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, 1999
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)
200 Park Avenue Ste 3900
New York, New York 10166
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (212) 808-7474
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 [ ] NO [X]
At September 17, 1999, 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, 1999
and December 31, 1998............................................3
Condensed Statements of Operations for the three month periods
ended March 31, 1999 and 1998....................................4
Condensed Statements of Cash Flows for the three month periods
ended March 31, 1999 and 1998....................................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)
March 31, December 31,
1999 1998(1)
(Unaudited)
Current assets:
Cash and equivalents $ 80 $ 2
Accounts receivable 6 53
---------- ----------
Total current assets 86 55
Property and equipment, net 54 56
Other assets 12 12
---------- ----------
Total assets $ 152 123
========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY)
Current liabilities:
Accounts payable $ 260 $ 282
Accrued expenses 679 638
Notes payable 298 85
Deferred revenues 22 22
Current portion of capital lease obligations 3 3
Total current liabilities 1,262 1,030
Long term deposits 10 10
Total liabilities 1,272 1,040
Shareholders' equity (deficiency):
Common stock 5 5
Additional paid-in capital 11,489 11,288
Accumulated deficit (12,614) (12,210)
---------- ----------
Total shareholders' (deficiency) (1,120) (917)
---------- ----------
Total liabilities and
shareholders' (deficiency) $ 152 $ 123
========== ==========
Derived from the December 31, 1998, audited balance sheet included in the
Company's 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)
Three Months Ended
March 31,
1999 1998
---- ----
Revenues $ 58 $ 0
------------ -------------
Gross Profit 58 0
------------ -------------
Operating Expense:
Selling, general, and administrative 106 472
Research and development 149 334
------------ -------------
Total operating expenses 255 806
------------ -------------
Operating Loss (197) (806)
------------ -------------
OTHER INCOME (EXPENSE)
Interest expense (208) (2)
Other income, net 0 28
------------ -------------
Total other income, net (208) 26
------------ -------------
Net Loss $ (405) $ (780)
============ =============
Basic and Diluted Net Loss-Per Share $ (0.09) $ (0.17)
------------ -------------
Shares used in calculating net loss per share 4,642 4,642
See notes to condensed financial statements
4
<PAGE>
THINKING TOOLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three months ended
March 31,
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (405) $ (780)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2 13
201 -
Accounts receivable 47 -
Prepaid expenses and other assets - 31
Accounts payable (22) (38)
Accrued expenses 42 (222)
Deferred revenues - -
Net cash used in operating activities (135) (996)
--------- --------
Cash flows from investing activities:
Purchase of property and equipment, net (0) (14)
--------- --------
Cash flows from Financing activities:
Principal payments on short-term notes payable - (30)
Proceeds from issuance of notes payable 213 -
Principal payments on capital lease obligations - (5)
Net cash used in financing activities 213 (35)
Net increase (decrease) in cash and equivalents 78 (1.045)
Cash and equivalents at beginning of period 2 2,597
--------- --------
Cash and equivalents at end of period $ 80 1,552
========= ========
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 0 1
========= ========
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, which contemplates the continuation of the Company as a going
concern. 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. The Company lacks product
revenues and has sustained substantial operating losses.
As of March 31, 1999, the Company had an accumulated deficit of $12,614,000. The
Company intends to locate and enter into a transaction with an existing, public
or privately held company which in management's view, has growth potential and
may be involved in the software or technology industry. To that end, the Company
is currently engaged in negotiations with several candidates. The Company's
continued existence is dependent on its ability to negotiate such a transaction
and its ability to raise additional financing.
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 and Exchange Commission for the year ended December 31,
1998.
2. Common Stock
The Company consummated a series of financing transactions in 1996. Warrants
were issued to Thinking Technologies, L.P. to purchase 468,242 shares of common
stock at an exercise price of $1.07 per share, expiring December 2006. Warrants
to purchase 456,250 shares of the Company's common stock at $3.90 per share,
expiring August 2001, were also issued. In addition, in October and November
1996, the Company completed its initial public offering (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 and accrued interest under the promissory notes
issued in the 1996 Bridge Financing. The Remainder of the net proceeds of the
IPO were used to fund the Company's sales and marketing and product development
efforts, and for working capital and general corporate purposes. In connection
with its IPO, 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).
