UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
OR
[ ] Transition report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from [ ] to [ ]
Commission file number 000-21295
THINKING TOOLS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 77-0436410
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6541 Via Del Oro 95119
San Jose, California (zip code)
(Address of principle executive offices)
Issuer's Telephone Number, Including Area Code: (408) 360-0400
One Lower Ragsdale Drive, 1-250, Monterey, CA 93940 (former address)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Check whether the issuer (1) has 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 [ ]
At October 31, 1997, the number of shares outstanding of the Issuer's Common
Stock, par value $.001 per share, was 4,641,758 shares.
<PAGE>
THINKING TOOLS, INC.
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Part I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of September 30, 1997 and
December 31, 1996 ............................................... 3
Condensed Statements of Operations for the three and
nine month periods ended September 30, 1997 and 1996 ............ 4
Condensed Statements of Cash Flows for the nine month
periods ended September 30, 1997 and 1996 ....................... 5
Notes to Condensed Financial Statements ......................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ....................................... 8
PART II - OTHER INFORMATION
- ---------------------------
Item 3. EXHIBITS ........................................................ 12
Signatures .................................................................. 13
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. FINANCIAL STATEMENTS
THINKING TOOLS, INC,
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 30,
1997 1996
(Unaudited) (1)
------------- ------------
ASSETS
Current Assets:
Cash and equivalents $ 3,870 $ 6,869
Accounts receivable 94 230
Prepaid expenses and other current assets 45 147
-------- --------
Total current assets 4,009 7,246
Property and equipment, net 301 101
Other assets 22 10
-------- --------
Total assets $ 4,332 $ 7,357
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 316 $ 181
Accrued expenses 163 161
Billings in excess of costs on
uncompleted contracts -- 32
Notes payable -- 127
Current portion of capital lease obligations 14 17
-------- --------
Total current liabilities 493 518
Long-term portion of capital lease obligations -- 12
-------- --------
Total liabilities 493 530
-------- --------
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 11,288 11,288
Deferred stock compensation (224) (302)
Accumulated deficit (7,230) (4,164)
-------- --------
Total stockholders' equity 3,839 6,827
-------- --------
Total liabilities and stockholders' equity $ 4,332 $ 7,357
======== ========
(1) Derived from the Company's audited financial statements included in the
Company's 1996 Annual Report on Form 10-KSB
3
See Notes to Condensed Financial Statements
<PAGE>
THINKING TOOLS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Contract revenues $ -- $ 138 $ 94 $ 772
Contract costs -- 164 94 519
--------- --------- --------- ---------
Gross profit (loss) -- (26) -- 253
--------- --------- --------- ---------
Operating expenses:
Selling, general, and administrative 893 423 2,099 955
Research and development 562 30 1,182 91
--------- --------- --------- ---------
Total operating expense 1,455 453 3,281 1,046
--------- --------- --------- ---------
Operating loss (1,455) (479) (3,281) (793)
--------- --------- --------- ---------
Other income (expense):
Interest expense -- (675) (6) (752)
Other income, net 61 16 221 60
--------- --------- --------- ---------
Total other income (expense) 61 (659) 215 (692)
--------- --------- --------- ---------
Net Loss (1,394) (1,138) (3,066) (1,485)
--------- --------- --------- ---------
Net loss per share $ (0.30) $ (0.36) $ (0.66) $ (0.47)
========= ========= ========= =========
Shares used in calculating per share data 4,642 3,141 4,642 3,141
========= ========= ========= =========
</TABLE>
4
See Notes to Condensed Financial Statements
<PAGE>
THINKING TOOLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,066) $(1,485)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 45 22
Non-cash interest charges -- 625
Stock compensation expense 78 200
Changes in assets and liabilities:
Accounts receivable 136 103
Prepaid expenses and other assets 102 (732)
Costs in excess of billings on uncompleted contracts -- 8
Other assets (12) --
Due to related party -- 8
Accounts payable 135 162
Accrued expenses 2 21
Billings in excess of costs on uncompleted contracts and deferred revenue (32) (228)
------- -------
Net cash used in operating activities (2,612) (1,296)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (245) (2)
------- -------
Cash flows from financing activities:
Principal payment on short-term notes payable (127) (581)
Proceeds from issuance of short-term notes payable -- 409
Proceeds from issuance of bridge notes -- 1,825
Principal payments on capital leases (15) (9)
Proceeds from issuance of long-term debt -- 120
------- -------
Net cash (used in) provided by financing activities (142) 1,764
------- -------
Net (decrease) increase in cash and equivalents (2,999) 466
Cash and equivalents, at beginning of period 6,869 152
------- -------
Cash and equivalents, at end of period $ 3,870 $ 618
======= =======
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Income taxes 1 1
------- -------
Interest 6 198
======= =======
Non-cash investing and financing activities:
Equipment acquired under capital leases $ -- $ 12
======= =======
Conversion of long-term debt to equity $ -- $ 1,320
======= =======
</TABLE>
5
See Notes to Condensed Financial Statements
<PAGE>
THINKING TOOLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (which
include only normal recurring adjustments) considered necessary for a fair
presentation of the financial position and the results of operations for the
interim periods have been included. Interim results are not necessarily
indicative of results for the full year.
