adjustments become necessary,
they are reported in earnings in the period in which they become known.
-13-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
p) Long-Lived Assets
On January 1, 1996, the company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. SFAS No. 121 requires that long-lived assets be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Management used its best estimate of the
undiscounted cash flows to evaluate the carrying amount and have
reflected the impairment.
q) Comprehensive Income
In 1999, the company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income". This standard requires companies to disclose
comprehensive income in their financial statements. In addition to items
included in net income, comprehensive income includes items currently
charged or credited directly to stockholders' equity, such as the changes
in unrealized appreciation (depreciation) of securities and foreign
currency translation adjustments.
r) Accounting for Stock-Based Compensation
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued. It introduces the use of a fair value-based method of
accounting for stock-based compensation. It encourages, but does not
require, companies to recognize stock-based compensation expenses to
employees based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the existing
accounting rules continued in Accounting Principles Board Option No. 25,
Accounting for stock issued to employees. However, SFAS No. 123 requires
companies that choose not to adopt the new fair value accounting rules to
disclose pro forma net income and earnings per share under the new
method. SFAS No. 123 is effective for financial statements for fiscal
years beginning after December 31, 1995. The company has adopted the
disclosure provisions of SFAS No. 123.
s) Computer software costs
The company accounts for the cost of developing computer software for
internal use, which may be sold as a separate product, as a research and
development expense until the technological feasibility of the product
has been established. At the end of each year the company compares the
unamortized capital costs represented by Deferred development costs in
Other Assets to the net realizable value of the product to determine if a
reduction in carrying value is warranted. Included in the software
developed for own use which may be sold as a separate product is the
Njoyn and Secondwave software and therefore for these products, the costs
incurred after technological feasibility was reached has been treated as
Deferred Development costs and the amount evaluated on an annual basis to
determine if a reduction in carrying value is warranted.
The company has developed computer software for internal use which is
reflected in deferred development costs for which the company has
commenced marketing in 2001.
t) Investments in Non-Related Companies
The company records its investment in companies in which it holds less
than 20% interest at fair market value. Changes in fair market value are
adjusted in comprehensive income.
u) Recent Pronouncements
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities" which was amended by
SFAS No. 138 and became effective on January 1, 2001. This statement
requires that an entity recognizes all derivatives as either assets or
liabilities and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting
designation. The adoption of this standard will not have a material
impact on the consolidated financial statements of the company.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Asset and Extinguishments of
Liabilities. SFAS No. 140 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. It is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001
and is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral
for fiscal years ending after December 15, 2000. The Company does not
believe that this statement will materially impact its results of
operations.
-14-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
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 the Company's application of those policies, and the
likelihood that materially different amounts would be reported under
different conditions and using different assumptions.
v) Advertising Costs
Advertising costs are expensed as incurred. For the three months ended
June 30, 2002, advertising expense was $80,232 compared to $224,545 for
the three months ended June 30, 2001.
For the three months ended March 31, 2002, advertising expense was
$68,772 compared to $123,240 for the three months ended March 31, 2001.
3. ACQUISITIONS
Systemsearch Consulting Services Inc. was acquired on January 2, 1997 for
$391,313. This amount was paid by the issuance of common stock and a cash
payment of $97,828. The purchase has been reflected as follows:
Consideration $ 391,313
Assumption of net liabilities 57,321
---------
Goodwill $ 448,634
=========
On December 31, 2001, the Company had written off a portion of the goodwill
related to its investment in Systemsearch Consulting Services Inc.
International Career Specialists Ltd. was acquired on January 1, 1998 for
$652,188. This amount was paid by the issuance of common stock and a cash
payment of $326,094. The purchase was reflected as follows:
Consideration $ 652,188
Assumption of net liabilities 198,409
---------
Goodwill $ 850,597
=========
On December 31, 2000, the Company had written off the goodwill related to
its investment in International Career Specialists Ltd.
The assets of Southport Consulting Company, a New Jersey corporation, were
acquired by Thinkpath Inc. in a transaction effective October 31, 1998. The
consideration for the acquisition was as follows:
Cash $ 50,000
Shares 200,000
---------
$ 250,000
=========
The assets acquired are valued as follows:
Software $ 130,000
Office furniture and equipment 20,000
Other assets 100,000
---------
$ 250,000
=========
-15-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
Cad Cam Inc. and its subsidiaries Cad Cam of Michigan Inc., Cad Cam
Technical Services Inc., and Cad Cam Integrated Systems Inc. was acquired
during 1999 for $6,000,000. This amount was paid as follows: $2,000,000 paid
in cash and $500,000 in common stock on the date of closing. The balance
consists of three notes payable totaling $2,500,000 and $1,000,000 in the
form of common stock to be issued with the final note payable. The documents
were executed at the end of September 1999 and the operations consolidated
with the company from October 1, 1999. The terms of the note payable were
subsequently restructured.(Note 12)
The assets acquired are valued as follows:
Current assets $ 2,468,029
Fixed assets 2,267,539
Other assets 817,004
Liabilities assumed (5,071,430)
Consideration (6,000,000)
-----------
Goodwill $ 5,518,858
===========
MicroTech Professionals Inc., was acquired effective April 1, 2000 for
$4,500,000.The amount was to be paid in two installments, based on certain
revenue requirements to be met by MicroTech Professionals Inc. The
requirements have been met. First Installment: 133,333 common stock issued
on closing, $1,250,000 cash paid on closing, $750,000 by a three year
promissory note bearing interest at 1/2% above prime paid semi-annually
issued on closing. Second Installment: $625,000 in common stock, $875,000
cash, $500,000 by a three-year promissory note bearing interest at 1/2%
above prime paid semi-annually. The acquisition was accounted for by the
purchase method and the operations have been included in the consolidated
operations from April 1, 2000. Refer to note 21(a) for supplemental
information. The terms of payment were subsequently restructured. (Note 12)
The net acquired assets are valued as follows:
Current assets $ 1,769,478
Other assets 850,000
Fixed assets 104,851
Liabilities assumed (1,073,527)
Consideration including
acquisition costs (4,660,000)
-----------
Goodwill $ 3,009,198
===========
On December 31, 2001, the Company had written off the goodwill related to
its investment in MicroTech Professionals Inc.
