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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER __________
THINKPATH INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
ONTARIO 52-209027
------------------------- --------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
201 WESTCREEK BOULEVARD
BRAMPTON, ONTARIO L6T 5S6
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 460-3040
-------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES |X| NO |_|
AS OF MAY 19, 2003 THERE WERE 181,658,312 SHARES OF COMMON
STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
THINKPATH INC.
MARCH 31, 2003 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 March 31, 2003 and
December 31, 2002 and 2001.... ......................................
Interim Consolidated Statements of Income for the three months ended
March 31, 2003, 2002 and 2001........................................
Interim Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 2003..........................................
Interim Consolidated Statements of Cash Flows for the three months
ended March 31, 2003, 2002 and 2001..................................
Notes to Interim Consolidated Financial Statements...................
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........
Item 4. Controls and Procedures..............................................
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................
Item 2. Changes in Securities and Use of Proceeds ...........................
Item 3. Defaults Upon Senior Securities .....................................
Item 4. Submission of Matters to a Vote of Security Holders .................
Item 5. Other Information ...................................................
Item 6. Exhibits and Reports on Form 8-K ....................................
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2003
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 (UNAUDITED) AND DECEMBER 31, 2002, AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
March 31, December 31, December 31,
2003 2002 2001
$ $ $
ASSETS
CURRENT ASSETS
Cash 143,802 114,018 482,233
Accounts receivable 1,981,479 2,663,823 5,502,113
Inventory -- -- 40,057
Income taxes receivable -- -- 431,817
Prepaid expenses 264,532 196,683 345,341
--------- --------- ----------
2,389,813 2,974,524 6,801,561
PROPERTY AND EQUIPMENT 1,707,763 1,915,379 2,859,340
GOODWILL 3,748,732 3,748,732 5,128,991
INVESTMENT IN NON-RELATED COMPANIES 45,669 45,669 1,013,926
LONG-TERM RECEIVABLE -- 53,924 83,450
OTHER ASSETS 50,642 49,303 1,287,710
DEFERRED INCOME TAXES -- -- --
--------- --------- ----------
7,942,619 8,787,531 17,174,978
========= ========= ==========
F-1
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 (UNAUDITED) AND DECEMBER 31, 2002, AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
March 31, December 31, December 31,
2003 2002 2001
---- ---- ----
$ $ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 254,637 209,776 5,039,171
Receivable Discount Facility 1,299,652 2,340,579 --
Accounts payable 2,540,305 3,197,286 4,073,444
Deferred revenue 94,433 163,609 365,023
Current portion of long-term debt 360,322 380,188 528,285
Current portion of notes payable 208,761 208,254 150,000
12% Convertible Debenture 560,777 192,950 --
--------- --------- ----------
5,318,887 6,692,642 10,155,923
DEFERRED INCOME TAXES -- -- 150,380
LONG-TERM DEBT 63,438 84,756 582,432
NOTES PAYABLE 682,565 686,703 2,340,000
LIABILITIES PAYABLE IN CAPITAL STOCK -- -- 699,297
----------- ----------- -----------
6,064,890 7,464,101 13,928,032
=========== =========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 23)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 38,576,916 33,367,034 26,571,481
DEFICIT (35,621,666) (30,966,083) (22,719,044)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,077,521) (1,077,521) (605,491)
----------- ----------- -----------
1,877,729 1,323,430 3,246,946
----------- ----------- -----------
7,942,619 8,787,531 17,174,978
=========== =========== ===========
The accompanying notes are an integral part of
these interim consolidated financial statements
F-2
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
---- ---- ----
$ $ $
REVENUE 3,292,122 7,014,379 9,339,329
COST OF SERVICES 2,457,847 5,271,471 6,377,659
---------- ---------- ----------
GROSS PROFIT 834,275 1,742,908 2,961,670
OTHER INCOME -- -- 12,429
---------- ---------- ----------
834,275 1,742,908 2,974,099
---------- ---------- ----------
EXPENSES
Administrative 719,575 959,065 936,056
Selling 317,804 956,749 1,439,272
Depreciation and amortization 192,064 257,684 448,434
Restructuring costs -- -- 49,919
---------- ---------- ----------
1,229,443 2,173,498 2,873,681
LOSS FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES (395,168) (430,590) 100,418
Interest Charges 4,281,366 224,664 220,287
---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (4,676,534) (655,254) (119,869)
Income Taxes (recovery) 3,619 (25,861) 203,962
---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (4,680,153) (629,393) (323,831)
LOSS FROM DISCONTINUED OPERATIONS
(INCLUDING GAIN ON DISPOSAL OF $400,229 IN 2002) 24,570 129,923 (166,465)
---------- ---------- ----------
NET LOSS BEFORE PREFERRED STOCK DIVIDENDS (4,655,583) (499,470) (490,296)
PREFERRED STOCK DIVIDENDS -- 23,680 226,500
NET LOSS APPLICABLE TO COMMON STOCK (4,655,583) (523,150) (716,796)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND FULLY DILUTED 57,421,886 17,640,438 13,025,123
========== ========== ==========
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK BEFORE PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.08) (0.03) (0.04)
========== ========== ==========
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK AFTER PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.08) (0.03) (0.06)
========== ========== ==========
The accompanying notes are an integral part of
these interim consolidated financial statements
F-3
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED
COMMON STOCK PREFERRED STOCK CAPITAL OTHER
NUMBER OF NUMBER OF SHARES STOCK COMPREHENSIVE COMPREHENSIVE
SHARES A B C AMOUNTS DEFICIT LOSS 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
before preferred
stock dividends -- -- -- -- -- (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 --
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)
Options exercised 22,122 -- -- -- 1 --
Debt settled through
the issuance
of common stock 93,883 -- -- -- 44,125 --
Common stock and
warrants issued
in consideration
of services 714,267 -- -- -- 519,994 --
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 year
before preferred
stock dividends -- -- -- -- -- (8,146,652) (8,146,652)
------------
