***TPI's 10-QSB (continued) ***
3. EQUITY TRANSACTIONS
On May 21, 1998, the Company issued for cash, two $250,000.00 6%
Convertible Debentures.
These convertible debentures are convertible to common stock at 80%
(eighty percent) of the five day average closing ask price prior to the
date of conversion. Each debenture is covered by a registration rights
agreement that prevents the conversion to common stock without the
securities being registered under the Securities Act. Each debenture
carries warrants that are calculated at 20% (twenty percent) of the
initial cash consideration times 120% (one hundred and twenty percent) of
the closing ask price at closing date. Each debenture carries a placement
fee payable to Thomson Kernaghan of 4% (four percent) of the debenture
value.
Charges relating to the issuance of convertible debentures are being
amortized over the period the debentures are convertible, ninety days. In
addition, the Company incurred debt issue costs of approximately $85,000,
which will be amortized using a straight-line method over the term of the
conversion period of the debentures.
4. SUBSEQUENT CHARGES
The Company will incur a charge of $286,294.00 to operations in the fourth
fiscal quarter ending July 31, 1998 in relation to the issuance of
convertible debt instruments. This charge is related to warrants issued
as part of the convertible debenture and, will be offset to Additional
Paid-in Capital.
7
5. MATERIAL DISCLOSURE
The Company entered into an agreement with Martin E. Janis & Company
("Janis") to provide the Company public and investor relations. Under the
terms of the agreement, the Company will grant Janis 150,000 common shares
of the Company as compensation for services that had not been provided as
of April 30, 1998. The common stock will be restricted under Rule 144
under the Securities Act.
6. SETTLEMENT LIABILITY
The Company reached an out of court settlement with IBS Conversions, Inc.
("IBS") concerning an outstanding lawsuit filed by IBS with the district
court of Illinois. The Settlement Agreement called for the payment of
$90,000 to IBS over a period of six months. In return, the Company
received the full release of IBS. The Company agreed to pay $30,000 on
June 26, 1998 and, $12,000 on the 26th of each consecutive month until
fully paid.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis should be read in conjunction with the
Company's third quarter ended financial statements and notes thereto dated
April 30, 1998 and 1997 and cumulative results from April 1, 1996 (date of
incorporation) to April 30, 1998. The period ended April 30, 1997 includes
the results of operation of the Company for the period from April 1, 1996 to
April 30, 1997 (hereinafter the "nine-month period ended April 30, 1997").
The results of operations for the period from April 1, 1996 to July 31, 1996
were not material.
Net Losses
For the quarters ended April 30, 1998 and 1997, the Company incurred net losses
of $584,962 and $318,035, respectively. For the nine-month period ended April
30, 1998 and 1997, the Company incurred net losses of $2,033,599 and
$2,431,255, respectively. Cumulative losses from April 1, 1996 totaled
$4,818,135. Explanations of these results are set forth below. The Company
expects to continue to incur operating losses until such time, if ever, as it
generates substantial revenues from the performance of its service offerings.
Revenue
For the quarter ended April 30, 1998 the Company's revenue was $260,324. The
Company had no revenue for the quarter ended April 30, 1997. For the
nine-month period ended April 30, 1998 the Company's revenue was $415,345 as
compared to $24,147 for the same period ended April 30, 1997. The Company saw
continuing gains in the Groupware business vertical. Conversion Services,
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the Company's core business, accounted for $43,084 or 10% of gross revenue for
the nine-month period ended April 30, 1998, as compared to $14,786 for the same
period in 1997. While no revenue was recorded in the quarter ending April 30,
1998 as it relates to Year 2000 services, the Company expects activity in this
area to increase substantially for the fiscal year ending July 1998.
Through the fall of 1996, the Company positioned itself to market its core
translation software and target the mid frame environment. The Company's
product offerings received good exposure and acceptance, however, the plan to
upgrade systems was receiving less attention as a new technical problem was
taking hold; namely Year 2000 compliance. Never before had the information
technology industry seen the scope of this problem and the dollar volumes
attached to repair it. The Company negotiated several vendor relationships
and, by April of 1997 was selling year 2000 solutions. The Company also
developed its own proprietary tool which is referred to as "Century Scan". The
product was commercially introduced on March 25, 1998 and has received good
reviews and, is gaining acceptance. The Company continues to develop the
product and new releases have been introduced.