On March 6, 2000, Thinkpath Inc. completed the acquisition of 80% of E-Wink,
Inc., a Delaware corporation, in consideration of: i) 300,000 shares of our
common stock valued at $975,000; and ii) warrants to purchase an aggregate
of 500,000 shares of our common stock at a price of $3.25 per share for a
period of five years valued at $1,458,700. E-Wink was formed to match
providers of venture capital, bridge loans and private placement capital
with members of the brokerage community. The full purchase price of
$2,433,700 has been allocated to goodwill. On December 31, 2000,the company
has written off the goodwill related to its investment in E-Wink, Inc.
-16-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
4. POOLING OF INTEREST
Effective January 1, 2000. Thinkpath Inc. entered into a merger and
acquisition agreement with a technical training provider, ObjectArts Inc.
and its subsidiary ObjectArts (US) Inc. ObjectArts (US) Inc., was merged
with IT Staffing New York Ltd., an inactive subsidiary of Thinkpath Inc. In
exchange for all of the outstanding shares of ObjectArts Inc., the company
issued 527,260 common stock. The merger was accounted for as a pooling of
interests and the results of ObjectArts Inc. and ObjectArts (US) Inc. have
been included for all periods presented.
On November 15, 2000, Thinkpath Inc. combined with TidalBeach Inc., a
software developer, and in exchange for all of the outstanding shares of
TidalBeach Inc., issued 250,000 common stock. The combination has been
accounted for as a pooling of interests and the results of TidalBeach Inc.
have been included for all periods presented. Refer to note 20(b) for
supplemental information concerning TidalBeach Inc.
5. ACCOUNTS RECEIVABLE
June 30, December 31,
2002 2001
$ $
Accounts receivable 5,483,229 6,079,676
Less: Allowance for doubtful accounts (316,153) (577,563)
--------- ---------
5,167,076 5,502,113
========= =========
6. CAPITAL ASSETS
June 30, December 31,
2002 2001
----------------------------------- -----------
Accumulated
COST AMORTIZATION NET NET
$ $ $ $
Furniture and equipment 771,107 460,128 310,979 344,693
Computer equipment
and software 6,358,499 4,296,640 2,061,859 2,322,887
Leasehold improvements 475,963 326,104 149,859 191,760
--------- --------- --------- ---------
7,605,569 5,082,872 2,522,697 2,859,340
========= ========= ========= =========
Assets under capital lease 853,590 378,911 474,679 474,485
========= ========= ========= =========
Amortization for the three months ended June 30, 2002 was $204,720 including
amortization of assets under capital lease of $32,929.
Amortization for the three months ended March 31, 2002 amounted to $222,358
including amortization of assets under capital lease of $33,927.
Amortization for the year ended December 31, 2001 amounted to $1,594,709.
Amortization includes amortization of assets under capital lease of $146,217
for the year ended December 31, 2001.
7. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
June 30, December 31,
2002 2001
Conexys $667,511 $667,511
Digital Cement 346,415 346,415
---------- ----------
Total $1,013,926 $1,013,926
========== ==========
-17-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
i) Conexys
During the year ended December 31, 1999, $383,146 of the Conexys
investment was included as a short-term investment as the company had
intended to sell these shares on the open market. During fiscal 2000, the
company acquired additional shares of Conexys at a cost of approximately
$284,365 in consideration of services rendered and reclassified the total
investment as available for sale. Since the shares of Conexys trade on the
Bermuda Stock Exchange, the fair value was determined based on the stock
price.
ii) Digital Cement
During fiscal 2000, the company acquired 1,125,000 shares of Digital
Cement, representing approximately 4% of that company's shares in
consideration of the co-licensing of SecondWave, software developed by
TidalBeach Inc., a wholly-owned subsidiary of Thinkpath Inc. The value of
these shares was determined to be approximately $507,865 based on a offer
to a third party to purchase shares in the company at a price of $0.50 per
share. During 2001, the fair value adjusted to $346,415 with a charge of
$161,450 to comprehensive income.
iii) Lifelogix
During 2000, the company acquired a twenty percent interest in LifeLogix
in consideration of the source code for Secondwave, the software which
supports LifeLogix's human stress and emotions management systems. The
value of these shares is approximately $142,715. This investment has been
accounted for on the cost basis as the company does not have significant
influence over LifeLogix. This investment was written off in 2001.
The acquisition of additional shares in 2000 of Conexys and the
acquisition of shares of Digital Cement and the investment in LifeLogix
were reflected at the estimated fair market value of the shares received
which represents the more determinable value in the exchange. Revenue
includes $932,927 arising from these transactions was reported in 2000.