Other comprehensive
income (loss),
net of tax:
Foreign currency
translation -- -- -- -- -- -- (171,283)
Adjustment to
market value -- -- -- -- -- -- (300,747)
------------
Other comprehensive
income (472,030) (472,030)
------------
Comprehensive loss (7,674,622)
============
Reduction in common
stock payable 8,387,840 -- -- -- 1,098,955 --
Dividend on
preferred stock -- -- -- -- 67,530 (67,530)
Conversion of
preferred stock to
common stock 23,278,448 -- -- (945) -- --
Beneficial conversion
on issuance of
preferred stock -- -- -- -- 32,857 (32,857)
Debt settled through
the issuance
of common stock 2,982,018 -- -- -- 434,348 --
Common stock and
warrants issued
in consideration
of services 13,878,026 -- -- -- 1,556,485 --
Warrants issued
for cash -- -- -- -- 707,050 --
Beneficial conversion
on issuance
of convertible
debt -- -- -- -- 2,898,328 --
------------ ---------- --- -------- ------------ ------------ ------------
Balance as of
December 31, 2002 66,258,043 -- -- -- 33,367,034 (30,966,083) (1,077,521)
============ ========== === ======== ============ ============ ============
Net loss for the year -- -- -- -- -- (4,655,583) (4,655,583)
------------
Other comprehensive
income (loss),
net of tax:
Foreign currency
translation -- -- -- -- -- -- --
Adjustment to
market value -- -- -- -- -- -- --
------------
Other comprehensive
income --
------------
Comprehensive loss (4,655,583)
============
Conversion of 12%
senior secured
convertible
debenture 37,013,329 -- -- -- 61,012 --
Interest on 12% senior
secured
Convertible debenture 953,034 -- -- -- 5,970 --
Debt settled through
the issuance
of common stock 15,930,230 -- -- -- 440,899 --
Common stock and
warrants issued
in consideration
of services 10,980,000 -- -- -- 226,500 --
Warrants issued
for cash -- -- -- -- 446,285 --
Beneficial conversion
on issuance
of convertible debt -- -- -- -- 4,029,216 --
------------ ---------- --- -------- ------------ ------------ ------------
Balance as of
March 31, 2003 131,134,636 -- -- -- 38,576,916 (35,621,666) (1,077,521)
============ ========== === ======== ============ ============ ============
The accompanying notes are an integral part of these interim consolidated financial statements.
F-4
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
---- ---- ----
$ $ $
Cash flows from operating activities
Net loss before preferred stock dividends (4,655,583) (499,470) (490,296)
----------- ---------- ---------
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Amortization 202,452 374,625 560,586
Amortization of beneficial conversion (included in interest) 4,029,216 -- --
Decrease (increase) in accounts receivable 788,200 583,402 (159,078)
Decrease (increase) in prepaid expenses (74,387) (11,272) (168,092)
Increase (decrease) in accounts payable (694,484) (1,087,036) (327,405)
Decrease (increase) in deferred income taxes -- -- 200,000
Decrease (increase) in inventory -- (3,169) 25,233
Decrease (increase) in long-term receivable 57,775 -- (139,956)
Increase (decrease) in deferred revenue (69,288) (48,542) (23,710)
Increase in income taxes payable (receivable) -- -- --
Common stock and warrants issued for services 226,500 -- 246,980
Accounts payable settled with common stock 440,899 -- --
Gain on disposal of subsidiary -- (401,027) --
----------- ---------- ---------
Total adjustments 4,906,883 (593,019) 214,558
----------- ---------- ---------
Net cash used in operating activities 251,300 (1,092,489) (275,738)
----------- ---------- ---------
Cash flows from investing activities
Purchase of capital assets -- (222,577) (62,089)
Disposal (purchase) of other assets -- -- --
Proceeds on sale of fixed assets -- -- --
Proceeds on disposal of subsidiary -- 1,320,786 --
----------- ---------- ---------
Net cash provided from (used in) investing activities -- 1,098,209 (62,089)
----------- ---------- ---------
Cash flows from financing activities
Repayment of notes payable (3,631) (37,500) (73,574)
Repayment of long-term debt (1,127,505) (335,861) (219,734)
Cash received (paid) on long-term debt -- -- 225,000
Proceeds from issuance of common stock -- -- 400,000
Proceeds from issuance of debentures and warrants 875,000 -- --
Increase (decrease in bank indebtedness) -- (28,356) 354,019
----------- ---------- ---------
Net cash provided by financing activities (256,136) (401,717) 685,711
----------- ---------- ---------
Effect of foreign currency exchange rate changes 34,620 3,994 (347,884)
----------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 29,784 (392,003) --
Cash and cash equivalents
Beginning of period 114,018 482,233 --
----------- ---------- ---------
End of period 143,802 90,230 --
=========== ========== =========
SUPPLEMENTAL CASH ITEMS:
Interest paid 252,150 239,865 116,553
=========== ========== =========
Income taxes paid (recovered) 4,244 (25,410) 3,962
=========== ========== =========
SUPPLEMENTAL NON-CASH ITEMS:
Preferred stock dividend -- 23,680 226,500
Common shares issued for liabilities 440,899 701,253 --
Reduction in notes payable -- -- --
=========== ========== =========
The accompanying notes are an integral part of
these interim consolidated financial statements
F-5
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(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 March 31, 2003,
the Company had a working capital deficiency of $2,929,074, a deficit of
$35,621,666 and has suffered recurring losses from operations.
With insufficient working capital from operations, the Company's primary
sources of cash are a receivable discount facility with Morrison
Financial Services Limited and proceeds from the sale of equity
securities. At March 31, 2003, the balance on the receivable discount
facility was approximately $1,300,000. The company is currently within
margin of its receivable discount facility with Morrison Financial
Services Limited based on 75% of qualifying accounts receivable.
During the three months ended March 31, 2003, the company closed $875,000
in convertible debentures pursuant to a financing arrangement entered
into on December 5, 2002. The funds were used for various debt
settlements and critical payables.
As at May 16, 2003, management's plans to mitigate and alleviate these
adverse conditions and events include:
a) Commitment from investors for additional convertible
debentures of up to $200,000 to be used for working capital.
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.
b) Ongoing restructuring of debt obligations and settlement of
outstanding claims.
c) Focus on growth in the engineering division, including
design services and technical publications and expansion of
the engineering service offerings to Ontario, Canada to
replace existing lower margin information staffing services.
