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 June 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)
One Lower Ragsdale Drive, 1-250 93940
Monterey, California (zip code)
(Address of principle executive offices)
Issuer's Telephone Number, Including Area Code: (408) 373-8688
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 August 1, 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 QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX
<TABLE>
<S> <C> <C>
Part I - FINANCIAL INFORMATION PAGE NO.
Item 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of June 30, 1997 and December 31, 1996.................... 3
Condensed Statements of Operations for the three and six month periods ended June 30,
1997 and 1996......................................................................... 4
Condensed Statements of Cash Flows for the six month periods ended June 30, 1997 and
1996.................................................................................. 5
Notes to Condensed Financial Statements............................................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION............................................................................. 7
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................... 10
Signatures......................................................................................... 11
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THINKING TOOLS, INC,
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited) (1)
---------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 5,184 $ 6,869
Accounts receivable 107 230
Prepaid expenses and other current assets 72 147
---------------- -----------------
Total current assets 5,363 7,246
Property and equipment, net 230 101
Other assets 26 10
---------------- -----------------
Total assets $ 5,619 $ 7,357
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 151 $ 181
Accrued expenses 223 161
Billings in excess of costs on uncompleted contracts --- 32
Notes payable 18 127
Current portion of capital lease obligations 17 17
---------------- -----------------
Total current liabilities 409 518
Long-term portion of capital lease obligations 3 12
---------------- -----------------
Total liabilities 412 530
---------------- -----------------
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 11,288 11,288
Deferred stock compensation (250) (302)
Accumulated deficit (5,836) (4,164)
---------------- -----------------
Total stockholders' equity 5,207 6,827
================ =================
Total liabilities and stockholders' equity $ 5,619 $ 7,357
================ =================
</TABLE>
(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 Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Contract revenues $ 24 $ 303 $ 94 $ 634
Contract costs 24 165 94 354
------------ ------------- ------------ ------------
Gross profit --- 138 --- 280
------------ ------------- ------------ ------------
Operating expenses
Selling, general, and administrative 631 298 1,207 532
Research and development 498 21 619 60
------------ ------------- ------------ ------------
Total operating expense 1,129 319 1,826 592
------------ ------------- ------------ ------------
Operating loss (1,129) (181) (1,826) (312)
Other income (expense):
Interest expense (3) (40) (6) (77)
Other income, net 76 43 161 43
------------ ------------- ------------ ------------
Total other income (expense) 73 3 155 (34)
------------ ------------- ------------ ------------
Loss before income taxes (1,056) (178) (1,671) (346)
Income tax expense 1 1 1 1
------------ ------------- ------------ ------------
Net loss $ (1,057) $ (179) $ (1,672) $ (347)
============ ============= ============ ============
Net loss per share $ (0.23) $ (0.06) $ (0.36) $ (0.11)
============ ============= ============ ============
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>
Six months ended
June 30,
-------------------------------------
1997 1996
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,672) $ (347)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 30 13
Stock compensation expense 52 ---
Changes in operating assets and liabilities:
Accounts receivable 123 (19)
Prepaid expenses and other assets 75 (33)
Costs in excess of billings on uncompleted contracts --- (13)
Other assets (16) 1
Due to related party --- 8
Accounts payable (30) 42
Accrued expenses 62 (32)
Billings in excess of costs on uncompleted contracts and deferred revenue (32) (169)
-------------- ---------
Net cash used in operating activities (1,408) (549)
-------------- ---------
Cash flows from investing activities:
Purchase of property and equipment (159) ---
-------------- ---------
Cash flows from financing activities:
Principal payment on short-term notes payable (109) (27)
Proceeds from issuance of short-term notes payable --- 257
Principal payments on capital leases (9) (6)
Proceeds from issuance of long-term debt --- 180
-------------- ---------
Net cash used in financing activities (118) 404
Net decrease in cash and equivalents (1,685) (145)
Cash and equivalents at beginning of period 6,869 152
-------------- ---------
Cash and equivalents at end of period $ 5,184 $ 7
============== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes 1 1
-------------- ---------
Interest 3 6
============== =========
</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 and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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 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 initial public offering, the Company sold to its
underwriter options to purchase 140,000 common shares for $.001 per option.
These options are exercisable for a period of five years at an exercise price
equal to 160% of the initial public offering price ($10.40 per share).
Approximately $1,856,500 of the net proceeds from the initial public offering
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 No. 128, "Earnings per Share" (SFAS 128). 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.
6
<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 six months ended
June 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 substantially completed as of June 30, 1997. The Company
historically has not had, and at June 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. The Company currently has two new products under
development. One product addresses the Year 2000 problem, and the other targets
the disaster recovery market. The Company has made significant progress in the
development of the Year 2000 product, having recently entered the first phase of
the beta testing program, and the disaster recovery product, which also remains
on schedule. Both products are designed to help business managers analyze, plan
for, and manage mission-critical business issues and the Company is on track to
release these products during 1997. The Company intends to continue to
selectively pursue 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 new
orders could have a material adverse effect on the Company's business, financial
condition and results of operations.
