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 March 31, 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
Monterey, California 93940
(Address of principal executive offices) (Zip Code)
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 May 12, 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 March 31, 1997
INDEX
Part I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ ---------
Item 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 1997 and
December 31, 1996................................................. 3
Condensed Statements of Operations for the three month periods
ended March 31, 1997 and 1996..................................... 4
Condensed Statements of Cash Flows for the three month
periods ended March 31, 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
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. FINANCIAL STATEMENTS
THINKING TOOLS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 (1)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 6,194 $ 6,869
Accounts receivable 112 230
Prepaid expenses and other current assets 118 147
-------- --------
Total current assets 6,424 7,246
Property and equipment, net 152 101
Other assets 14 10
-------- --------
Total assets $ 6,590 $ 7,357
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30 $ 181
Accrued expense 218 161
Billings in excess of costs on uncompleted contracts 8 32
Notes payable 73 127
Current portion of capital lease obligations 17 17
-------- --------
Total current liabilities 346 518
Long-term liabilities:
Long-term portion of capital lease obligations 8 12
-------- --------
Total liabilities 354 530
-------- --------
Stockholders' equity:
Common Stock 5 5
Additional paid-in capital 11,288 11,288
Deferred Stock Compensation (278) (302)
Accumulated deficit (4,779) (4,164)
-------- --------
Total stockholders' equity 6,236 6,827
-------- --------
Total liabilities and stockholders' equity $ 6,590 $ 7,357
======== ========
</TABLE>
(1) Derived from the December 31, 1996, audited balance sheet 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)
Three Months Ended
March 31,
1997 1996
Contract revenues $ 70 $ 331
Contract costs 70 189
====== ======
Gross profit -- 142
Operating expenses
Selling, general, and administrative 576 234
Research and development 121 39
------ ------
Total Operating Expense 697 273
------ ------
Operating loss (697) (131)
------ ------
Interest expense (3) (37)
Other income, net 85 --
------ ------
Total other income (expense) 82 (37)
------ ------
Loss before income taxes (615) (168)
Income tax expense -- --
Net Loss (615) (168)
====== ======
Net loss per share (0.13) (0.05)
====== ======
4,642 3,141
Shares used in calculating per share data ====== ======
4
See notes to Condensed Financial Statements
<PAGE>
THINKING TOOLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
<S>
Cash flows from operating activities: <C> <C>
Net loss $ (615) $ (168)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 15 5
Stock compensation 24 --
Changes in operating assets and liabilities:
Accounts receivable 118 29
Prepaid expenses and other assets 25 (13)
Costs in excess of billings on uncompleted contracts -- 7
Accounts payable (151) 48
Accrued expenses 57 43
Billings in excess of costs on uncompleted contracts
and deferred revenue (24) (76)
------- ------
Net cash used in operating activities (551) (125)
------- ------
Cash flows from investing activities
Purchase of property and equipment (66) (1)
------- ------
Cash flows from financing activities:
Principal payment on short-term notes payable (54) (7)
Principal payments on capital leases (4) (3)
------- ------
Net cash used in financing activities (58) (10)
Net decrease in cash (675) (136)
Cash at beginning of period 6,869 152
------- ------
Cash at end of period $ 6,194 $ 16
======= ======
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest 3 13
======= ======
</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 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 a 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 have 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 ("ORD") during the three
months ended March 31, 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 March 31,
1997. The Company historically has not had, and at March 31, 1997 did not have,
any substantial firm order backlog.
The Company's current strategy is to change its focus from custom projects to
self-funded development of simulations for broader markets by leveraging its
technology to develop new products to become a product-oriented, sales-driven
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 that are
expected to be released before year-end 1997. One product addresses the Year
2000 problem, and the other helps information technology managers plan for
disaster recovery. 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. Any 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 March 31, 1997, the Company had experienced cumulative losses of
$4,779,000 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
development efforts and anticipated sales, marketing and general and
administrative expenses. Through
7
<PAGE>
March 31, 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 of 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 three months ended March 31, 1997, and March 31, 1996
Revenues Revenues for the three months ended March 31, 1997, decreased by
$261,000, or 79%, to $70,000, from $331,000 for three months ended March 31,
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 March 31, 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,
sales-oriented company.
Gross Margin Gross margin for the three months ended March 31, 1997, was nil
as compared with 43% of revenues for the three months ended March 31, 1996.
During the three months ended March 31, 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 second quarter of 1997. Contract costs equaled
contract revenue in the first quarter of 1997 because the loss was correctly
incurred in 1996.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased by $342,000, or 146%, for the three months
ended March 31, 1997, to $576,000, or 823% of revenues, from $234,000, or 71% of
revenues, for the three months ended March 31, 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, and the additional costs associated with being a public
company. The Company expects selling, general and administrative expenses to
increase in future periods as the Company begins to implement a selling and
marketing program and expands its staff and facilities.
Research and Development Research and development expenses for the three
months ended March 31, 1997, increased to $121,000, or 173% of revenues, from
$39,000, or 12% of revenues, for the three months ended March 31, 1996. This
increase was primarily due to the shifting of development efforts to internal
software development of new products from custom software development contracts.
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.
Interest Expense Interest expense for the three months ended March 31, 1997,
decreased by $34,000, or 92%, to $3,000, or 4% of revenues, from $37,000, or 11%
of revenues, for the three months ended March
8
<PAGE>
31, 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 March 31, 1997,
increased by $85,000, to $85,000, or 121% of revenues, from nil, for the three
months ended March 31, 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
March 31, 1997, increased by $447,000, or 266%, to $615,000, from $168,000 for
the three months ended March 31, 1996.
Liquidity and Capital Resources
Since its inception and through December 31, 1996, and March 31, 1997, the
Company has incurred cumulative losses aggregating approximately $4,164,000 and
$4,779,000, 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, and 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 March 31, 1997, the Company had cash of approximately $6,194,000, working
capital of approximately $6,078,000, and stockholders' equity of approximately
$6,236,000. At March 31, 1997, the Company had no long-term liabilities
outstanding except for $8,000 due under capital leases.
Net cash used in operating activities for the three months ended March 31,
1997, and March 31, 1996, totaled approximately $551,000 and $125,000,
respectively, and was primarily a result of the Company's net losses during
those periods. Net cash used in financing activities for the three months ended
March 31, 1997, and March 31, 1996, totaled approximately $58,000 and $10,000,
respectively.
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 the next twelve 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 any 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 capital 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 general 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.
9
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Exhibit 27 Financial Data Schedule
10
<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: May 14, 1997 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)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,194
<SECURITIES> 0
<RECEIVABLES> 112
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,424
<PP&E> 224
<DEPRECIATION> 72
<TOTAL-ASSETS> 6590
<CURRENT-LIABILITIES> 346
<BONDS> 0
<COMMON> 5
0
0
<OTHER-SE> 6,231
<TOTAL-LIABILITY-AND-EQUITY> 6,590
<SALES> 70
<TOTAL-REVENUES> 155
<CGS> 70
<TOTAL-COSTS> 697
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (615)
<INCOME-TAX> 0
<INCOME-CONTINUING> (615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (615)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