8. GOODWILL
Goodwill is the excess of cost over the value of assets acquired over
liabilities assumed in the purchase of the following companies:
June 30, December 31,
2002 2001
-------------------------------------- ----------
Accumulated
COST AMORTIZATION NET NET
$ $ $ $
Systemsearch Consulting Services 448,634 303,337 145,297 145,297
International Career Specialists 850,597 850,597 -- --
Cad Cam Inc. 5,518,858 535,164 4,983,694 4,983,694
MicroTech Professionals Inc. 3,009,198 3,009,198 -- --
E-Wink Inc. 2,433,700 2,433,700 -- --
---------- ---------- ---------- ----------
12,260,987 7,131,996 5,128,991 5,128,991
========== ========== ========== ==========
Effective January 1, 2002, the Company adopted Statements of Financial
Accounting Standards No. 141, Business Combinations, No. 142, Goodwill
and Other Intangible Assets and No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. These statements require the Company
to evaluate the carrying value of our goodwill and intangible assets
based on assumptions and estimates of fair value and future cash flow
information. These assumptions and estimates may differ from actual
results. If different assumptions and estimates are used, carrying
values could be adversely impacted, resulting in writedowns that could
adversely affect the Company's earnings. As of June 30, 2002, the
company had not determined the effect of impairment tests on its
earnings and financial position. In accordance with the requirements
of SFAS No. 142, the company has not amortized goodwill in the current
period. For the three and six months ended June 30, 2001, the company
recorded amortization of goodwill of $132,000 and $280,000
respectively. The adjusted net loss for the three and six months ended
June 30, 2001 without amortization of goodwill would have been
$1,487,034 and $1,829,330 respectively. The adjusted loss per share
before preferred dividends for the three and six months ended June 30,
2001 without amortization of goodwill would have been $0.10 and $0.13
respectively. The adjusted loss per share after preferred dividends
for the three and six months ended June 30, 2001 without amortization
of goodwill would have been $0.13 and $0.18.
Amortization for the year ended December 31, 2001 was $454,908.
Effective July 1, 2001, the Company changed its amortization period
from 30 to 15 years on a prospective basis.
-18-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
In accordance with the requirements of SFAS 121, the impairment of
goodwill resulted in the writedown of the following amounts;
2001 2000
-------- ---------
Systemsearch Consulting Services 238,673 --
MicroTech Professionals Inc. 2,762,718 --
International Career Specialists -- 679,568
E-Wink Inc. -- 2,433,700
--------- ----------
3,001,391 3,113,268
========= ==========
The Systemsearch Consulting Services office was closed on April 8,
2002 and its staff terminated. The balance of its contracts have been
transferred to head office. MicroTech Professionals Inc. has had
ongoing operating losses since February 2001 and has had the majority
of its staff terminated subsequent to December 31, 2001.
In 2000, the International Career Specialists office was closed and
the balance of its contracts transferred to head office. Also in
2000, the start-up operations of E-wink were abandoned.
9. OTHER ASSETS
June 30, December 31,
2002 2001
$ $
Deferred development cost 58,620 993,765
Deferred financing costs 181,146 --
Deferred contract(net of accumulated
amortization of $690,000) 150,000 250,000
Cash surrender value of life insurance 46,624 43,945
--------- ---------
436,390 1,287,710
========= ==========
Amortization for the three months ended June 30, 2002 amounted to $112,789.
Amortization for the three months ended March 31, 2002 amounted to $152,267.
Amortization for the year ended December 31, 2001 amounted to $510,038.
10.BANK INDEBTEDNESS
i) June 30, 2002
At June 30, 2002, the balance of the revolving line of credit was $4,400,000
including an overdraft of approximately $300,000. The revolving line of
credit provided for a maximum borrowing amount of $4,100,000 at variable
interest rates based on eligible accounts receivable. The revolving line of
credit agreement requires the Company to meet various restrictive covenants,
including a senior debt to EBITDA ratio, debt service coverage ratio, debt
to tangible net worth ratio and certain other covenants. At June 30, 2002
and thereafter, the Company was not in compliance with the covenants
contained in the revolving line of credit agreement.
On July 1, 2002 and as amended on August 1, 2002, and August 15, 2002 the
company entered into a Forbearance and Modification Agreement with its
senior lender, Bank One whereby the Bank agreed to forebear from exercising
its rights and remedies against the company as a result of its violation of
certain loan covenants, until the period ending August 31, 2002. Under the
terms of the agreement, the Bank is entitled to a forbearance fee of $50,000
and payment of related legal fees and expenses. The interest rate on the
revolving line facility was increased to prime plus 3%. The company has
continued to borrow from the revolving line facility subject to eligible
accounts receivables as monitored weekly by the Bank. In the event that the
company defaults under the agreement including the failure to make payment
when due, the Bank is entitled to exercise any and all of its security
rights including foreclosing on collateral.
Bank One has agreed to extend the expiration of the Forbearance and
Modification Agreement until August 31, 2002 to allow the company's new
lender to complete the financing arrangement required to purchase Bank
One's debt and security.
ii) December 31, 2001
At December 31, 2001, the Company had $4,870,000 outstanding with Bank One.
The revolving line of credit provided for a maximum borrowing amount of
$4,760,000 at variable interest rates based on eligible accounts receivable.
At December 31, 2001, the Company had an
-19-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
overdraft of $110,000. The Company does not have an authorized overdraft
facility with Bank One, however the bank has allowed an overdraft of up to
$500,000 on a regular basis for approximately ten weeks. At December 31,
2001 and thereafter, the Company was not in compliance with the covenants
contained in the revolving line of credit agreement.
As a result of the default on the loan covenants governing our credit line
facility, Bank One restricted our repayment of certain subordinated loans
and notes payable which affected payments to the Business Development Bank
of Canada, Roger Walters and Denise Dunne.