As the Company had shifted its marketing and sales efforts to the Year 2000, a
number of industry specialists were brought on board to represent the Company's
interests. TPI is now bidding on, and, may participate in contracts, ranging
in size from $100,000 to $1,000,000. This environment will introduce the
Company to many cross-selling engagements whereas other products and services
can be delivered.
Expenses
For the quarters ended April 30, 1998 and April 30, 1997, cost of consulting
services accounted for $80,794 and $2,312, respectively. For the nine-month
periods ended April 30, 1998 and 1997, cost of consulting services expenses
were $141,899 and $10,078, respectively. Cumulatively, cost of consulting
services accounted for $153,171, of total expenses. The Company anticipates
managed growth in this area as people are added to satisfy consulting services
provided to our customers. As the employment market becomes more competitive
as the result of channeling human resources toward the Year 2000 problem, the
Company expects to pay a premium for skilled consultants. These consulting
services will be allocated to projects in which the Company has signed
contracts.
Cost of software translation services accounted for $277,967 of total
expenses for the quarter ended April 30, 1998. Comparatively, the Company
spent $18,230 for the same quarter ended April 30, 1997 and, has spent
$997,265 cumulatively in the development stage. For the nine-month period
ended April 30, 1998 and 1997, software translation services expenses were
$304,536 and $172,895, respectively. The Company anticipates adding people
to this area by the end of the fiscal year ending July 31, 1998, but, only if
contracts are in hand. This growth will depend on the volume of conversion
services and year 2000 scan and repair services provided to our customers.
Software development accounted for $119,886 of total expenses for the quarter
ended April 30, 1998. Comparatively, the Company spent $119,605 for the same
quarter in 1997 and, has spent $548,018 cumulatively in the
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development stage. The increases in costs of product development are expected
to continue as the Company expands its product offerings.
General and administrative expense accounted for $355,480 of expenses for the
quarter ended April 30, 1998. Comparatively, the Company spent $177,868 for the
same quarter in 1997 and, has spent $1,986,104 cumulatively in the development
stage. General and administrative expense accounted for $1,611,680 of expenses
for the nine-month period ended April 30, 1998 compared to $605,435 for the
nine-month period in 1997. The Company's general and administrative expenses
consisted primarily of salaries, rent, consulting fees, advertising and legal
costs associated with running a publicly traded company.
For the quarter ending April 30, 1997, the Company incurred two unusual
expenses. The first was the settlement of an outstanding issue regarding the
distribution of additional shares of the Company to Jaford Holdings Limited
("Jaford") in relation to software marketing rights. The Company elected to
pay $259,500 in cash to settle the dispute. In turn, the Company received
full release from Jaford with no further exposure to the Company. In the
second instance, the Company negotiated an out of court settlement with IBS
Conversions, Inc. ("IBS") concerning an outstanding lawsuit filed by IBS with
the District Court of Illinois. The Settlement Agreement called for the
payment of $90,000 to IBS over a period of six months. In return, the Company
received the full release of IBS.
The Company incurred a charge of $1,536,341 for the fiscal period ended April
30, 1997 to record an expense related to shares issued to consultants involved
in the reverse acquisition of Samuel Hamann Graphix. The charge recognized the
fair value of the shares however, did not represent a cash outlay.
Cost of Consulting Services, Conversion Services and Product Development
The Company's variable costs of software consulting, translation services and
development are in a direct relation to the volume of sales. As a percentage
of revenue, these costs will vary depending on the nature of the sale and the
product mix required to satisfy customer needs. Sales based on mature product
will yield a higher margin while specific project type environments may call
for a higher degree of manpower and travel costs.
The Company will continue product development of the core software product to
enable the Company to broaden its impact on many vendor environments. The
development of translators to translate application code from any type of
machine language to virtually any target platform will serve as the benchmark
of the Company to respond effectively to end user requirements. The key to
this objective is a responsive, knowledgeable development team.
General and administrative
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General and administrative costs consist of management and administrative
staff, professional services, office and occupancy costs. Significant costs
are attributed to the Company becoming a public company. This status will
increase audit and legal costs significantly. In relation to the Company
becoming a public company, the cost of corporate relations will also increase
as quarterly reports and other investor information is required. The Company
anticipates that its General and Administrative costs (as a percentage of
costs) will decline as the Company's operations expand.