As of June 30, 1997, the Company had experienced cumulative losses of
$5,836,000 and had not experienced any quarter of profitable operations. The
Company expects to incur additional operating losses for the foreseeable future,
principally as a result of expenses associated with the Company's product
7
<PAGE>
development efforts and anticipated sales, marketing and general and
administrative expenses. Through June 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. In connection
with the IPO, the Company sold to its underwriter warrants to purchase 140,000
common shares for $.001 per warrant. These warrants are exercisable for a period
of five years at an exercise price equal to 160% of the initial public offering
price ($10.40 per share). 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
support its development costs, 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 June 30, 1997, and June 30, 1996
Revenues Revenues for the three months ended June 30, 1997, decreased by
$279,000, or 92%, to $24,000 from $303,000 for the three months ended June 30,
1996. During each of such periods the Company's revenues were derived primarily
from a relatively small number of development contracts. During the three months
ended June 30, 1997, the Company was in the process of completing 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 three months ended June 30, 1997, was nil
as compared with 46% of revenues for the three months ended June 30, 1996.
During the three months ended June 30, 1997, the Company was in the process of
completing its only remaining custom project under contract. This project is
expected to be completed in the third quarter of 1997. Contract costs equaled
contract revenue in the second quarter of 1997 because the expected loss was
recorded in 1996.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased by $333,000, or 112%, for the three months
ended June 30, 1997, to $631,000 from $298,000 for the three months ended June
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 Chief Financial Officer, the beginning of
developing a selling 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 three
months ended June 30, 1997, increased by $477,000, or 2,271%, to $498,000 from
$21,000 for the three months ended June 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. 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 June 30, 1997,
decreased by $37,000, or
8
<PAGE>
93%, to $3,000 from $40,000 for the three months ended June 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 June 30, 1997, increased
by $33,000 to $76,000 from $43,000 for the three months ended June 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 three months ended
June 30, 1997, increased by $878,000, or 491%, to $1,057,000 from $179,000 for
the three months ended June 30, 1996.
Comparison of six months ended June 30, 1997, and June 30, 1996
Revenues Revenues for the six months ended June 30, 1997, decreased by
$540,000, or 85%, to $94,000 from $634,000 for six months ended June 30, 1996.
During each of such periods the Company's revenues were derived primarily from a
relatively small number of development contracts. During the six months ended
June 30, 1997, the Company was in the process of completing 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 six months ended June 30, 1997, was nil as
compared with 44% of revenues for the six months ended June 30, 1996. During the
six months ended June 30, 1997, the Company was in the process of completing its
only remaining custom project under contract. This project is expected to be
completed in the third quarter of 1997. Contract costs equaled contract revenue
in the first half of 1997 because the expected loss was recorded in 1996.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased by $675,000, or 127%, for the six months ended
June 30, 1997, to $1,207,000 from $532,000 for the six months ended June 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 Chief Financial Officer, the beginning of
developing a selling 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 six months
ended June 30, 1997, increased by $559,000, or 932%, to $619,000 from $60,000
for the six months ended June 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. 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 six months ended June 30, 1997,
decreased by $71,000, or 92%, to $6,000 from $77,000 for the six months ended
June 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 six months ended June 30, 1997, increased
by $118,000 to $161,000 from $43,000 for the six months ended June 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 six months ended June
30, 1997, increased by $1,325,000, or 382%, to $1,672,000, from $347,000 for the
six months ended June 30, 1996.
9
<PAGE>
Liquidity and Capital Resources
Since its inception and through December 31, 1996, and June 30, 1997, the
Company has incurred cumulative losses aggregating approximately $4,164,000 and
$5,836,000, 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, 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 June 30, 1997, the Company had cash and equivalents of approximately
$5,184,000, working capital of approximately $4,954,000, and stockholders'
equity of approximately $5,207,000. At June 30, 1997, the Company had no
long-term liabilities outstanding except for $3,000 due under capital leases.
Net cash used in operating activities for the six months ended June 30, 1997,
and June 30, 1996, totaled approximately $1,408,000 and $549,000, respectively,
and was primarily a result of the Company's net losses during those periods.
Cash used by investing activities was $159,000 during the six months ended June
30, 1997, for purchase of property and equipment, as compared to nil for the
same period in 1996. Financing activities used net cash of $118,000 during the
six months ended June 30, 1997, primarily for the repayment of debt, as compared
to providing net cash of $404,000 during the six months ended June 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 for at least the next nine months. 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.
10
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Exhibit 27 Financial Data Schedule
11
<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: 8/13/97 By: /s/Phillip F. Whalen, Jr.
-------------------------
Phillip F. Whalen, Jr.
President and CEO
By: /s/Barbara T. Portner
---------------------
Barbara T. Portner
Chief Financial Officer
(Chief Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,184
<SECURITIES> 0
<RECEIVABLES> 107
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,363
<PP&E> 317
<DEPRECIATION> 88
<TOTAL-ASSETS> 5,619
<CURRENT-LIABILITIES> 409
<BONDS> 0
<COMMON> 5
0
0
<OTHER-SE> 5,202
<TOTAL-LIABILITY-AND-EQUITY> 5,619
<SALES> 94
<TOTAL-REVENUES> 94
<CGS> 94
<TOTAL-COSTS> 94
<OTHER-EXPENSES> 1,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (1,672)
<INCOME-TAX> 1
<INCOME-CONTINUING> (1,672)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,672)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