These financial statements should be read in conjunction with the
information included in the Company's 1996 Annual Report on Form 10-KSB filed
with the Securities Exchange Commission.
2. Common Stock
In August 1996, Thinking Technologies, L.P., a principal stockholder of the
Company, converted $1,200,000 aggregate principal amount of outstanding
indebtedness, plus an aggregate of approximately $120,000 of accrued interest,
into an aggregate of 263,158 shares of common stock.
In October and November 1996, the Company completed its Initial Public
Offering (IPO) (including the exercise of the underwriter's over-allotment
option) and issued 1,610,000 shares of common stock at $6.50 per share for net
proceeds of approximately $8,470,000. In connection with its IPO, the Company
sold to its underwriter warrants to purchase 140,000 common shares for a par
value of $.001 per share. These warrants are exercisable for a period of five
years at an exercise price equal to 160% of the IPO price ($10.40 per share).
Approximately $1,856,500 of the net proceeds from the IPO were used to retire
outstanding indebtedness under certain promissory notes issued in a bridge
financing in August 1996.
3. Net Loss Per Share
Net loss per share is computed based upon the weighted average number of
shares of common stock outstanding. In accordance with certain Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares from stock options and warrants (using the treasury stock method) and
convertible debt (using the if-converted method) issued by the Company at prices
below the offering price during the twelve month period prior to the Company's
initial public offering have been included in the calculation as if they were
outstanding for all periods presented prior to the effective date of the initial
public offering, regardless of whether they are antidilutive.
4. Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The
Company is required to adopt SFAS 128 in the fourth quarter of 1997 and will
restate at that time earnings per share (EPS) data for prior periods to conform
with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net loss by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
The Company does not expect that its historically reported EPS will change as
a result of adopting SFAS 128. In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130 "Reporting Comprehensive Income," which requires that
an enterprise report, by major components and as a single total, the change in
its net assets during the period from non-owner sources, and SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," which
establishes annual and
6
<PAGE>
interim reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows. Both statements are
effective for fiscal years beginning after December 15,1997, with earlier
application permitted.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained in this Quarterly Report on Form 10-QSB, other than
the historical financial information, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
such forward-looking statements involve known and unknown risks, uncertainties
or other factors which may cause actual results, performance or achievement of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Factors
that might cause such a difference include risks and uncertainties related to
the Company's dependence on the emerging market for business simulation
software, development of additional products, protection of its intellectual
property, limited marketing experience, limited number of customers, and need
for additional personnel, as well as risks and uncertainties associated with the
Company's growth strategy, technological changes affecting the Company,
competitive factors affecting the Company, and other risks described herein and
in the Company's 1996 Annual Report on Form 10-KSB.
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in the Quarterly Report on Form
10-QSB.
Overview
The Company commenced operations in December 1993 to develop and market
business simulation software. Since its inception, the Company has been engaged
in research and development activities and organizational efforts, including the
development of its initial products, recruiting personnel, establishing
marketing and manufacturing capabilities and raising capital.
The Company commenced commercial activities in January 1994, but to date
has not generated substantial revenues from the sale of its products. Revenues
generated to date have been primarily derived from software development projects
completed under contracts with customers. Historically, a significant portion of
such revenues has been derived from a limited number of relatively large
development projects contracted for by a small number of customers. Revenues
earned from the Office of Research and Development during the nine months ended
September 30, 1997, accounted for 100% of the Company's revenue for such period.
This customer is not affiliated with the Company. The Company does not believe
that it is materially dependent upon sales to this customer. Contracts with this
customer have been completed as of September 30, 1997. The Company historically
has not had, and at September 30, 1997, did not have, any substantial firm order
backlog.
Currently, the Company is changing its focus from custom projects to
self-funded development projects as part of its strategy to become a
product-oriented company. During this transition period, revenues are not
expected to be material, as the Company will be focusing on developing new
product sales channels. On September 29, 1997, the company introduced Think
2000, a product that was developed to help large organizations address the risk
associated with the Year 2000 problem. The Company is also developing a new
product targeted to the disaster recovery market; however, for the remainder of
1997 the company plans to focus its resources on Think 2000. Both products are
designed to help business managers analyze, plan for, and manage
mission-critical business issues. The company may in the future undertake
strategic contract software development projects that could allow for further
development of an important technology on a paid basis, or facilitate the
development of relationships with potential distribution partners. An inability
by the Company to develop new products or obtain product sales could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, there can be no assurance that any product
developed by the Company will achieve commercial acceptance or result in
revenues or profits to the Company.