Despite its negative working capital and deficit, the company believes
that its management has developed a business plan that if successfully
implemented could substantially improve the company's operational results
and financial condition. However, the company can give no assurances that
its current cash flows from operations, if any, borrowings available
under its receivable discounting facility with Morrison Financial
Services Limited, and proceeds from the sale of securities, will be
adequate to fund its expected operating and capital needs for the next
twelve months. The adequacy of cash resources over the next twelve months
is primarily dependent on its operating results, and the closing of new
financing, all of which are subject to substantial uncertainties. Cash
flows from operations for the next twelve months will be dependent, among
other factors, upon the effect of the current economic slowdown on sales,
the impact of the restructuring plan and management's ability to
implement its business plan. The failure to return to profitability and
optimize operating cash flows in the short term, and close alternate
financing, could have a material adverse effect on the company's
liquidity position and capital resources.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Going Concern
These consolidated financial statements have been prepared on the going
concern basis, which assumes the realization of assets and liquidation of
liabilities and commitments in the normal course of business. The
application of the going concern concept is dependent on the Company's
ability to generate sufficient working capital from operations and
external investors. These consolidated financial statements do not give
effect to any adjustments should the Company be unable to continue as a
going concern and, therefore, be required to realize its assets and
discharge its liabilities in other than the normal course of business and
at amounts differing from those reflected in the consolidated financial
statements. Management plans to obtain sufficient working capital from
operations and external financing to meet the Company's liabilities and
commitments as they become payable over the next twelve months. There can
be no assurance that management's plans will be successful. Failure to
obtain sufficient working capital from operations and external financing
will cause the Company to curtail operations. These consolidated
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
F-6
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
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 wholly-owned subsidiaries Thinkpath US Inc.
(formerly Cad Cam Inc.), Thinkpath Michigan Inc. (formerly Cad Cam of
Michigan Inc.), Thinkpath Technical Services Inc. (formerly Cad Cam
Technical Services Inc.), provides engineering, design, technical
publications and staffing, services to enhance the resource performance
of clients. In addition, the company owns the following companies which
are currently inactive: Systemsearch Consulting Services Inc.,
International Career Specialists Ltd., Microtech Professionals Inc.,
E-Wink Inc. (80%), Thinkpath Training Inc. (formerly ObjectArts Inc.),
Thinkpath Training US Inc. (formerly ObjectArts US Inc.) and TidalBeach
Inc. In 2002, the company sold Njoyn Software Incorporated, a
wholly-owned subsidiary.
d) Basis of 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 from and to
banks, and any other highly liquid investments purchased with a maturity
of three months or less. The carrying amount approximates fair value
because of the short maturity of those instruments.
f) Other Financial Instruments
The carrying 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.
h) Property and Equipment
Property and equipment are recorded at cost and are amortized over the
estimated useful lives of the assets principally using the declining
balance method.
The company's policy is to record leases, which transfer substantially
all benefits and risks incidental to ownership of property, as
acquisition of property and equipment and to record the occurrences of
corresponding obligations as long-term liabilities. Obligations under
capital leases are reduced by rental payments net of imputed interest.
F-7
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
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) Prior to the sale of the training division (Note 18), the company
provided advanced training and certification in a variety of technologies
and revenue was recognized on delivery.
5) Prior to the sale of the technology division (Note 18), the company
licensed software in the form of a Human Capital Management System called
Njoyn. The revenue associated with providing this software consisted of
an initial set up fee, customization and training as agreed and an
ongoing monthly per user fee. The allocation of revenue to the various
elements was based on the company's determination of the fair value of
the elements if they had been sold separately. The customers had the
right to choose a provider to host the software which was unrelated to
the company. The set-up fee and customization revenue was recognized upon
delivery of access to the software with customization completed in
accordance with milestones determined by the contract.
Revenue was recognized on a percentage of completion basis for contracts
with significant amounts of customization and clearly defined milestones
agreed to by the customer and an enforceable right to invoice and collect
on a partial completion basis.
For contracts which required significant customization, without clearly
defined milestones, and an inability to estimate costs, revenue was
reflected on a completed contract basis. Substantial completion was
determined based on customer acceptance of the software.
6) Prior to the sale of the technology division (Note 18), the company
also signed contracts for the customization or development of SecondWave,
a web development software in accordance with specifications of its
clients. The project plan defined milestones to be accomplished and the
costs associated. These amounts were billed as they were accomplished and
revenue was recognized as the milestones were reached. The work in
progress for costs incurred beyond the last accomplished milestone was
reflected at the period end. The contracts did not include any
post-contract customer support. Additional customer support services were
provided at standard daily rates, as services are required.
F-8
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
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.
Thinkpath completed SFAS No.142 transitional impairment test during the
third quarter of 2002 and concluded that there was no impairment of
recorded goodwill, as the fair value of its reporting units exceeded
their carrying amount as of January 1, 2002. Therefore, the second part
of the transitional test was not required to be performed.
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.
F-9
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.
In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
Company adopted SFAS 144, effective January 1, 2002. The adoption of SFAS
144 did not have a material impact on the Company's results of operations
or financial condition.
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 introduced the use of a fair value-based method of
accounting for stock-based compensation. It encourages, but does not
require, companies to recognize stock-based compensation expenses to
employees based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the existing
accounting rules continued in Accounting Principles Board Option No. 25,
Accounting for stock issued to employees. However, SFAS No. 123 requires
companies that choose not to adopt the new fair value accounting rules to
disclose pro forma net income and earnings per share under the new
method. SFAS No. 123 is effective for financial statements for fiscal
years beginning after December 31, 1995. The company has adopted the
disclosure provisions of SFAS No. 123.
s) Computer software costs
The company accounts for the cost of developing computer software,
through its wholly-owned subsidiary Njoyn Software Incorporated. The
company records these costs as research and development expenses until
the technological feasibility of the product has been established at
which time the costs are deferred. At the end of each year, the company
compares the unamortized costs represented by deferred development costs
in Other Assets to the net realizable value of the product to determine
if a reduction in carrying value is warranted. The software developed for
own use which may be sold as a separate product is the Njoyn software and
during development, the company decided to market the software and
therefore for the costs incurred after technological feasibility was
reached has been treated as Deferred Development costs and the amount
evaluated on an annual basis to determine if a reduction in carrying
value is warranted. On March 8, 2002, Thinkpath sold all of its shares in
Njoyn Software Incorporated.
t) Investments in Non-Related Companies
The company records its investments in companies in which it holds a 20%
or more interest and in which the company can exercise significant
influence over the investee's operating and financial policies on the
equity basis.
