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, 1998
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
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 April 30, 1998, 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, 1998
INDEX
Part I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 1998
and December 31, 1997 ............................................ 3
Condensed Statements of Operations for the three month periods
ended March 31, 1998 and 1997 .................................... 4
Condensed Statements of Cash Flows for the three month
periods ended March 31, 1998 and 1997 ............................ 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 6. EXHIBITS AND REPORTS ON FORM 8-K ................................. 12
Signatures ................................................................. 13
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. FINANCIAL STATEMENTS
THINKING TOOLS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 (1)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,552 $ 2,597
Accounts receivable 7 7
Prepaid expenses and other current assets 104 131
------- -------
Total current assets 1,663 2,735
------- -------
Property and equipment, net 266 265
Other assets 25 29
------- -------
Total assets $ 1,954 $ 3,029
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 162 $ 200
Accrued expenses 137 359
Notes payable 58 88
Capital lease obligations 8 13
------- -------
Total current liabilities 365 660
Shareholders' equity:
Common stock 5 5
Additional paid-in capital 11,288 11,288
Deferred stock compensation (198) (198)
Accumulated deficit (9,506) (8,726)
------- -------
Total shareholders' equity 1,589 2,369
------- -------
Total liabilities and shareholders' equity $ 1,954 $ 3,029
======= =======
</TABLE>
(1) Derived from the December 31, 1997, audited balance sheet included in the
Company's 1997 Annual Report on Form 10-KSB
See notes to condensed financial statements
3
<PAGE>
THINKING TOOLS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------ ------
<S> <C> <C>
Contract Revenues $0 $70
Cost of Contract Revenues 0 70
------ ------
Gross Profit 0 0
------ ------
Operating Expense:
Selling, general, and administrative 472 576
Research and development 334 121
------ ------
Total operating expenses 806 697
------ ------
Operating Loss (806) (697)
------ ------
Interest expense (2) (3)
Other income, net 28 85
------ ------
Total other income, net 26 82
====== ======
Net Loss $(780) $(615)
====== ======
Net loss per share $(0.17) $(0.13)
====== ======
Shares used in calculating net loss per share 4,642 4,642
------ ------
</TABLE>
See notes to condensed financial statements
4
<PAGE>
THINKING TOOLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (780) $ (615)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 13 15
Stock compensation 0 24
Changes in operating assets and liabilities:
Accounts receivable 0 118
Prepaid expenses and other assets 31 25
Accounts payable (38) (151)
Accrued expenses (222) 57
Billings in excess of costs on
uncompleted contracts and
deferred revenue 0 (24)
------- -------
Net cash used in operating activities (996) (551)
------- -------
Cash flows from investing activities:
Purchase of property and equipment, net (14) (66)
------- -------
Cash flows from financing activities:
Principal payment on short-term notes payable (30) (54)
Principal payments on capital lease obligations (5) (4)
------- -------
Net cash used in financing activities (35) (58)
Net decrease in cash and equivalents (1,045) (675)
Cash and equivalents at beginning of period 2,597 6,869
------- -------
Cash and equivalents at end of period $ 1,552 $ 6,194
======= =======
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 1 $ 3
======= =======
</TABLE>
See notes to condensed financial statements
5
<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 considered necessary
for a fair presentation of the financial position and the results of operations
and cash flows for the interim periods have been included. Interim results are
not necessarily indicative of results for a full year.
These interim condensed financial statements should be read in conjunction with
the information included in the Company's Annual Report on Form 10-KSB
filed with the Securities Exchange Commission for the year ended December 31,
1997.
2. Common Stock
In August 1996, Thinking Technologies, L.P., a principal stockholder of the
Company, converted $1,320,000 of notes and 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 $.001 per warrant.
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 was used to retire outstanding indebtedness under
certain promissory notes issued in a bridge financing in August 1996.
3. Net Loss Per Share
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share" which requires presentation of basic and diluted earnings
(loss) per share and restatement of all prior year earnings (loss) per share.
Due to the Company's net loss, all convertible securities are antidultive; hence
both basic and diluted loss per share are computed based on the weighted average
number of shares of common stock outstanding during the period. The earnings per
share amount for the quarter ended March 31, 1997 has been restated to conform
to SFAS 128.
4. Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"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. The Company's financial statements for the quarters
ended March 31, 1998 and 1997 do not include amounts which are considered
components of other comprehensive income, consequently, net income and
comprehensive income are equivalent for both
6
<PAGE>
periods as defined.
5. Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board Issued SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information", which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographical
areas, and major customers. Adoption of this statement will not impact the
Company's financial position, results of operations or cash flows. This
statement is effective for the Company beginning January 1, 1998. The Company
will include the required disclosures within its Annual Report as of December
31, 1998. Quarterly reporting is permitted; however, the Company has chosen not
to adopt the application earlier than December 31, 1998.
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, but are not limited to, risks and
uncertainties related to the Company's limited operating history, uncertain
future profitability, future financing needs, limited marketing experience and
dependence on the emerging markets for business simulation software; competition
risks; uncertainties regarding the commercial acceptance of Think 2000 and the
development of additional products; risks associated with the Company's growth
strategy; and other risks described herein and in the Company's 1997 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. Such
customers are not affiliated with the Company, and all such contracts have been
completed. The Company historically has not had, and at March 31, 1998, did not
have any firm order backlog. During the three month period ended March 31, 1998,
the Company continued to implement its previously announced strategy to change
its focus from custom projects to self-funded development of simulation products
for broader markets. As part of this strategy, the Company is continuing to seek
to leverage its existing products and technology platform 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's current and planned expense levels are
based in part on
8
<PAGE>
its expectations towards anticipated revenue.