6
<PAGE>
On November 6, 1998, the Company approved a bridge financing offer from
Technologies, under which Technologies was granted the right to purchase up to
350 units for $1,000 per unit (the "1998 Bridge Financing"). Each unit (a
"Bridge Unit") consists of a Secured Convertible Note in the principal amount of
$1,000, payable at 10% interest per annum (each, a "Bridge Note"), and a warrant
to purchase 30 shares of common stock of the Company at an exercise price of
$.20 per share (each, a "Bridge Warrant"). Each Bridge Note is convertible into
5,000 shares of Common Stock at a conversion price of $.20 per share. One Bridge
Warrant shall be terminated upon each conversion of a Bridge Note. As of
September 1, 1999, Technologies has purchased 321 Bridge Units. This total
includes the reimbursement with Bridge Units for expenses incurred in obtaining
the 1998 Bridge Financing and for seeking a Target Business for the Company. The
proceeds of the 1998 Bridge Financing have been used for working capital and
general corporate purposes.
In July, 1999, the Company completed a bridge financing in which it sold 150
units (the "Gem Units") consisting of a 10% Unsecured Convertible Note in the
principal amount of $1,000 (each a "Gem Note") and a Warrant to purchase 30
shares of the Company's Common Stock at an exercise price of $.20 per share
(each, a "Gem Warrant") to Gem Management Limited (the "Gem Financing") for
$150,000. Each Gem Note is convertible into 5,000 shares of the Company's Common
Stock at a conversion price of $.20 per share. Upon conversion of each Gem Note,
one Gem Warrant shall be terminated. The proceeds of this financing will be used
for working capital and general corporate purposes.
3. Accounting for convertible securities with beneficial
fixed dollar conversion
Pursuant to a recent accounting standard consensus it is necessary to recognize
the intrinsic value (that is, the difference between the conversion price and
fair value of the common stock into which a debt is convertible, multiplied by
the number of shares into which the debt is convertible) at the commitment date.
A portion of the proceeds from issuance of the convertible debt, equal to the
intrinsic value, is then allocated to additional paid-in capital (APIC). Because
the debt is convertible at the date of issuance, the date discount is charged to
interest expense at the date of issuance. In accordance with this requirement,
the 1998 Bridge Notes currently held by Technologies resulted in a year to date
interest expense recognition of $201,000 as of March 31, 1999.
4. Net Loss Per Share
The Company follows Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share." Due to the Company's net loss, all convertible securities,
options and warrants are antidilutive; 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.
7
<PAGE>
5. 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, 1999 and 1998 do not include amounts which are considered
components of other comprehensive income. Consequently, net income and
comprehensive income are equivalent for both periods as defined.
6. Notes Payable
In November 1998 the Company approved a Bridge Financing offer from
Technologies, under which Technologies was granted the right to purchase up to
$350,000 of Senior Secured Convertible Notes due within 90 days at 10% interest
per annum. Cash advances and certain expenses through March 1999, resulted in
borrowings under this arrangement amounting to approximately $285,000.
In July 1999, an additional unsecured convertible note of $150,000, with
interest of 10% per annum and with warrants to purchase common stock, was
entered into with Gem Management Ltd. (see note 2)
7. Related Party Transactions
The Company's Chairman of the Board controls Thinking Technologies, L.P., which
owns approximately 42% of the Company's outstanding common stock, owns warrants
to purchase additional shares of common stock, and has made a Bridge Loan to the
Company, as discussed in Notes 2 and 6. Included in accrued expenses at March
31, 1999, is $213,000 due to the Company's Chairman of the Board for consulting
services as approved by the Board of Directors. This obligation may, at the
Company's election, be paid in options to purchase common stock. These
consulting services commenced October, 1997, for $150,000 per year less certain
related expenses.
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 emerging market 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 1998 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.
8
<PAGE>
OVERVIEW
The Company commenced operations in December 1993 to develop and market business
simulation software. Until April 1999, the Company was 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
through October 30, 1997 were primarily derived from software development
projects completed under contracts with customers. Historically, a significant
portion of such revenues were 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. The Company does not believe it
is materially dependent upon sales to these customers. Contracts with such
customers have been fully completed as of December 31, 1997. The Company
historically has not had, and at March 31, 1999, did not have, any firm order
backlog. During 1998 the Company sought to continue its previously announced
strategy to change its focus from custom projects to self funded development of
simulation for broader markets. The Company sought to leverage its existing
products and technology platform to become a product-oriented, sales-driven
company. During this period, revenues were not expected to be material.