The company records its investment in companies in which it holds less
than 20% interest or in which the company has a 20% or greater interest
but the company is unable to exercise significant influence at fair
market value. Changes in fair market value are adjusted in comprehensive
income, unless the impairments are of a permanent nature, in which case
the adjustments are recorded in earnings.
F-10
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
u) Recent Pronouncements
In April 2002, the FASB issued SFAS No. 145, which, among other factors,
changed the presentation of gains and losses on the extinguishments of
debt. Any gain or loss on extinguishments of debt that does not meet the
criteria in APB Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", shall be included in operating earnings and not presented
separately as an extraordinary item. The new standard is effective for
companies with fiscal years beginning after May 15, 2002. However, the
company has elected to adopt the standard as the debt restructuring gain
in the current period, as permitted by SFAS No. 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting
for restructuring and similar costs. SFAS No.146 supersedes previous
accounting guidance, principally Emerging Issues Task Force Issue, or
EITF, No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit on Activity (including Certain Costs
Incurred in a Restructuring)". The company will adopt the provisions of
SFAS No. 146 for restructuring activities initiated after December 31,
2002. SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
In January 2003, the FASB issued SFAS No. 148, Accounting for Stock
-Based Compensation - Transition and Disclosures. This statement provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, this statement also amends the disclosure requirements of
SFAS No. 123 to require more prominent and frequent disclosures in the
financial statements about the effects of stock-based compensation. The
transitional guidance and annual disclosure provisions of this Statement
is effective for the December 31, 2002 financial statements. The interim
reporting disclosure requirements is effective for the March 31, 2003
financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This
Interpretation elaborates on the existing disclosure requirement for most
guarantees including loan guarantees, and clarifies that at the time a
company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and
annual financial statements. The initial recognition and measurement
provisions of the Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities,"
which addresses consolidation by business enterprises of variable
interest entities. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. A variable
interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity
may be essentially passive or it may engage in research and development
or other activities on behalf of another company. The objective of
Interpretation No. 46 is not to restrict the use of variable interest
entities but to improve financial reporting by companies involved with
variable interest entities. Until now, a company generally has included
another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Interpretation No. 46
changes that by requiring a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss
from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation No. 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established.
The Company does not have any variable interest entities, and,
accordingly, adoption is not expected to have a material effect on the
Company.
F-11
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". The Statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under Statement 133. The
amendments set forth in Statement 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in Statement 133. In
addition, it clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. This
Statement is effective for contracts entered into or modified after June
30, 2003 with certain exceptions. The Company does not believe that the
adoption of Statement No. 149 will have a material effect on the Company.
v) Advertising Costs
Advertising costs are expensed as incurred.
4. ACCOUNTS RECEIVABLE
March 31, December 31, December 31,
2003 2002 2001
$ $ $
Accounts receivable 2,225,525 2,900,616 6,079,676
Less: Allowance for doubtful accounts (244,046) (236,793) (577,563)
--------- --------- ---------
1,981,479 2,663,823 5,502,113
========= ========= =========
March 31, December 31, December 31,
2003 2002 2001
$ $ $
Allowance for doubtful accounts
Balance, beginning of period 236,793 577,563 458,833
Provision 7,253 (292,764) 118,730
Recoveries -- (48,006) --
--------- --------- ---------
Balance, end of period 244,046 236,793 577,563
========= ========= =========
5. PROPERTY AND EQUIPMENT
March 31, December 31, December 31,
2003 2002 2001
----------------------------------- ---------- ---------
ACCUMULATED
COST AMORTIZATION NET NET NET
$ $ $ $
Furniture and equipment 728,289 484,601 243,688 255,118 344,693
Computer equipment
and software 5,781,090 4,378,099 1,402,991 1,593,937 2,322,887
Leasehold improvements 201,117 140,033 61,084 66,324 191,760
--------- --------- --------- --------- ---------
6,710,496 5,002,733 1,707,763 1,915,379 2,859,340
========= ========= ========= ========= =========
Assets under capital lease 707,167 403,517 303,650 326,365 474,485
========= ========= ========= ========= =========
F-12
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
Amortization of property and equipment for the three months ended March
31, 2003 amounted to $202,452 including amortization of assets under
capital lease of $22,715.
Amortization of property and equipment for the year ended December 31,
2002 amounted to $974,142 including amortization of assets under capital
lease of $110,763.
Amortization for the year ended December 31, 2001 amounted to $1,594,709
and $1,067,029 for the year ended December 31, 2000. Amortization
includes amortization of assets under capital lease of $146,217 for the
year ended December 31, 2001 and $136,487 for the year ended December 31,
2000.
6. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
March 31, December 31, December 31,
2003 2002 2001
Conexys $ 1 $ 1 $667,511
Digital Cement 45,668 45,668 346,415
Lifelogix -- -- --
-------- ---------- ----------
Total $ 45,669 $ 45,669 $1,013,926
======== ========== ==========
i) Conexys
During the year ended December 31, 1999, $383,146 of the Conexys
investment was included as a short-term investment as the company had
intended to sell these shares on the open market. During fiscal 2000, the
company acquired additional shares of Conexys at a cost of approximately
$284,365 in consideration of services rendered and reclassified the total
investment as available for sale.
Effective February 26, 2003, the common shares of Conexys were
temporarily suspended from trading on the Bermuda Stock Exchange as it
does not have adequate sources of funding for its immediate operating
requirements and is currently investigating various options to retain and
maximize shareholder value including the restructuring of its debt and
refinancing of the company.
At December 31, 2002, the company wrote down its investment by $667,510
to a carrying value of $1. The write down was considered a permanent
decline in value and as such was recorded as a charge to operations.
ii) Digital Cement
During fiscal 2000, the company acquired 1,125,000 shares of Digital
Cement, representing approximately 4% of that company's shares in
consideration of the co-licensing of SecondWave, software developed by
TidalBeach Inc., a wholly-owned subsidiary of Thinkpath Inc. The value of
these shares was determined to be approximately $507,865 based on a offer
to a third party to purchase shares in the company at a price of $0.50
per share. During 2001, the fair value was adjusted to $346,415 with a
charge of $161,450 to comprehensive income. During 2002, the fair value
was adjusted to $45,668 with a charge of $300,747 to comprehensive
income.
