<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
AMENDMENT NO. 1
---------------
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR I5(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File No.:
001-15179
H-Quotient, INC.
(Exact name of small business issuer as specified in its charter)
Virginia 54-1947753
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
12030 Sunrise Valley Drive, Suite 205, Reston, VA 20191
(Address and zip code of registrant's principal executive offices)
(703) 716-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 7,526,784 shares of its $.0001
par value common stock as of June 30, 1999.
The undersigned registrant hereby files this Amendment No. 1 to its Form 10-QSB
in response to comments contained in the Commission's letter dated August 24,
1999.
<PAGE>
H-Quotient INC.
FORM 10-QSB
FOR THE SIX MONTHS ENDED JUNE 30,1999
INDEX
PART I: FINANCIAL INFORMATION (unaudited)
Item 1 : PAGE
Condensed Consolidated Balance Sheet as of June 30, 1999,
December 31, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1999 4
Condensed Consolidated Statements of Operations for the three
and six months periods ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and June 30, 1998 6
Notes to Unaudited Condensed Consolidated Financial 7
Statements for the six months ended June 30, 1999
Item 2:
Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 17
Item 2: Changes in Securities and Use of Proceeds 18
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 19
2
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H-Quotient, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------ ------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash .................................................................. $ 284,541 $ 1,776
Contracts receivable .................................................. 117,640 70,332
Due from officers ..................................................... 25,368 9,985
Prepaid expenses and other current assets ............................. 73,014 --
------------ ------------
Total current assets ............................................. 500,563 82,093
Property and equipment, net ........................................... 89,882 67,776
Capitalized software, net of accumulated .............................. 317,754 69,308
amortization of $-0- in 1998 and $10,546
as of June 30, 1999
Intangibles, net ...................................................... 13,367
Deposits .............................................................. 59,490 6,860
------------ ------------
Total assets ..................................................... $ 981,056 $ 226,037
============ ============
Liabilities and Shareholders' Accumulated Deficit
Current liabilities:
Accounts payable ...................................................... $ 762,499 $ 923,306
Accrued expenses ...................................................... 1,773,717 1,901,458
Short-term debt ....................................................... 998,864 1,337,130
Deferred revenues ..................................................... 115,957 238,225
Billings in excess of costs and estimated earnings .................... 422,106 --
------------ ------------
Total current liabilities ........................................ 4,073,143 4,400,119
Shareholders' accumulated deficit:
Common stock, $.0001 par value authorized
50,000,000 shares (90,000,000 shares authorized at June 30, 1999),
5,110,075 shares outstanding at December 31, 1998 and 7,526,784
shares
outstanding at June 30, 1999, respectively ....................... 753 511
Additional paid-in capital ............................................ 8,585,201 7,489,905
------------ ------------
Accumulated deficit ................................................... (11,678,041) (11,664,498)
------------ ------------
Total shareholders' accumulated deficit .......................... (3,092,087) (4,174,082)
Total liabilities and shareholders' accumulated
deficit ................................................ $ 981,056 $ 226,037
============ ============
</TABLE>
See accompanying notes to financial statements.
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H-Quotient, INC.
Consolidated Statements of Shareholders' Accumulated Deficit
<TABLE>
<CAPTION>
Common Stock Additional Total
Accumulated Paid in Accumulated Shareholders'
Shares Amount Capital Deficit (Deficit)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
December 31, 1996 ............................. 3,162,591 316 5,104,137 (6,464,087) (1,359,634)
Issuance of common stock and warrants:
Warrants issued in connection with
purchase of IST assets @ $.10 ........ 134,000 134,000
Reg A Issuance @ $2.00 .................. 271,984 28 543,940 543,968
Stock Issuance @ $0.84 .................. 100,000 10 83,893 83,903
Sale of Stock for notes @ $0.33 ......... 1,065,747 107 354,590 354,697
Sale of Stock for notes @ $1.01 ......... 77,428 8 78,202 78,210
Stock Issuance - Rule 144 @ $2.00 ....... 135,029 14 270,044 270,058
Warrants pursuant to a Regulation D
offering @ $1.00 ..................... 265,188 265,188
Net Loss for 1997 ............................. (3,282,673) (3,282,673)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 .................. $ 4,812,779 $ 483 $ 6,833,994 $ (9,746,760) $ (2,912,283)
============ ============ ============ ============ ============
Issuance of common stock and warrants:
Warrants pursuant to a Regulation D
offering @ $1.00 ..................... 145,000 145,000
Warrants issued for services @ $.75 ..... 233,350 233,350