11.LONG-TERM DEBT
i) June 30, 2002
At June 30, 2002, the Company had $402,670 in subordinated debt outstanding
to the Business Development Bank of Canada. The loan agreements require the
Company to meet a certain working capital ratio. At June 30, 2002 and
thereafter, the Company was not in compliance with the covenant contained in
the loan agreements. In March 2002, the Business Development Bank
consolidated the Company's loans and established a new repayment schedule
with extended maturity dates after a nine month payment deferment. However,
the company's ability to make subordinated debt and interest payments
continues to be restricted by its senior lender, Bank One.
In May 2002, the company secured a loan of $259,375 from an individual,
Terry Lyons which was secured by the company's IRS refund. The company paid
a placement fee of 10% to Mr. Lyons and the loan bears interest at 30% per
cent per annum. Although the company received its IRS refund in July 2002,
Mr. Lyons agreed to an extension of the loan until August 31, 2002.
ii) December 31, 2001
At December 31, 2001, the Company had $419,079 in subordinated debt
outstanding to the Business Development Bank of Canada. At December 31, 2001
and thereafter, the Company was not in compliance with the covenant
contained in the loan agreements. The Business Development Bank of Canada
agreed to postpone principal repayment of its subordinated loans until March
2002.
June 30, December 31,
2002 2001
$ $
a) Included therein:
Several loans with Business Development Bank of
Canada ("BDC") secured by a general security
agreement at various interest rates and royalties. 402,670 419,079
A loan with T. Lyons payable by August 31, 2002 259,375 --
bearing interest at 30% per annum.
A loan with Bank One that was payable in 19
remaining monthly payments of $13,889 with
interest at 6% at December 31, 2001.
In March 2002, this loan was paid in full. -- 263,889
Various capital leases with various payment terms
and interest rates 343,249 427,749
---------- ----------
1,005,294 1,110,717
Less: current portion 607,010 528,285
---------- ----------
$ 398,284 $ 582,432
========== ==========
b) Future principal payments obligations as at June 30, 2002, were as
follows:
2002 $ 485,209
2003 325,838
2004 139,841
2005 50,588
2006 3,818
----------
1,005,294
==========
-20-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
c) Interest expense with respect to the long-term debt for the three
months ended June 30, 2002 amounted to $67,673. Interest expense
related to long-term debt was $21,638 for the three months ended March
31, 2002 and $99,651 for the year ended December 31, 2001.
d) Pursuant to the BDC loan agreement, BDC had the option to acquire 22,122
common stock for an aggregate consideration of $1. The fair market value
of these options at the time of issuance was $62,393 ($2.82 per option).
The imputed discount on these options has been amortized over the term
of the loan as interest and was fully amortized prior to January 1,
1999. The options were exercised in July 2001.
12. NOTES PAYABLE
In September 2001, the company restructured its note payable to Roger
Walters, the vendor of Cad Cam Inc. The principal was reduced from
$1,200,000 to $750,000 in consideration of capital stock payable of
$450,000. The company agreed to price protection on the 1,756,655 shares
that were issued to Mr. Walters to a maximum floor price of $.14 per
share. All principal payments were postponed until January 1, 2002 at
which time, the Company began making principal payments of $12,500 per
month plus interest at 4.5% until December 31, 2006.
Subsequent to June 30, 2002, the company restructured its note payable to
Roger Walters, reducing the principal from $675,000 to $240,000 in
consideration of the issuance of 1,000,000 shares of its common stock. The
company agreed to issue and register the shares upon obtaining shareholder
approval of an amendment to its Articles of Incorporation increasing its
authorized capital stock. Principal payments of $4,000 per month will
begin September 1, 2002 bearing no interest until August 1, 2007.
In September 2001, the company restructured its note payable to Denise
Dunne-Fushi, the vendor of MicroTech Professionals Inc. The principal was
reduced from $1,965,000 to $1,740,000 in consideration of capital stock
payable of $225,000. In addition, all principal payments were postponed
until January 1, 2003, at which time, the Company will pay $20,000 per
month plus interest at 5% until December 31, 2006. The balance of $781,287
will be due on January 1, 2007. The Company is currently making interest
payments of $14,397 per month until December 30, 2002.
Subsequent to June 30, 2002, the company restructured its note payable to
Denise Dunne-Fushi, reducing the principal from $1,740,000 to $600,000 in
consideration of the issuance of 3,000,000 shares of its common stock. The
company agreed to issue and register the shares upon obtaining shareholder
approval of an amendment to its Articles of Incorporation increasing its
authorized capital stock. Principal payments of $10,000 per month will
begin November 1, 2002 bearing 5% interest until October 1, 2007. In
addition, the company agreed to cover the monthly expense associated with
Ms. Dunne-Fushi's family health benefits and vehicle lease for a period of
four years.
June 30, December 31
2002 2001
$ $
Note Payable to Roger Walters 675,000 750,000
Note Payable to Denise Dunne 1,740,000 1,740,000
---------- ----------
2,415,000 2,490,000
Less: current portion 230,000 150,000
---------- ----------
2,185,000 $2,340,000
========== ==========
c) Capital repayments as at June 30, 2002
2002 95,000
2003 390,000
2004 390,000
2005 390,000
2006 370,000
2007 780,000
----------
$2,415,000
==========
-21-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
13. CAPITAL STOCK
a) Authorized
30,000,000 Common stock, no par value (15,000,000 at December 31, 2000)
1,000,000 Preferred stock, issuable in series,
rights to be determined by the Board of Directors
b) Issued
On June 8, 1999, the company was successful in its Initial Public
Offering. 1,100,000 common stock were issued at an issuance price of
$5.00 per share. Net proceeds received, after all costs, was $3,442,683.
The company trades on Nasdaq under the trading symbol "THTH". As part of
the Initial Public Offering, the underwriters exercised the over-
allotment, resulting in 107,000 common stock being issued for net
proceeds of $465,000. Deferred costs of $1,351,365, which were incurred
as part of the completion of the Initial Public Offering, have been
applied against the proceeds raised by the offering, and are included in
the net proceeds.