Liquidity and Capital Resources
At April 30, 1998, the Company had a deficit accumulated during the development
stage of ($4,818,135), current assets of $618,404 and current liabilities of
$1,645,785, which resulted in a current ratio of 1:2.66. During the
three-month period ended April 30, 1998, the Company entered into a convertible
debenture with two private placement investors sponsored by Thomson Kernaghan a
registered broker dealer. The convertible debt will require the issuance of
common stock at date of conversion, not cash resources of the Company.
Otherwise, the Company did not incur any additional long-term debt. The Company
has funded its activities to April 30, 1998 primarily through private
placements of securities, the issuance of convertible debentures and to a
lessor extend, from cash flow from the proceeds of two bank loans. The
outstanding principal balance of the loans is currently approximately $70,957
and the loans bear interest at an annual rate equal to 2.5% over the bank's
prime rate of interest in effect from time to time. Repayment of the loans,
together with interest thereon, is secured by a lien on substantially all of
the assets of the Company and the Company's executive officers and directors
guarantee repayment of the loans. The Company expects to continue to raise
capital through these vehicles to fund operating activities and other capital
requirements. Failure to obtain such equity capital could have a material
adverse impact on the Company's ability to expand its operations. There can be
no assurance that equity capital will be available to the Company on acceptable
terms or at all.
In addition, implementation of the Company's business plan subsequent to the
Company's year end will require capital resources substantially greater than
those currently available to the Company. The Company may determine, depending
on the opportunities available to it, to seek additional debt or equity
financing to fund the cost of continuing expansion. To the extent that the
Company finances expansion through the issuance of additional equity
securities, any such issuance would result in dilution of the interests of the
Company's stockholders. Additionally, to the extent that the Company incurs
indebtedness or issues debt securities to finance expansion activities, it will
be subject to all of the risks associated with incurring substantial
indebtedness, including the risks that interest rates may fluctuate and cash
flow may be insufficient to pay the principal of, and interest on, any such
indebtedness.
The Company has no current arrangements with respect to, or sources of,
additional financing, and it is not contemplated that its existing stockholders
will provide any portion of the Company's future financing requirements. There
can be no assurance that any additional financing will be available
11
to the Company on acceptable terms, or at all. The inability of the Company to
obtain financing when needed will have a material adverse effect on the
Company, including possibly requiring the Company to significantly curtail or
cease its operations.
During the nine-month period ended April 30, 1998, the Company had a net
increase in cash of $257,775 as compared to $112,430 in the nine-month period
ended April 30, 1997. This resulted primarily from a negative cash flow from
operating activities of $1,621,499 in the nine-month period ended April 30,
1998, which resulted primarily from a net loss from development stage
operations of $2,033,599 and a $217,161 increase in accounts receivable and a
$168,816 increase in depreciation and amortization offset, in part, by a
$342,980 increase in accounts payable. During the nine-month period ended
April 30, 1997 the Company had a net loss of $2,326,919. This loss resulted
primarily from operating results during the development stage and, a $1,504,978
non-cash charge from the issuance of common stock taken as a consulting fees
expense.
The Company used $91,953 to purchase property and equipment during the
nine-month period ended April 30, 1998, as compared to $113,614 in the
nine-month period ended April 30, 1997 and $127,405 of advances to related
parties.
The Company had net cash flow provided by financing activities of $1,973,382 in
the nine-month period ended April 30, 1998, consisting primarily of $1,038,998
obtained from the issuance of common stock and $986,120 upon the issuance of
convertible debentures. During the nine-month period ended April 30, 1997, the
company had net cash primarily from financing activities of $1,207,496. This
consisted primarily of $1,140,360 from the issuance of Common Stock.
Inflation
The Company believes that the impact of inflation and changing prices on its
operations since commencement of operations has bee negligible.
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PART II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
[a] Financial Data Schedule
Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the three-month
period ended April 30, 1998.
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TRANSFORMATION PROCESSING INC.
Date July 1, 1998 /s/ John McGee
--------------------------- ----------------------------------
John McGee, Chief Financial Officer
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