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 the ability
to exercise significant influence over LifeLogix as the majority
ownership of the investee is concentrated among a small group of
shareholders who operate Lifelogix without regard to the views of the
company and the company has been unable to obtain quarterly information.
This investment was written off in 2001.
F-13
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
iv) Tillyard Management
During the year ended December 31, 2001, the company acquired an interest
of $130,242 in Tillyard Management Inc., a property management company,
in consideration of a real estate management software system developed by
Thinkpath Inc. This investment has been accounted for using the cost
method. Tillyard was formed to utilize and market the real estate
management software. The value of the investment was established based
upon the capitalization for the investee and our share of that
capitalization. As sufficient funding and interest was not forthcoming,
the operations of Tillyard were abandoned and the Company wrote down its
investment at December 31, 2001.
7. GOODWILL
Goodwill is the excess of cost over the value of assets acquired over
liabilities assumed in the purchase of the subsidiaries. Goodwill has
been allocated to reporting units as follows:
March 31, December 31, December 31,
2003 2002 2001
-------------------------------------- ---------- ----------
ACCUMULATED IMPAIRMENT
COST AMORTIZATION LOSSES NET NET NET
$ $ $ $ $ $
IT Recruitment 448,634 303,337 145,297 -- -- 145,297
(Systemsearch
Consulting Services)
Technical Publications
& Engineering 5,518,858 535,164 1,234,962 3,748,732 3,748,732 4,983,694
(CadCam Inc.)
---------- ---------- --------- ---------- --------- ---------
5,967,492 838,501 1,380,259 3,748,732 3,748,732 5,128,991
========== ========== ========== ========== ========= =========
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.
During the third quarter of 2002, the company completed its transitional
goodwill impairment test as of January 1, 2002 and determined that no
adjustment to the carrying value of goodwill was needed.
The IT recruitment unit was tested for impairment in the third quarter,
after the annual forecasting process. Due to a decrease in margins and
the loss of key sales personnel, operating profits and cash flows were
lower than expected in the first nine months of 2002. Based on that
trend, the earnings forecast for the next two years was revised. At
September 30, 2002, a goodwill impairment loss of $57,808 was recognized
in the IT recruitment reporting unit. The fair value of that reporting
unit was estimated using the expected present value of future cash flows.
During the fourth quarter, the IT recruitment unit experienced further
decline, indicating impairment. The fair value of the unit was estimated
using the expected present value of future cash flows. At December 31,
2002, a further goodwill impairment loss of $87,489 was recognized.
The Technical Publications and Engineering unit was tested for impairment
in the fourth quarter, as operating profits, cash flows and forecasts
were lower than expected. At December 31, 2002, a goodwill impairment
loss of $1,234,962 was recognized. The fair value of that reporting unit
was estimated using the expected present value of future cash flows.
On an ongoing basis, absent any impairment indicators, the company
expects to perform a goodwill impairment test as of the end of the third
quarter of every year.
F-14
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
The following table presents the impact of adopting SFAS No. 142 on net
loss and net loss per share had the standard been in effect for the year
ended December 31, 2001.
2001
Reported loss from continuing operations (8,559,402)
Adjustments:
Amortization of goodwill 454,908
---------
Adjusted loss from continuing operations (8,104,494)
==========
Reported loss from continuing operations, before preferred dividends,
(0.57) basic and fully diluted loss per common share
Impact of amortization of goodwill 0.03
-----
Adjusted loss from continuing operations, before preferred
dividends, basis and fully diluted loss per common share (0.54)
=====
Reported loss from continuing operations after preferred dividends (9,288,142)
Adjustments:
Amortization of goodwill 454,908
--------
Adjusted loss from continuing operations after preferred dividends (8,833,234)
=========
Reported loss from continuing operations, after preferred dividends,
basic and fully diluted loss per common share (0.62)
Impact of amortization of goodwill 0.03
-----
Adjusted loss from continuing operations, after preferred (0.59)
dividends, basis and fully diluted loss per common share =====
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. The goodwill amortization
and any impairment write down reported in 2001 relate to continuing
operations.
In accordance with the requirements of SFAS 121 and SFAS 142, the
impairment of goodwill has resulted in the writedown of the following
amounts;
2002 2001
-------- ---------
Systemsearch Consulting Services 145,297 238,673
CadCam Inc. 1,234,962 --
MicroTech Professionals Inc. -- 2,762,718
International Career Specialists -- --
E-Wink Inc. -- --
--------- ----------
1,380,259 3,001,391
========= ==========
Systemsearch Consulting Services Inc., MicroTech Professionals Inc.,
International Career Specialists and E-Wink Inc. are inactive companies.
F-15
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
8. OTHER ASSETS
March 31, December 31, December 31,
2003 2002 2001
$ $ $
Deferred development cost -- -- 993,765
Deferred financing costs -- -- --
Deferred contracts -- -- 250,000
Cash surrender value of life insurance 50,642 49,303 43,945
-------- --------- ---------
50,642 49,303 1,287,710
======== ========= =========
Amortization of other assets for the year ended December 31, 2002
amounted to $317,886. Amortization for the year ended December 31, 2001
amounted to $510,038.
9. BANK INDEBTEDNESS
i) March 31, 2003
At March 31, 2003, the company had $1,300,000 outstanding with Morrison
Financial Services Limited under a receivable discount facility which
allows the company to borrow up to 75% of the value of qualified accounts
receivables.
ii) December 31, 2002
On December 5, 2002, Bank One's security and indebtedness were purchased
by Morrison Financial Services Limited. Bank One accepted a $1,100,000
discount on the payoff of its debt. On July 1, 2002 the company entered
into a Forbearance and Modification Agreement with Bank One which was
subsequently amended on August 1, 2002, August 15, 2002, September 1,
2002, September 16, 2002, September 30, 2002, October 15, 2002, November
15, 2002, and November 30, 2002. Under the terms of the agreement, the
Bank was entitled to forbearance fees and payment of related legal fees
and expenses. The Bank charged the company approximately $250,000 in
forbearance fees and $18,000 in legal fees.