On June 30, 1999, 163,767 common stock were issued in conjunction with
the acquisition of Cad Cam Inc., with a carrying value of $500,000.
During 2000, the company effected two acquisitions accounted for as
pooling of interest and therefore the capital stock of the company
outstanding at January 1, 1999 and December 31, 1999 have been restated
to reflect the aggregate capital stock and shareholder equity amounts as
follows:
# $
Original Balance as of December 31, 1998 1,717,875 1,448,368
Issuance of Shares for pooling of interest 777,260 344,576
--------- ---------
Revised Balance as of December 31, 1998 2,495,135 1,792,944
========= =========
As part of the acquisition of ObjectArts Inc., the company issued 196,800
common shares for a total consideration of $837,151 on the conversion of
debt to common shares.
On April 25, 2000, 133,333 common stock were issued for the purchase of
MicroTech Professionals Inc., for a total consideration of $500,000.
During 2000, 300,000 common stock were issued as partial consideration
for the purchase of shares of E-Wink Inc. for a value of $975,000.
On August 22, 2000, 1,063,851 shares of common stock and 560,627 warrants
were issued in a private placement for net proceeds of $2,333,715 (gross
proceeds of $2,681,600).
During 2000, 3,533,111 common stock were issued for services rendered
totaling $3,160,288. An amount of $110,000 has been included in the
acquisition of MicroTech and the balance of $3,050,288 has been included
in financing expenses as of December 31, 2000.
During 2000, 1,694,343 common stock were issued on the conversion of
Preferred Stock.
The company has issued 1,800,000 common shares of the company in
consideration of services rendered related to the acquisition of various
subsidiaries. These shares are included in common stock issued in
consideration of services in the amount of $1,125,000 and have been
included in Acquisition costs and financing expenses for December 31,
2000.
On September 13, 2000, the Company. entered into an agreement with
Burlington Capital Markets Inc. to aid the company in further
acquisitions. A total of 425,000 common shares has been reflected as
issued for an aggregate cost of $717,250. This amount has been expensed
in the year ended December 31, 2000 and is included in Acquisition costs
and financing expenses.
During January 2001, the Company agreed to issue 250,000 warrants to
acquire shares of the company at $1.50 and to re-price a total of 330,693
options to an exercise price of $1.00. In consideration of the foregoing,
a total of 275,000 shares were issued for an amount of $275,000 in cash.
The terms of the warrants are indicated in note 13(e). The value of the
repricing of the warrants and the new warrants issued have been treated
as the part of the allocation of the proceeds on the issuance of the
common stock.
-22-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
On June 6, 2001, the Company amended its Articles of Organization to
increase its authorized common stock from 15,000,000 to 30,000,000.
During the year December 31, 2001, the Company issued 400,000 shares of
its common stock in consideration of $203,000 in cash.
During the year ended December 31, 2001, the Company issued 30,632 shares
of its common stock in consideration of legal services, 300,000 shares of
its common stock in consideration of investment banking services, 596,667
shares to reduce common stock payable of $709,005, and 93,883 shares in
settlement of accounts payable.
During the three months ended March 31, 2002, the Company issued 588,235
shares of its common stock as payment of an executive bonus, 1,756,655
shares to reduce common stock payable of $474,297, and 665,517 shares in
settlement of accounts payable.
During the three months ended June 30, 2002, the Company issued 250,000
shares of its common stock in consideration of public relations services,
and 181,818 shares of its common stock in consideration of marketing and
communications services.
On May 24, 2002, the company entered into a loan agreement with Tazbaz
Holdings Inc., an Ontario Corporation. Pursuant to the agreement, Tazbaz
securitized an overdraft position of the company with Bank One in the
amount of $650,000 in consideration of an aggregate of 5,000,000 shares
of its common stock to be issued upon an amendment to the company's
Articles of Incorporation permitting an increase in the company's
authorized capital stock.
On June 24, 2002, the company entered into consulting agreements with
each of Mark Young and George Georgiou pursuant to which Messrs. Young
and Georgiou shall perform consulting services with respect to corporate
and debt restructuring. In consideration for such services the company
issued 2,250,000 and 1,000,000 shares of its common stock to Messrs.
Young and Georgiou, respectively. Pursuant to the agreement the company
registered such shares of common stock under an S-8 registration
statement.
c) Liabilities payable in common stock
During the year ended December 31, 2001, the company issued 316,667
shares to reduce a note payable of $625,000 to Denise Dunne related to
the purchase of MicroTech Professionals Inc. The company also issued
280,000 shares in relation to a settlement with an Njoyn employee. The
balance at December 31, 2001, represents $474,297 to Roger Walters in
settlement of a note payable, and $225,000 to Denise Dunne also in
settlement of a note payable.
During the three months ended March 31, 2002, the company issued
1,756,655 shares to reduce a note payable of $474,297 to Roger Walters
related to the purchase of CadCam Inc. The balance at June 30, 2002
represents $225,000 to Denise Dunne in settlement of a note payable.
d) Preferred Stock
On December 30, 1999, 15,000 shares of series A, 8% cumulative,
convertible, preferred stock, no par value were issued in a private
placement for gross proceeds of $1,500,000. The preferred stock are
convertible into common stock at the option of the holders under certain
conditions, at any time after the effective date of the registration
statement. The conversion price will be based on the trading price at
December 30, 1999 or 80% of the average of the ten trading days
immediately preceding the conversion of the respective shares of Series
A, preferred stock. The stockholders of the Series A, 8% cumulative,
convertible stock are entitled to receive preferential cumulative
quarterly dividends in cash or shares at a rate of 8% simple interest per
annum on the stated value per share. The intrinsic value of the
conversion price at date of issue was reflected as a dividend of
$138,000.