As of September 30, 1997, the Company had experienced cumulative losses of
$7,230,000 and had not experienced any quarter of profitable operations. The
Company expects to incur additional operating losses
8
<PAGE>
for the foreseeable future, principally as a result of expenses associated with
the Company's product development efforts and anticipated sales, marketing and
general and administrative expenses. Through September 30, 1997, the Company's
operations have been funded primarily through private sales of debt and equity
securities and the Initial Public Offering ("IPO") which was completed in 1996.
In October and November 1996, the Company completed the IPO (including the
exercise of the underwriter's over-allotment option) and issued 1,610,000 shares
of common stock at $6.50 per share for net proceeds of approximately $8,470,000.
Approximately $1,856,500 of the net proceeds of the IPO were used to retire
outstanding indebtedness under certain promissory notes issued on a bridge
financing in August 1996. The remainder of the net proceeds from the IPO are
being used to fund the Company's sales and marketing and product development
efforts, and for working capital and general corporate purposes.
The Company expects to incur substantial operating expenses in the future
to expand its sales and marketing capabilities and organization, expand its work
force and for other general and administrative expenses. The Company's results
of operations may vary significantly from quarter to quarter during this period
of development.
Results of Operations
Comparison of the three months ended September 30, 1997, and September 30, 1996
Revenues Revenues for the three months ended September 30, 1997, decreased
by $138,000, or 100%, to nil from $138,000 for the three months ended September
30, 1996. During the three months ended September 30, 1996 revenues were derived
primarily from a relatively small number of development contracts. During the
three months ended September 30, 1997, the Company was focusing on self-funded
development projects as part of its strategy to become a product-driven company.
Gross Margin Gross margin for the three months ended September 30, 1997,
was nil as compared with a loss of 19% of revenues for the three months ended
September 30, 1996.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased by $469,000, or 111%, for the three months
ended September 30, 1997 to $892,000 from $423,000 for the three months ended
September 30, 1996. Selling, general, and administrative expenses consisted
primarily of costs associated with labor. The increase in selling, general and
administrative expenses was primarily due to increased administrative headcount,
including a new Chief Executive Officer, and the development of a selling and
marketing strategy and starting to implement such strategy, the additional costs
associated with being a public company, and the opening of a new office in San
Jose, California. The Company expects selling, general and administrative
expenses to increase in future periods as the Company continues to develop and
implement a selling and marketing program and expands its staff and facilities.
Research and Development Research and development expenses for the three
months ended September 30, 1997, increased by $532,000, or 1,773%, to $562,000
from $30,000 for the three months ended September 30, 1996. This increase was
primarily due to the shifting of development efforts to internal development of
a new software product from custom software development contracts. In the prior
year, these costs were accounted for as cost of goods sold.
As the Company's business strategy shifts from custom development projects
to self-funded development projects, the Company expects that research and
development expenses will increase further.
Interest Expense Interest expense for the three months ended September 30,
1997, decreased by $675,000, or 100%, to nil from $675,000 for the three months
ended September 30, 1996. This decrease was primarily due to the repayment of
substantially all debt as of December 31, 1996.
Other Income Other income for the three months ended September 30, 1997
increased by $45,000 to $61,000 from $16,000 for the three months ended
September 30, 1996. This increase was primarily due to interest income generated
from investing the excess proceeds raised from the Company's Initial Public
Offering.
9
<PAGE>
Net Loss As a result of the foregoing, net loss for the three months ended
September 30, 1997, increased by $256,000, or 23%, to $1,394,000 from $1,138,000
for the three months ended September 30, 1996.
Comparison of the nine months ended September 30, 1997 and September 30, 1996
Revenues Revenues for the nine months ended September 30, 1997, decreased
by $678,000, or 88%, to $94,000 from $772,000 for nine months ended September
30, 1996. During each of such periods the Company's revenues were derived
primarily from a relatively small number of development contracts. During the
nine months ended September 30, 1997, the Company completed the only remaining
custom project under contract and was focusing on self-funded development
projects as part of its strategy to become a product-driven company.
Gross Margin Gross margin for the nine months ended September 30, 1997, was
nil as compared with 33% of revenues for the nine months ended September 30,
1996. During the nine months ended September 30, 1997, the Company completed its
only remaining custom project under contract. Contract costs equaled contract
revenue in the first nine months of 1997 because the expected loss was recorded
in 1996.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased by $1,144,000, or 120%, for the nine months
ended September 30, 1997, to $2,098,000 from $954,000 for the nine months ended
September 30, 1996. Selling, general, and administrative expenses consisted
primarily of costs associated with labor. The increase in selling, general and
administrative expenses was primarily due to increased administrative headcount,
including a new Chief Executive Officer, the development of and marketing
strategy and starting to implement such strategy, the additional costs
associated with being a public company, and the signing of an operating lease
for the opening of a new office in San Jose, CA. The Company expects selling,
general and administrative expenses to increase in future periods as the Company
continues to develop and implement a selling and marketing program and expands
its staff and facilities.