As of March 31, 1999, the Company had experienced cumulative losses of
$12,614,000 and has not experienced any quarter of profitable operations. The
Company's operations to date have been funded primarily through private sales of
debt and equity securities and the IPO.
During 1998, the Company focused primarily on the commercial introduction of
Think 2000, a Year 2000 risk simulation software program, which was introduced
in September 1997. Think 2000 was the first simulation product the Company
internally funded and brought to a broader market. The Company made a
significant investment in the development and commercialization of Think 2000.
Changes in market conditions and the failure of the Company to successfully
commercialize Think 2000 has had a material adverse effect on the Company's
business, operating results and financial condition.
On May 5, 1998 the Company received notification from The Nasdaq Stock Market,
Inc ("Nasdaq") that the Company was not in compliance with certain quantitative
requirements for continued listing of its Common Stock on the Nasdaq SmallCap
Market.
9
<PAGE>
Nasdaq requires, among other things companies listed on the Nasdaq Small Cap
Market maintain (i) net tangible assets of $2,000,000, (ii) a market
capitalization of $35,000,000, or (iii) net income (in the latest fiscal year or
two of the last three fiscal years) of $500,000. After a hearing before Nasdaq
on July 24, 1998, Nasdaq notified the Company on November 7, 1998 that its stock
had been delisted from the Nasdaq SmallCap Market due to the Company's failure
to maintain compliance with these quantitative requirements. The Company's
Common Stock is currently traded on the OTC Bulletin Board, but the Company
intends to be listed on the Nasdaq SmallCap Market again when it is able to
comply with Nasdaq listing requirements.
In light of the changes in market conditions, and the Company's failure to
commercialize Think 2000, on April 23, 1999, the Company announced that it was
eliminating substantially all of its operations and all personnel were separated
from the Company, other than those required to perform certain executive and
administrative functions. It has since begun to search for candidates with which
to enter into transactions. The Company has retained the technology underlying
the products it discontinued.
Plans of Business
The Company intends to locate and enter into a transaction with an existing,
public or privately-held company that in management's view, has growth potential
and may be involved in the software or technology industry (a "Target
Business"). To that end, the Company is currently engaged in negotiations with
several candidates. A combination may be structured as a merger, consolidation,
exchange of the Company's common stock for stock or assets or any other form
which will result in the combined enterprise's remaining a publicly-held
corporation.
Pending negotiation and consummation of a transaction, the Company anticipates
that it will have, aside from carrying on its search for a transaction partner,
no business activities, and, thus, no material source of revenue. Should the
Company incur any significant liabilities prior to a combination with a Target
Business, it may not be able to satisfy without additional financing such
liabilities as are incurred. If the Company's management pursues one or more
combination opportunities beyond the preliminary negotiations stage and those
negotiations are subsequently terminated, it is foreseeable that such efforts
will exhaust the Company's ability to continue to seek such combination
opportunities before any successful transaction can be consummated. In that
event, the Company's common stock will become worthless and holders of the
Company's common stock will receive a nominal distribution, if any, upon the
Company's liquidation and dissolution.
Results of Operations
Comparison of three months ended March 31, 1999 and March 31, 1998
Revenues. Revenues for the three months ended March 31, 1999 increased by
$58,000 from nil for three months ended March 31, 1998. During the first quarter
ending March 31, 1998 the Company was focused primarily on the commercial
introduction of Think 2000.
Gross Margin. Gross margin for the three months ended March 31, 1999 was $58,000
compared to nil for the comparable period ended 1998.
10
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $366,000, or 78 %, for the three months
ended March 31, 1999, to $106,000, from $472,000 for the three months ended
March 31, 1998. 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 reduction in all departmental expenses in a Company wide effort to continue
operations.
Research and Development. Research and development expenses for the three months
ended March 31, 1999, decreased by $185,000, or 55%, to $149,000, from $334,000
for the three months ended March 31, 1998. The decrease was primarily due to
reducing staff and all expenses in a Company wide effort to continue operations.