In September 1997, the Company introduced Think 2000, a Year 2000 risk
simulation software program. Think 2000 is the first simulation product which
the Company internally funded and is bringing to a broader market. The Company
has made a significant investment in the development and commercialization of
Think 2000, and as a result, does not currently anticipate significant revenues
in the near future from other sources. The Company currently has limited capital
and human resources and is focusing such resources primarily on Think 2000. Any
failure of the Company to successfully commercialize Think 2000 or to meet
demands for such product on a timely basis could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company is relying on the success of Think 2000, as well as the successful
development, commercialization and marketing of additional products for its
long-term viability and growth.
The Company intends to distribute its products through its existing
strategic partners, new service providers as well as by initiating direct sales
to customers. The Company is also in discussion with additional prospective
value-added resellers ("VARs"). As the Company moves into new specific product
areas, it intends to seek alliances in such areas. The Company plans to continue
making presentations and appearances at academic forums and corporate-sponsored
events.
As of March 31, 1998, the Company had experienced cumulative losses of
$9,506,000 and has 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 March 31, 1998, the Company's operations have
been funded primarily through private sales of debt and equity securities and
the Company's Initial Public Offering ("IPO"). 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 in 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
as it seeks to expand sales and marketing efforts in accordance with its
strategic plan.
9
<PAGE>
Results of Operations
Comparison of three months ended March 31, 1998 and March 31, 1997
Revenues Revenues for the three months ended March 31, 1998 decreased by
$70,000 to nil from $70,000 for three months ended March 31, 1997. During the
three months ended March 31, 1998, the Company was in the process of
implementing a new marketing and business strategy as it seeks to become a
product-oriented, sales-driven company.
Gross Margin Gross margin for the three months ended March 31, 1998 was nil
as was the gross margin for the comparable period ended 1997.
Selling, General and Administrative Expenses Selling, general and
administrative expenses decreased by $104,000, or 18 %, for the three months
ended March 31, 1998, to $472,000, from $576,000 for the three months ended
March 31, 1997. Selling, general, and administrative expenses consisted
primarily of costs associated with labor. The decrease in selling, general and
administrative expenses was primarily due to decreased administrative headcount
and a reduction in contractor costs. 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, 1998, increased by $213,000, or 176%, to $334,000, from
$121,000 for the three months ended March 31, 1997. This increase was primarily
due to the increased costs associated with the Think 2000 project. The Company
anticipates that research and development costs will increase in future periods
as the Company's business shifts from custom development projects to product
sales.
Interest Expense Interest expense for the three months ended March 31, 1998
decreased by $1,000, or 33%, to $2,000, from $3,000 for the three months ended
March 31, 1997.
Other Income Other income net for the three months ended March 31, 1998
decreased by $57,000, or 67%, to $28,000, from $85,000 for the three months
ended March 31, 1997. Other income is primarily the result of interest income
generated from investing the excess proceeds raised from the Company's IPO. The
decrease from the comparable period in 1997 is due to the decrease in invested
funds.
Net Loss As a result of the foregoing, net loss for the three months ended
March 31, 1998 increased by $165,000, or 27%, to $780,000, from $615,000 for the
three months ended March 31, 1997.
Liquidity and Capital Resources
Since its inception and through March 31, 1998, the Company has
incurred
10
<PAGE>
cumulative losses aggregating approximately $9,506,000 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. During the past two fiscal
years, the Company has satisfied its cash requirements principally from advances
from shareholders, 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, 1998, the Company had cash and equivalents of approximately
$1,552,000, working capital of approximately $1,298,000 and shareholders' equity
of approximately $1,589,000. At March 31, 1998, the Company had no long-term
liabilities outstanding.
Net cash used in operating activities for the three months ended March 31,
1998 and 1997, totaled approximately $996,000 and $551,000 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, 1998 and 1997,
totaled approximately $35,000 and $58,000, respectively.
Based on the Company's operating plan, the Company believes that its current
cash balances will be sufficient to satisfy its capital requirements and finance
its operation through the mid-third 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 debt or
equity financing in order to fund its future operations and growth strategy. The
Company anticipates that it will be required to seek additional funding through
public or private sales of debt or equity securities. The Company is currently
evaluating its financing options. 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 such event, the Company may be unable to implement its
business plan.
Year 2000
The Company has developed plans to address the changes that need to be made
to its own computer system and applications for the implications of Year 2000.
The Company is also currently communicating with its application vendors,
suppliers, financial institutions and other third parties with which it is doing
business to address the impact of the Year 2000. The Company does not anticipate
that the financial impact of making the required changes to its systems and
applications to become Year 2000 compliant will be material to the Company's
financial position, results of operations or cash flows.
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: May 1, 1998 By: /s/ Moshe Zarmi
---------------------------
Moshe Zarmi
President and CEO
By: /s/ Patricia Kessler
---------------------------
Patricia Kessler
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Thinking Tools, Inc.
Financial Data Schedule
Commercial and Industrial Companies
Article 5 of Regulations S-X
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,552
<SECURITIES> 0
<RECEIVABLES> 7
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,663
<PP&E> 396
<DEPRECIATION> 130
<TOTAL-ASSETS> 1,954
<CURRENT-LIABILITIES> 365
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 1588
<TOTAL-LIABILITY-AND-EQUITY> 1954
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (780)
<INCOME-TAX> 0
<INCOME-CONTINUING> (780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (780)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