Research and Development Research and development expenses for the nine
months ended September 30, 1997, increased by $1,091,000, or 1,199%, to
$1,182,000 from $91,000 for the nine months ended September 30, 1996. This
increase was primarily due to the shifting of development efforts to internal
development of new software products from custom software development contracts.
As the Company's business strategy continues to shift from custom
development projects to self-funded development projects, the Company expects
that research and development expenses will increase further.
Interest Expense Interest expense for the nine months ended September 30,
1997, decreased by $46,000, or 99%, to $6,000 from $752,000 for the nine months
ended September 30, 1996. This decrease was due to the repayment of
substantially all debt as of December 31, 1996.
Other Income Other income for the nine months ended September 30, 1997
increased by $161,000 to $221,000 from $60,000 for the nine months ended
September 30, 1996. This increase was primarily due to interest income generated
from investing the excess proceeds raised from the Company's Initial Public
Offering.
Net Loss As a result of the foregoing, net loss for the nine months ended
September 30, 1997 increased by $1,581,000, or 106%, to $3,066,000, from
$1,485,000 for the nine months ended September 30, 1996.
Liquidity and Capital Resources
Since its inception and through December 31, 1996 and September 30, 1997
the Company has incurred cumulative losses aggregating approximately $4,164,000
and $7,230,000, respectively, and has not experienced any quarter of profitable
operations. The Company expects to continue to incur operating losses for the
foreseeable future, principally as a result of expenses associated with the
Company's product development efforts and anticipated sales, marketing and
general and administrative expenses. In the past,
10
<PAGE>
the Company has satisfied its cash requirements principally from advances from
stockholders, private and public sales of equity securities and, to a limited
extent, from cash flows from operations. The primary uses of cash have been to
fund research and development and for sales, general and administrative
expenses.
At September 30, 1997, the Company had cash and equivalents of
approximately $3,870,000, working capital of approximately $3,516,000, and
stockholders' equity of approximately $3,839,000. At September 30, 1997, the
Company had no long-term liabilities outstanding.
Net cash used in operating activities for the nine months ended September
30, 1997 and September 30, 1996 totaled approximately $2,612,000 and $1,296,000,
respectively, and was primarily a result of the Company's net losses during
those periods. Cash used by investing activities was $245,000 during the nine
months ended September 30, 1997, for purchase of property and equipment, as
compared to $2,000 for the same period in 1996. Financing activities used net
cash of $142,000 during the nine months ended September 30, 1997, primarily for
the repayment of debt, as compared to providing net cash of $1,764,000 during
the nine months ended September 30, 1996.
Based on the Company's operating plan, the Company believes that the
Company's current cash balances will be sufficient to satisfy its capital
requirements and finance its operation through the first quarter of 1998. Such
belief is based upon certain assumptions, and there can be no assurance that
such assumptions are correct. The Company may be required to raise substantial
additional capital in the future in order to carry out its business plan. In
addition, contingencies may arise which may require the Company to obtain
additional capital. Accordingly, there can be no assurance that such resources
will be sufficient to satisfy the Company's capital requirements. The Company
anticipates that any additional financing required to meet its current plans for
expansion may take the form of the issuance of common or preferred stock or debt
securities, or may involve other debt financing. The lender may impose certain
restrictive covenants on the Company and, upon default by the Company, on such
debt financing, and in a liquidation of the Company, the rights of such lender
would be superior to the rights of the holders of common stock. There can be no
assurance that the Company will be able to obtain such additional funds on a
timely basis, on favorable terms, or at all. In any of such events, the Company
may be unable to implement its business plan.
Inflation
The impact of inflation on the Company's business has been insignificant to
date and the Company believes that it will continue to be insignificant for the
foreseeable future.
11
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Exhibit 27 Financial Data Schedule
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THINKING TOOLS, INC.
Date: By:
----------------------------------- ---------------------------------
Phillip F. Whalen, Jr.
President and CEO
(Principal Executive, Accounting
& Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,870
<SECURITIES> 0
<RECEIVABLES> 94
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,009
<PP&E> 301
<DEPRECIATION> 103
<TOTAL-ASSETS> 4,332
<CURRENT-LIABILITIES> 493
<BONDS> 0
5
0
<COMMON> 0
<OTHER-SE> 3,834
<TOTAL-LIABILITY-AND-EQUITY> 4,332
<SALES> 94
<TOTAL-REVENUES> 94
<CGS> 94
<TOTAL-COSTS> 94
<OTHER-EXPENSES> 3,281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (3,066)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,066)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,066)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