Interest Expense. Interest expense for the three months ended March 31, 1999
increased by $206,000, to $208,000, from $2,000 for the three months ended March
31, 1998. There are two factors regarding the interest expense and primarily are
as follows:
(i) Interest of approximately $7,000 represents a 10% computation of
interest from December 10, 1998 through March 31, 1999 and is in
accordance with the 1998 Bridge Financing between Technologies and the
Company; and
(ii) Interest expense of approximately $201,000 represents the
recognition of the Bridge Notes at the lower of their conversion rate
and a rate fixed at the commitment date. The Bridge Notes are
convertible into shares of Common Stock at $.20 per share, less than
the market price on the various dates of conversion. Accounting
standards require the appropriate reporting of this variance. The
"Additional Paid-In-Capital" area of the Balance sheet reflects the
$201,000 adjustment.
Other Income. Other income net for the three months ended March 31, 1999
decreased by approximately $28,000, to nil, from $28,000 for the three months
ended March 31, 1998. Net Loss As a result of the foregoing, net loss for the
three months ended March 31, 1999 decreased by $375,000, or 48%, to $405,000,
from $780,000 for the three months ended March 31, 1998.
Liquidity and Capital Resources
Since its inception and through March 31, 1999, the Company has incurred
cumulative losses aggregating approximately $12,614,000 and has not experienced
any quarter of profitable operations. During the past three fiscal years, the
Company has satisfied its cash requirements principally from advances from
shareholders, 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, 1999, the Company had cash and equivalents of approximately
$80,000, a negative working capital of approximately $1,176,000 and a negative
shareholders' equity of approximately $1,120,000. At March 31, 1999, the Company
had long-term liabilities of approximately $10,000 outstanding.
11
<PAGE>
Net cash used in operating activities for the three months ended March 31, 1999
and 1998, totaled approximately $135,000 and $996,000 respectively. The funds
from the first quarter ending March 31, 1998 were used primarily for the
Company's product development. Funds used during the quarter ending March 31,
1999 were used primarily to fulfill general operating expenses.
The Company is currently evaluating its financing options and is actively
searching for candidates with which to enter into transactions. The Company's
management intends to consider only transaction candidates which in management's
view, have growth potential. The Company's limited financial resources may make
the search difficult or even impossible without additional financing. There can
be no assurance that the Company will be able to obtain this goal 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
Currently, the Company has no active computer operations and will not have
active operations until and unless it enters into a transaction with a Target
Business. As part of its consideration of the merits of entering into a
transaction with a Target Business, the Company will consider the effects on the
Year 2000 problem on such Target Business and the actions taken by such Target
Business to be ready for Year 2000. In assessing the level of readiness of any
Target business, the Company considers the following to be the most important
factors: (1) the level of compliance of such Target Business' central computer
systems; (ii) the level of compliance of the software used in such Target
Business' ongoing operations; and (iii) the level of readiness of such Target
Business' largest vendors.
There can be no assurance that either a Target Business or any customers and
suppliers of such Target Business, will be year 2000 compliant. In the event
that any Target Business or any of such Target Business, customers or suppliers
do not install Year 2000 compliant systems, following such transaction the
Company may need additional clerical staff to perform certain tasks. There can
be no assurance that the Company will not have to bear additional costs and
expenses to the future related to the Year 2000 problem.
12
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the 1998 Bridge Financing, The Company issued 285 Bridge Units as of
April 1999. Each Bridge Unit consists of a Bridge Note and a Bridge Warrant.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Exhibit 27 Financial Data Schedule
13
<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: September 17, 1998 By: /s/ Moshe Zarmi
--------------------------
Moshe Zarmi
President and CEO
By: /s/ Patricia Kessler
--------------------------
Patricia Kessler
Acting Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 001021444
<NAME> THINKING TOOLS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 80
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 86
<PP&E> 73
<DEPRECIATION> 19
<TOTAL-ASSETS> 152
<CURRENT-LIABILITIES> 1262
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> (1120)
<TOTAL-LIABILITY-AND-EQUITY> 152
<SALES> 58
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208
<INCOME-PRETAX> (405)
<INCOME-TAX> 0
<INCOME-CONTINUING> (405)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (405)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