Morrison Financial Services Limited charged the company a 15% fee or
$165,000 for the discount negotiation with Bank One. The discount amount
of $1,100,000 was recognized by the company as debt forgiveness and the
fee of $165,000 was netted against this amount for total debt forgiveness
of $935,000.
iii) 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 overdraft of
$110,000. The Company did not have an authorized overdraft facility with
Bank One, however the bank 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 the company's
credit line facility, Bank One restricted the company's repayment of
certain subordinated loans and notes payable which affected payments to
the Business Development Bank of Canada, Roger Walters and Denise
Dunne-Fushi.
F-16
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
10. CONVERTIBLE DEBENTURE
Pursuant to a share purchase agreement dated December 5, 2002, the
Company entered into an agreement (the "12% Senior Secured Convertible
Debenture Agreement"), with a syndicate of investors for debentures of up
to $3,000,000. The first debenture of $800,000 was purchased together
with 45,714,285 warrants on closing. The debenture will become due twelve
months from the date of issuance. The investors will have the right to
acquire up to $800,000 worth of the Company's common stock at a price the
lesser of $.0175 or 50% of the average of the three lowest prices on
three separate trading days during the sixty-day trading period prior to
conversion. The warrants are exercisable at any time and in any amount
until December 5, 2009 at a purchase price of $.0175 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture
at the rate of 12% per annum, payable on each conversion date and
maturity date in cash or shares of common stock.
On December 18, 2002, the Company entered into a share purchase agreement
with Tazbaz Holdings Limited for the issuance and sale by the Company of
a $100,000 principal amount Convertible Debenture and 5,625,000 warrants
to purchase shares of the Company's common stock. The debenture will
become due twelve months from the date of issuance. Tazbaz Holdings
Limited will have the right to acquire up to $100,000 worth of our common
stock at a price the lesser of $.0175 or 50% of the average of the three
lowest prices on three separate trading days during the sixty-day trading
period prior to conversion. The warrants are exercisable at any time and
in any amount until December 18, 2009 at a purchase price of $.0175 per
share. The Company is required to pay interest to Tazbaz Holdings Limited
on the aggregate unconverted and outstanding principal amount of the
debenture at the rate of 12% per annum, payable on each conversion date
and maturity date in cash or shares of common stock.
The proceeds of $900,000 received by the company were allocated between
the warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants in the amount
of $707,050. The value of the beneficial conversion feature was
determined to be $2,898,328 which was credited to paid in capital and
charged to earnings as interest expense in 2002.
During the three months ended March 31, 2003, the company sold an
additional $875,000 in convertible debentures along with 50,000,000
warrants. The debenture will become due twelve months from the date of
issuance. The investors will have the right to acquire up to $875,000
worth of the Company's common stock at a price the lesser of $.0175 or
50% of the average of the three lowest prices on three separate trading
days during the sixty-day trading period prior to conversion. The
warrants are exercisable at any time and in any amount for a period of
seven years from closing at a purchase price of $.0175 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture
at the rate of 12% per annum, payable on each conversion date and
maturity date in cash or shares of common stock.
The proceeds of $875,000 received by the company were allocated between
the warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants in the amount
of $446,285.
At March 31, 2003, the value of the beneficial conversion feature on all
issued convertible debentures was determined to be $3,935,684 which was
credited to paid in capital and charged to earnings as interest expense.
11. LONG-TERM DEBT
i) March 31, 2003
At March 31, 2003, the Company had a loan balance of $30,978 with the
Business Development Bank of Canada. The loan was assigned to the Company
when it combined with TidalBeach Inc. in November 2000. The loan is
secured by a general security agreement with monthly payments of $950.00
and bears interest at 12.5%.
At March 31, 2003, the company had a loan balance of $259,356 with Terry
Lyons.
F-17
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
ii) December 31, 2002
At December 31, 2002, the Company had a loan balance of $31,397 with the
Business Development Bank of Canada. The loan was assigned to the Company
when it combined with TidalBeach Inc. in November 2000. The loan is
secured by a general security agreement with monthly payments of $950.00
and bears interest at 12.5%.
On December 5, 2002, Morrison Financial Services Limited purchased
additional debt belonging to the Business Development Bank of Canada of
approximately $440,000 in consideration of $100,000.
Morrison Financial Services Limited charged the company a 15% fee or
$45,000 for the discount negotiation with the Business Development Bank
of Canada. The discount amount of $341,467 was recognized by the company
as debt forgiveness and the fee of $45,000 was netted against this amount
for total debt forgiveness of $296,467.
In May 2002, the company secured a loan of $259,356 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. Although the company received
its IRS refund in July 2002, Mr. Lyons agreed to an extension of the loan
until October 31, 2003. The loan is payable in twelve monthly payments of
$21,613 beginning November 30, 2002 and bears interest at 30% per annum.
This loan is subordinated to Morrison Financial Services Limited and no
principal payments have been made.
iii) 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.
March 31, December 31, December 31,
2003 2002 2001
$ $ $
a) Included therein:
A loan with Business Development
Bank of Canada ("BDC") secured by
a general security agreement at
the bank's floating base rate
plus a variance of 6% per year on
the principal outstanding. At
March 31, 2003, the bank's
floating base rate was 6.5%.
30,978 31,397 419,079
A loan with T. Lyons payable in
monthly payments of $21,613 which
were to begin November 30, 2002
and bearing interest at 30% per
annum. This loan is subordinated
to Morrison Financial Services
Limited and no principal payments
have been made. 259,356 259,356 --
A loan with Bank One payable in
19 remaining monthly payments of
$13,889 plus interest based on
prime. This loan was paid in full
on March 31, 2002 -- -- 263,889
Various capital leases with
various payment terms and
interest rates 133,426 174,191 427,749
-------- --------- ---------
423,760 464,944 1,110,717
Less: current portion 360,322 380,188 528,285
-------- --------- ---------
63,438 $ 84,756 $ 582,432
======== ========= =========
b) Future principal payments obligations as at March 31, 2003, were as
follows:
2003 360,322
2004 63,438
2005 --
2006 --
2007 --
----------
423,760
==========
F-18
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
c) Interest expense related to long-term debt was $10,834 for the three
months ended March 31, 2003. Interest expense related to long-term debt
was $138,240 for the year ended December 31, 2002 ($99,651 in 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 was 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
a) On August 1, 2002, the company restructured its note payable to Roger
Walters, reducing the principal from $675,000 to $240,000 in
consideration of the issuance of 1,000,000 shares of its common stock.