At any time after the effective date of the registration statement,
Thinkpath Inc. has the option to redeem any or all of the shares of
Series A, 8% cumulative, convertible, preferred stock by paying to the
holders a sum of money equal to 135% of the stated value of the aggregate
of the shares being redeemed if the conversion price is less than $2.00.
Thinkpath Inc. holds the option to cause the investors in the December
30, 1999 placement offering to purchase an additional $500,000 worth of
Series A, 8% cumulative, convertible, preferred stock upon the same terms
as described above. This right was exercised in July, 2000.
-23-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
On April 16, 2000, 2,500 shares of Series A, 8% cumulative, convertible,
preferred stock, no par value were issued in a private placement for
gross proceeds of $250,000. The proceeds have been reduced by any issue
expenses.
On April 16, 2000, 1,500 shares of Series B, 8% cumulative, convertible,
preferred stock, no par value were issued in a private placement for
gross proceeds of $1,500,000. The proceeds have been reduced by any issue
expenses.
On July 7, 2000, 5000 shares of series A, 8% cumulative, convertible,
preferred stock, no par value were issued in a private placement for
gross proceeds of $500,000. The proceeds have been reduced by any issue
expenses.
The preferred stock are convertible into common stock at the option of
the holders under certain conditions, at any time after the effective
date of the registration statement. As of December 31, 2000, 1,050 Series
A preferred stock and 750 Series B preferred stock were not yet converted
into common stock.
Pursuant to a share purchase agreement dated April 18, 2001, the Company
issued 1,105 shares of Series C 7% Cumulative Convertible Preferred Stock
(Series C Preferred Stock). Each share of Series C Preferred Stock has a
stated value of $1,000 per share. The shares of Series C Preferred Stock
are convertible into shares of the Company's common stock at the option
of the holders, at any time after issuance until such shares of Series C
Preferred Stock are manditorily converted or redeemed by the Company,
under certain conditions. The Company is required to register 200% of the
shares of common stock issuable upon the conversion of the 1,105 shares
of Series C Preferred Stock. In addition, upon the effective date of such
registration statement, the Company is obligated to issue to the holders
of Series C Preferred Stock an aggregate of 500 shares of Series C
Preferred Stock in consideration for $500,000, under certain conditions.
The holders of the shares of Series C Preferred Stock are entitled to
receive preferential dividends in cash, on a quarterly basis commencing
on June 30, 2001, out of any of the Company's funds legally available at
the time of declaration of dividends before any other dividend
distribution will be paid or declared and set apart for payment on any
shares of the Company's common stock, or other class of stock presently
authorized, at the rate of 7% simple interest per annum on the stated
value per share plus any accrued but unpaid dividends, when as and if
declared. The Company has the option to pay such dividends in shares of
the Company's common stock to be paid (based on an assumed value of
$1,000 per share) in full shares only, with a cash payment equal to any
fractional shares.
The number of shares of the Company's common stock into which the Series
C Preferred stock shall be convertible into that number of shares of
common stock equal to (i) the sum of (A) the stated value per share and
(B) at the holder's election, accrued and unpaid dividends on such share,
divided by (ii) the Conversion Price". The "Conversion Price" shall be
the lesser of (x) 87.5% of the average of the 5 lowest daily volume
weighted average prices of the Company's common stock during the period
of 60 consecutive trading days immediately prior the date of the
conversion notice; or (y) 90% of the average of the daily volume weighted
average prices during the period of the 5 trading days prior to the
applicable closing date ($.4798 with respect to the 1,105 shares of
Series C 7% Preferred Stock issued and outstanding). The Conversion Price
is subject to certain floor and time limitations. At any time prior to
October 24, 2001, the Company may, in its sole discretion, redeem in
whole or in part, the then issued and outstanding shares of Series C
Preferred Stock at a price equal to $1,150 per share, plus all accrued
and unpaid dividends, and after October 24, 2001 at a price equal to
$1,200 per share, plus all accrued and unpaid dividends.
During the year ended December 31, 2001, the Company issued 3,864,634
common stock on the conversion of 1,050 Series A preferred stock, 750
Series B preferred stock and 285 Series C preferred stock. The Company
paid dividends of $723,607 on the conversions.
During the three months ended March 31, 2002, the Company issued 541,593
common stock on the conversion of 65 Series C preferred stock. The
Company paid dividends of $21,617 on the conversions.
During the three months ended June 30, 2002, the Company issued 3,253,534
shares of its common stock on the conversion of 280 Series C preferred
stock. The Company paid dividends of $84,506 on the conversions.
-24-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
During the three months ended June 30, 2002, the company received four
conversion notices for an aggregate of 435 shares of Series C Preferred
Stock requiring the issuance of approximately 5,421,386 shares of its
common stock. The company is unable to honor these conversions until it
files an amendment to its Articles of Incorporation increasing its
authorized capital stock, which amendment is subject to shareholder
approval. The company has reflected the dividend on each of these
conversions for a total of $51,687.
On June 25, 2002, the company received letters from two of the holders of
the Series C Preferred Stock demanding payment of an aggregate of
$253,250 in liquidated damages as a result of a default of certain
registration rights. The company believes that it has reached an oral
agreement whereby such holders would forgo any liquidated damages.
The proceeds received on the issue of Class C preferred shares have been
allocated between the value of detachable warrants issued and the
preferred shares outstanding on the basis of their relative fair values.
