July 19, 2004
Dear Shareholder,
Thank you for your continued interest in and support of Thinkpath Inc. As disclosed in the company’s annual and quarterly filings, Thinkpath has undertaken a massive financial and operational restructuring over the past two years, including the closure of non-profitable offices and operating divisions; the sale of non-complimentary business units and termination of redundant staff.
Operations
The company has continued its focus on growing its higher-margin engineering sales divisions in Ontario and the United States. The engineering division, which averages approximately 33% gross profit, is growing quickly and continues to win significant contract awards. As of this date, the company has 170 full-time engineers working representing approximately $1,000,000 in monthly revenue, which represents an increase of approximately $170,000 per month over last year.
Revenues for the first quarter were $3 million compared to $2.5 million for the same period last year. The increase in revenue is attributable to new contracts with existing automotive, aerospace and defense clients that were awarded in the fourth quarter of 2003.
Gross profit for the first quarter was 33% compared to 29% for the same period last year. The increase in gross profit is a result of the focus on higher margin contracts in design, drafting and technical publishing compared to the lower margins earned on traditional on-site engineering support.
For the first quarter, the company recorded an operating loss from continuing operations of $30,000 compared to an operating loss of $410,000 for the same period last year. Included in the loss is depreciation expense of $140,000 for this year and $190,000 for last year.
For the first quarter, the company recorded a net loss of $790,000 or (0.00) per share compared to a net loss of $4.6 million or (0.08) per share for the same period last year. Included in the net loss is interest expense of $600,000 related to the beneficial conversion feature on the 12% Senior Secured Convertible Debentures this year and $3.9 million for last year.
After adjusting for non-cash items, the company has been profitable from continuing operations since the third quarter of 2003. The company believes that its results for the second quarter 2004 will be very similar to the first, with increased revenue and gross profit levels being maintained and profits from continuing operations increasing.
Debt
This year, the company has continued to restructure its operations and debt obligations to improve its ongoing cash flow. The company is currently in negotiations to settle outstanding debt with a prior landlord and two note holders, and is confident that these obligations can be settled for approximately 10-20% of the value of the outstanding amounts.
The company has funded its operations and debt repayment with proceeds from a receivable discount facility and equity financing in the form of convertible debentures. Under the terms of the receivable discount facility, the company may borrow up to 75% of eligible account receivables at 30% interest per annum. The company is confident that with the forecasted continued profitability from current operations, it will be able to replace the current facility with an asset based loan at more conventional interest rates.
The company has sold approximately $3.8 million in convertible debentures with warrants, of which it netted approximately $3.2 million cash. The proceeds were used to pay down the company’s significant accumulated liabilities, related primarily to discontinued operations such as deductions at source, taxes, loan payments, litigation settlements and various accounts payable. Under the terms of the convertible debenture agreements, the investors have the right to acquire equal value of the company’s common stock at a price the lesser of $0.0175 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 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 debentures are due twelve months from the date of issuance. As of this date, there is approximately $1 million in convertible debentures outstanding. The company does not intend to issue any additional convertible debentures.
The unfortunate effect of the debenture conversions and warrant exercises has been the extensive dilution of the company’s stock and negative selling pressure. The company strongly believes that the current stock price does not accurately reflect the value of the company’s continuing business operations. Once the company has successfully completed the restructuring of its debt obligations and outstanding capital, it will consider various options with regards to a reverse stock split that will best serve the interests of the company and enhance shareholder value.
Communications
Thinkpath Inc.
Forward-Looking Statement
This update contains forward-looking statements regarding Thinkpath Inc., its business prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause Thinkpath’s actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by Thinkpath in this update and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect Thinkpath’s business.