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
will be made monthly and started September 1, 2002 until August 1, 2007.
This loan is non-interest bearing.
Also as part of the restructuring, the company agreed to price protection
on the 1,756,655 shares that were issued to Mr. Walters in January 2002.
In the event that the bid price is less than $.27 per share when Mr.
Walters seeks to sell his shares in an open market transaction, the
Company will be obligated to issue additional shares of unregistered
common stock with a value equal to the difference between $.27 per share
and the closing bid price to a floor of $.14 per share.
The company has accounted for its modification in the terms of its notes
payable as troubled debt restructuring. Accordingly, the company has
recognized a gain on the restructuring of the old debt based upon the
difference between the total carrying value of the original debt (with
any accrued interest) and the total future cash flows of the restructured
debt. The gain on the restructured debt, included in expenses in the
consolidated statement of operations is as follows:
Old debt
Principal balance $ 675,000
Accrued interest --
---------
Carrying value 675,000
Common stock issued
(2,631,185 shares at $0.0942) (247,858)
Principle balance of new debt (240,000)
Interest (payable through maturity) --
----------
Gain on restructured debt $ 187,142
==========
All future cash payments under the modified terms will be accounted for
as reductions of note payable and no interest expense will be recognized
for any period between the closing date and the maturity date.
The loan is subordinated to Morrison Financial Services Limited and the
12% Senior Secured Convertible Debenture holders. The company has not
made any principal payments to Mr. Walters since December 2002 and is
currently in default of the loan agreement. In the event that the company
defaults on payment, the principal balance will bear interest at 12% per
annum until payment is made.
b) On August 1, 2002, the company restructured its note payable to
Denise Dunne-Fushi, reducing the principal from $1,740,536 to $600,000 in
consideration of the issuance of 4,000,000 shares of its common stock. In
addition a prior debt conversion of $225,000 that was to be paid in
capital was forgiven. 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
until May 2004 and vehicle lease until August 2004.
F-19
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
The company has accounted for its modification in the terms of its notes
payable as troubled debt restructuring. Accordingly, the company has
recognized a gain on the restructuring of the old debt based upon the
difference between the total carrying value of the original debt (with
any accrued interest) and the total future cash flows of the restructured
debt. The gain on the restructured debt, included in expenses in the
consolidated statement of operations is as follows:
Old debt
Principal balance $ 1,740,536
Accrued interest --
Capital stock payable 225,000
-----------
Carrying value 1,965,536
Common stock issued
(4,000,000 shares at $0.0942) (376,800)
Principle balance of new debt (600,000)
Interest, insurance and vehicle lease costs (98,987)
-----------
Gain on restructured debt $ 889,749
===========
All future cash payments under the modified terms will be accounted for
as reductions of note payable and no interest, insurance or vehicle
expense will be recognized for any period between the closing date and
the maturity date.
The loan is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and the 12% Senior
Secured Convertible Debenture holders. The company has not made any
principal payments to Ms. Dunne-Fushi since December 2002 and is
currently in default of the loan agreement. In the event of default, Ms.
Dunne-Fushi has the option of enforcing the security she holds.
March 31, December 31, December 31,
2003 2002 2001
$ $ $
Note Payable to Roger Walters 224,000 224,000 750,000
Note Payable to Denise Dunne 667,326 670,957 1,740,000
-------- -------- ----------
891,326 894,957 2,490,000
Less: current portion 208,761 208,254 150,000
-------- -------- ----------
$682,565 $686,703 $2,340,000
======== ======== ==========
c) Capital repayments as at March 31, 2003
2003 208,761
2004 193,911
2005 182,250
2006 176,250
2007 130,154
----------
$ 891,326
==========
F-20
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
13. CAPITAL STOCK
a) Authorized
800,000,000 Common stock, no par value (100,000,000 at
December 31, 2002)
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 the OTC:BB under the trading symbol "THTH-F". 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. The shares were valued at
the date of issue based upon the trading price.
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.
F-21
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
On September 13, 2000, Thinkpath Inc. entered into an agreement with
Burlington Capital Markets Inc. to aid the company in further
acquisitions. The agreement with Burlington Capital Markets Inc.
(Burlington) provided for the issuance of 250,000 shares of our common
stock at a cash purchase price of $.01 per share upon signing of the
agreement. We further agreed to issue 250,000 at a cash price of $.01 per
share upon the successful completion of the Company's first acquisition
initiated through Burlington. We further agreed to issue warrants to
purchase an aggregate of 400,000 shares of our common stock according to
the following schedule: (i) 100,000 shares at an exercise price of $5.00
per share, exercisable at any time after October 13, 2000; (ii) 100,000
shares at an exercise price of $7.00 per share, exercisable at any time
after November 13, 2000; (iii) 100,000 shares at an exercise price of
$9.00 per share, exercisable at any time after December 13, 2000, and
(iv) 100,000 shares at an exercise price of $11.00 per share, exercisable
at any time after February 13, 2001. Such warrants were exercisable in
whole or in part 5 years from the respective vesting date and contained a
cashless exercise provision and registration rights.
Compensation was to be paid to Burlington at a monthly fee of $10,000 for
the term of the agreement with a minimum notice period for termination of
six months. Through Burlington, the company began to pursue the
acquisition of Aquila Holdings Limited and a letter of intent was signed
on October 4, 2000. The company and Aquila subsequently agreed to
postpone the transaction. The agreement with Burlington was subsequently
terminated and no warrants were issued. In the aggregate, Burlington
received 425,000 shares of our common stock and $10,000 pursuant to the
agreement. The additional 175,000 shares constituted compensation to
Burlington Capital Markets Inc. as a settlement on the termination of the
agreement for their entitlement to the monthly fees and the arrival at a
letter of intent for the acquisition of Aquila.The difference between the
fair market value of the shares and the purchase price of $.01 represents
the value agreed between the Company and Burlington for its acquisition
services. The total of 425,000 common shares has been reflected as issued
for an aggregate cost of $717,250 based on the stock price at the date of
the performance was complete. This amount has been expensed in the year
ended December 31, 2000 and is included in 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.