Paid in capital has been credited by the value of the warrants and
retained earnings charged for the amount of preferred dividends
effectively paid. The conversion benefit existing at the time of issue of
the preferred Class C shares has been computed and this amount has been
credited to paid in capital for the Class C preferred shares and charged
to retained earnings as dividends on the Class C preferred shares.
e) Warrants
On December 30, 1999, 475,000 warrants were issued in conjunction with
the private placement of the Series A, preferred stock. They are
exercisable at any time and in any amount until December 30, 2004 at a
purchase price of $3.24 per share. These warrants have been valued at
$1,091,606 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.33%. This amount has been
treated as a cumulative effect adjustment to retained earnings. For
purposes of earnings per share, this amount has been included with
preferred share dividend in the 2000 financial statements.
In connection with the Initial Public Offering, the underwriters received
110,000 warrants. They are exercisable at a purchase price of $8.25 per
share until June 1, 2004.
On April 16, 2000, we issued 50,000 warrants in connection with a private
placement of Series A stock and 300,000 warrants on the issue of Class B
preferred shares. The warrants were issued with a strike price of $3.71
and expire April 16, 2005. These warrants have been valued at $939,981
based on the Black Scholes model utilizing a volatility rate of 100% and
a risk-less interest rate of 6.18%. This amount has been treated as a
preferred share dividend in the 2000 financial statements.
In connection with the private placement of Series B preferred stock
225,000 warrants were issued. They are exercisable at a purchase price of
$3.58. These warrants have been valued at $533,537 based on the Black
Scholes model utilizing a volatility rate of 100% and a risk-less
interest rate of 6.13%. This amount has been treated as a preferred share
dividend in the 2000 financial statements.
In 2000, in connection with the purchase of the investment in E-Wink
500,000 warrants were issued. They are exercisable at a purchase price of
$3.25 and expire March 6, 2005. These warrants have been valued at
$1,458,700 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.50%. This amount has been
treated as part of the cost of the E-Wink investment.
In 2000, in connection with the private placement of August 22, 2000,
560,627 warrants were issued. They are exercisable at a purchase price of
$2.46 and expire August 22, 2005. These warrants have been valued at
$1,295,049 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.13%. This amount has been
treated as an allocation of the proceeds on the common stock issuance.
On January 26, 2001, the Company: (i) repriced warrants to purchase up to
100,000 shares of its common stock, which warrant was issued to a certain
investor in our April 2000 private placement offering of Series B 8%
Cumulative Preferred Stock, so that such warrant is exercisable at any
time until April 16, 2005 at a new purchase price of $1.00 per share; (b)
repriced warrants to purchase an aggregate of up to 280,693 shares of its
common stock, which warrants were issued to the placement agent, certain
financial advisors, and the placement agent's counsel in our August 2000
private placement offering of units, so that such warrants are
exercisable at any time until August 22, 2005 at a new purchase price of
$1.00 per share; and (c) issued warrants to purchase up to 250,000 shares
of its common stock exercisable at any time and in any amount until
January 26, 2006 at a purchase price of $1.50 per
-25-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
share. In February 2001, 150,000 of such warrants were exercised by KSH
Investment Group, the placement agent in the Company's August 2000
private placement offering. The exercise prices of the revised and newly
issued warrants are equal to, or in excess of, the market price of our
common stock on the date of such revision or issuance.
Following verbal agreements in December 2000, on January 24, 2001, the
company signed an agreement with The Del Mar Consulting Group, a
California corporation, to represent it in investors' communications and
public relations with existing shareholders, brokers, dealers and other
investment professionals. The company issued a non-refundable retainer of
400,000 shares to Del Mar and are required to pay $4,000 per month for
on-going consulting services. In addition, Del Mar has a warrant to
purchase 400,000 shares of common stock at $1.00 per share and 100,000
shares at $2.00 which expires January 24, 2005 and which are exercisable
commencing August 1, 2001. As the agreement to issue the non- refundable
retainer was reached in December 2000, the 400,000 shares with a value of
$268,000 has been included in the shares issued for services rendered and
has been included in financing expenses for December 31, 2000. The
commitment to issue the non-refundable deposit was effected in December
2000. The value of the warrants of $216,348 has been included in paid in
capital in January 2001 and the expense was reflected over the six month
period ending August 1, 2001. In April 2001, the warrants were cancelled
and new warrants were issued which are exercisable at $0.55. 200,000 of
the warrants are exercisable commencing April 2001 and the balance are
exercisable commencing August 1, 2001. The value of the change in the
warrants of $29,702 has been included in the paid in capital in April
2001 and the additional expense was amortized in the period ending August
1, 2001.
During the year ended December 31, 2001, the Company issued 723,436
warrants to the Series C Preferred Stock investors of which 663,484 have
a strike price of $0.54 and expire on April 18, 2005. The balance of
59,952 have a strike price of $0.63 and expire on June 8, 2005.
During the year ended December 31, 2001, the company issued 22,122 shares
to the Business Development Bank of Canada on the exercise of warrants at
$1.00.
During the three months ended June 30, 2002, the company issued 200,000
warrants. The warrants were issued to Johnston & Associates, LLC, a
Washington company, to provide strategic governmental relations
counseling and marketing representation before the Department of
Defense, Congress and targeted companies in connection with marketing
the services of the Company's engineering operations related to
specific government contracts. The warrants were issued at the fair
market value on the date of grant and will vest at 50% per year. In
addition, Johnston & Associates will be compensated at a rate of
$10,000 per month for twelve months from April 2002 until March 31,
2003.
f) Stock Options
The company had outstanding stock options issued in conjunction with its
long-term financing agreements for 22,122 common stock which were
exercised in July 2001, the cost of which has been expensed prior to
January 1, 1999, and additional options issued to a previous employee of
the company for 200,000 shares exercisable at $2.10, of which 18,508 were
exercised during 2000. The balance of 181,492 are outstanding.
During 1999, 250,500 options to purchase shares of the company were
issued to related parties. The options are exercisable at $3.19.
In connection with the acquisition of Cad Cam Inc. 100,000 options to
purchase shares of the company were delivered in quarterly installments
of 25,000 options each, starting January 1, 2000. The exercise amounts
ranged from $2.12 to $3.25. The exercise price was amended to $1.00 and
these options will be exercisable between April 4, 2001 to 2004. The cost
of re-pricing of these options totaling $100,000 has been recorded in
Acquisition costs and financing expenses for the year ended December 31,
2000.
In July 1999, the directors of the company adopted and the stockholders
approved the adoption of the company's 1998 Stock Option Plan. In May
2000, the directors approved the adoption of the 2000 Stock Option Plan.
In June 2001, the directors approved the adoption of the 2001 Stock
Option Plan. Each of the plans provides for the issuance of 435,000
options with the following terms and conditions.
The plans are administrated by the Compensation Committee or the Board of
Directors, which determine among other things, those individuals who
shall receive options, the time period during which the options may be
partially or fully exercised, the number of common stock to be issued
upon the exercise of the options and the option exercise price.
-26-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
The plans are effective for a period of ten years and options may be
granted to officers, directors, consultants, key employees, advisors
and similar parties who provide their skills and expertise to the
company.
Options granted under the plans generally require a three year vesting
period, and shall be at an exercise price that may not be less than the
fair market value of the common stock on the date of the grant. Options
are non-transferable and if a participant ceases affiliation with the
company by reason of death, permanent disability or retirement at or
after age 65, the option remains exercisable for one year from such
occurrence but not beyond the option's expiration date. Other types of
termination allow the participant 90 days to exercise the option,
except for termination for cause which results in immediate termination
of the option.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the company become available again
for issuance under the plans, subject to applicable securities
regulation.
The plans may be terminated or amended at any time by the Board of
Directors, except that the number of common stock reserved for issuance
upon the exercise of options granted under the plans may not be
increased without the consent of the stockholders of the company.
Included in the options granted in 2000 were 260,000 options issued to
related parties in December 2000. The options are exercisable at $0.70
and expire December 2005.
14. RESTRUCTURING COSTS
At the end of December 31, 2001 the Company had a restructuring reserve
balance of $79,118 as a result of certain of the Company's actions to
better align its cost structure with expected revenue growth rates. The
restructuring activities related to the closure of one training
location in London, Ontario resulting in costs to sever 3 employees
with long-term contracts until December 2002 and the lease commitment
for the premises in London Ontario. These long-term contracts do not
require the employees to provide services until the date of involuntary
termination. Other employees at the London location, without contracts,
were terminated during March 2001 and April 2001. In addition, in
February 2001, the company began to close down one of its research and
development (R&D) offices in Toronto. The company continued to
terminate employees until April 2001.
The remaining accrual will be relieved throughout fiscal 2002 as
severance payments are completed. Details of the restructuring costs
and reserve balance is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance
non/cash March 31, 2002 Costs June 30, 2002
Severance packages
London-Training Cash 37,646 -- (37,646) --
Toronto-R&D Cash -- -- -- --
Lease cancellations
London-Training Cash -- -- -- --
Toronto-R&D Cash -- -- -- --
------- ------- ------- -------
Commitments 37,646 -- (37,646) --
======= ======= ======= =======
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
15. DEFERRED INCOME TAXES AND INCOME TAXES
a) Deferred Income Taxes
The components of the future tax liability classified by source of
temporary differences that gave rise to the benefit are as follows:
June 30,
2002
$
Accounting amortization in excess of tax
amortization 9,875
Losses available to offset future income
taxes 3,117,220
Share issue costs 532,405
Adjustment cash to accrual method (496,879)
Investment tax credit --
---------
3,162,621
Less: Valuation allowance 3,313,001
---------
(150,380)
=========
As part of the acquisitions of Cad Cam Inc. and MicroTech Professionals
Inc., there was a change of control which resulted in the subsidiaries
being required to change from the cash method to the accrual method of
accounting for income tax purposes.
b) Current Income Taxes
Current income taxes consist of:
June 30,
2002
$
Amount calculated at Federal and
Provincial statutory rates (412,874)
----------
Increase (decrease) resulting from:
Permanent differences 205,527
Valuation allowance 182,047
----------
387,574
----------
Current income taxes (25,300)
==========
Issue expenses totaling approximately $1,300,000 may be claimed at the
rate of 20% per year until 2005. To the extent that these expenses create
a loss, the loss is available to be carried forward for seven years from
the year the loss is incurred. As the US subsidiaries have been acquired
by a non-US entity, the taxable income will be increased by approximately
$1,900,000 over the next three years as the company is required to change
its taxation method from the cash basis to the accrual basis. The company
has not reflected the benefit of utilizing non-capital losses totaling
approximately $8,200,000 in the future as a deferred tax asset as at June
30, 2002. As at the completion of the June 30, 2002 financial statements,
Management believed it was more likely than not that the results of
future operations would not generate sufficient taxable income to realize
the deferred tax assets.
-27-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
(AMOUNTS EXPRESSED IN US DOLLARS)
16. OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended June 30, 2002:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments 61,005 -- 61,005
Adjustment to market value -- -- --
--------- ------- ---------
Other comprehensive income (loss) 61,005 -- 61,005
========= ======== =========
Comprehensive income (loss) for the three months ended March 31, 2002:
Before Tax Tax (Expense) Net-of-Tax