On June 6, 2001, the Company amended its Articles of Incorporation 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. The shares were valued at the date of
issue based upon the trading price.
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 3,221,126 shares
of its common 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. The shares were valued at the date of issue based upon the
trading price.
On October 1, 2002, the company entered into consulting agreements with a
group of seven consultants with expertise in restructuring, financing,
legal and management services for one-year terms to assist the company
with its restructuring and refinancing efforts. In consideration for such
services the Company issued warrants to purchase 10,600,000 shares of our
common stock at an exercise price of $0.025 per share.
F-22
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
On October 4, 2002, the company's securities were delisted from The
Nasdaq SmallCap Market, for failure to comply with the minimum bid price
or net tangible assets requirements for continued listing, as set forth
in Nasdaq's Marketplace Rule 4310(c)(4). The company also failed to meet
the initial inclusion requirements under Nasdaq's Marketplace Rule
4310(c)(2)(A) including minimum stockholders' equity of $5 million,
market capitalization of $50 million or net income of $750,000 (excluding
extraordinary or non-recurring items) in the most recently completed
fiscal year or in two of the last three most recently completed fiscal
years.
On October 16, 2002, the Company amended its Articles of Incorporation to
increase its authorized common stock from 30,000,000 to 100,000,000.
During the year ended December 31, 2002, the Company issued 588,235
shares of its common stock as payment of an executive bonus in the amount
of $100,000, 8,387,840 shares to reduce common stock payable of
$1,098,955, and 2,393,783 shares in settlement of various accounts
payable and liabilities in the amount of $334,348.
During the year ended December 31, 2002, the company issued both shares
of its common stock and warrants as payment for a variety of services:
1,230,000 shares in consideration of investor relations and marketing
services in the amount of $79,000; 1,651,495 shares and warrants in
consideration of finance services in the amount of $719,664; 546,531
shares in consideration of restructuring services in the amount of
$45,321; 3,250,000 shares pursuant to the June 24, 2002 consulting
agreements with Mr. Young and Mr. Georgiou in the amount of $520,000; and
7,200,000 shares on the exercise of warrants pursuant to the October 1,
2002 consulting agreements in the amount of $192,500. The shares were
valued at the date of issue based upon the trading price.
On January 24, 2003, the company amended its Articles of Incorporation to
increase its authorized common stock from 100,000,000 to 800,000,000.
On January 28, 2003, the company registered an aggregate of 12,427,535
shares of common stock, no par value per share, issued to Declan A.
French, the company's Chief Executive Officer, pursuant to an amendment
to his employment agreement.
On February 7, 2003, the company entered into a consulting agreement with
Rainery Barba, who shall perform legal and advisory services for a period
of one year. In consideration for such services the company registered an
aggregate of 4,000,000 shares of common stock, no par value per share.
On February 7, 2003, the company entered into a consulting agreement with
Dailyfinancial.com Inc. who shall perform corporate consulting services
in connection with mergers and acquisitions, corporate finance and other
financial services. In consideration for such services the company issued
4,200,000 shares of common stock, no par value per share.
During the three months ended March 31, 2003, the company issued
3,502,695 shares of its common stock in settlement of various accounts
payable and liabilities in the amount of $80,147.
During the three months ended March 31, 2003, the company issued both
shares of its common stock and warrants as payment for a variety of
services: 2,280,000 shares and warrants in consideration of finance
services in the amount of $57,000; 4,000,000 shares in consideration of
legal services pursuant to the February 7, 2003, agreement with Rainery
Barba; 4,200,000 shares in consideration of financial services pursuant
to the February 7, 2003 agreement with Dailyfinancial.com Inc.; 500,000
shares in consideration of financial services.
During the three months ended March 31, 2003, the company issued
37,966,363 shares of its common stock upon the conversion of 12% Senior
Secured Convertible Debentures in the amount of $61,012.
F-23
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
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 year ended December 31, 2002, the company issued 4,387,840
shares of its common stock to reduce a note payable of $909,297 to Roger
Walters related to the purchase of CadCam Inc.
During the year ended December 31, 2002, the company issued 4,000,000
shares of its common stock to reduce a note payable of $1,140,536 to
Denise Dunne related to the purchase of MicroTech Professionals Inc.
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 were
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 was 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 were 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. had 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 was less than $2.00.
Thinkpath Inc. held 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.
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 were 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 were 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 were reduced by any issue
expenses.
The preferred stock were 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 March 31, 2003, there were no Series A or B Convertible Preferred
Stock outstanding.
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 had a
stated value of $1,000 per share. The shares of Series C Preferred Stock
were 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 were manditorily converted or redeemed by the Company,
under certain conditions. The Company was 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 was obligated to issue to the
holders of Series C Preferred Stock an aggregate of 500 shares of Series
C Preferred Stock in consideration for $500,000, under certain
conditions.
F-24
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2003
(AMOUNTS EXPRESSED IN US DOLLARS)
The number of shares of the Company's common stock into which the Series
C Preferred stock was convertible into that number of shares of common
stock equal to (i) the sum of (A) the stated value per share and (B) at
the holder's election, accrued and unpaid dividends on such share,
divided by (ii) the Conversion Price". The "Conversion Price" was the
lesser of (x) 87.5% of the average of the 5 lowest daily volume weighted
average prices of the Company's common stock during the period of 60
consecutive trading days immediately prior the date of the conversion
notice; or (y) 90% of the average of the daily volume weighted average
prices during the period of the 5 trading days prior to the applicable
closing date ($.4798 with respect to the 1,105 shares of Series C 7%
Preferred Stock issued and outstanding). The Conversion Price was subject
to certain floor and time limitations.
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 year ended December 31, 2002, the Company issued 23,278,448
shares of its common Stock on the conversion of 945 Series C preferred
stock. The Company paid dividends of $100,387 on the conversions. As of
March 31, 2003, there were no Series C preferred stock outstanding.
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 a