Net loss for the six months ended
June 30, 1998 (unaudited) ............... (917,857) (917,857)
------------ ------------ ------------ ------------ ------------
June 30, 1998 (unaudited) ..................... 4,812,779 483 7,212,344 (10,664,617) (3,451,790)
============ ============ ============ ============ ============
Issuance of common stock and warrants:
Pursuant to Regulation D offering @ $1.00 50,000 50,000
Pursuant to Regulation D offering @ $.10 25,000 25,000
Stock Issuance - Rule 144 @ $.68 ........ 297,926 28 202,561 202,589
Net Loss for the six months ended
December 31, 1998 ....................... (999,881) (999,881)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 .................. 5,110,705 511 7,489,905 (11,664,498) (4,174,082)
============ ============ ============ ============ ============
Issuance of common stock:
Regulation D offering
@ $0.50 per share (unaudited) ......... 1,727,079 173 883,365 883,538
@ $0.25 per share (unaudited) ......... 560,000 56 139,944 140,000
Stock Issuance - Rule 144
@ $0.75 per share (unaudited) ......... 30,000 3 22,497 22,500
@ $0.50 per share (unaudited) ......... 99,000 10 49,490 49,500
Net loss for the six months ended
June 30, 1999 (unaudited) ............... (13,543) (13,543)
------------ ------------ ------------ ------------ ------------
June 30, 1999 (unaudited) ............... 7,526,784 753 8,585,201 (11,678,041) (3,092,087)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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H-Quotient, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended Three months ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
<S> <C> <C> <C> <C>
Software sales .................. $ 222,908 $ -- $ 193,008 $ --
Maintenance and service income .. 322,531 150,986 124,969 78,382
----------- ----------- ----------- -----------
Total revenues ............. 545,439 150,986 317,977 78,382
Operating expenses:
Cost of sales and services ...... 93,045 163,493 54,085 68,142
Selling and marketing ........... 112,109 93,425 66,167 32,340
General and administrative ...... 445,510 754,972 252,928 191,399
----------- ----------- ----------- -----------
Total operating expenses ... 650,664 1,011,890 373,180 291,881
----------- ----------- ----------- -----------
Operating loss .................. (105,225) (860,904) (55,203) (213,499)
Other expense/(income):
Interest expense ................ 43,763 45,285 13,930 23,808
Other expense/(income) .......... (135,445) 11,668 (136,405) (335)
----------- ----------- ----------- -----------
Total other expense/(income) (91,682) 56,953 (122,475) 23,473
----------- ----------- ----------- -----------
Net income (loss) ..................... $ (13,543) $ (917,857) $ 67,272 $ (236,972)
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted: ............... $ (0.00) $ (0.19) $ 0.01 $ (0.05)
----------- ----------- ----------- -----------
Weighted Average of
Common shares outstanding ............. 6,397,260 4,812,779 7,162,930 4,812,779
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
5
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H-Quotient, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
--------- ---------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................... $ (13,543) $(917,857)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ................................. 24,761 19,554
Amortization ................................. 13,221 (15,643)
Stock and warrants issued for current expenses 1,000 233,350
Changes in operating assets and liabilities:
(Increase)/Decrease in:
Contracts receivable ......................... (47,309) 26,200
Due from affiliate ........................... -- --
Due from officers ............................ (15,383) (505)
Prepaid expenses and other current assets .... (70,014) --
Deferred charges and other assets ............ (55,631) --
Increase/(Decrease) in:
Accounts payable ............................. 230,021 97,615
Accrued expenses ............................. (127,928) 226,797
Deferred revenues ............................ (124,598) 74,429
Billings in excess of costs .................. 422,106 --
--------- ---------
Net cash (used) in/provided by operating
activities ................................ 236,703 (256,060)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment .......... (48,788) --
Disposals of property and equipment, net ..... 1,549 --
Additions to intangibles ..................... (275,031) --
--------- ---------
Net cash used in investing activities ........ (322,270) --
Cash flows from financing activities:
Proceeds from sale of common stock ........... 588,332
Proceeds from sale of warrants ............... 145,000
Proceeds from notes payable .................. -- 90,000
Repayment of notes payable ................... (220,000) (20,000)
Repayment of related parties ................. (90,000)
Proceeds from related parties ................ -- 120,074
--------- ---------
Net cash provided by financing activities ........... 368,332 245,074
--------- ---------
Net increase in cash ................................ 282,765 (10,986)
Cash at beginning of period ......................... 1,776 (1,838)
--------- ---------
Cash at end of period ............................... $ 284,541 $ (12,824)
========= =========
</TABLE>
See accompanying footnotes to consolidated financial statements.
6
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H-Quotient, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Six Months Ended June 30, 1999
Organization
H-Quotient, Inc. and Subsidiary (the "Company") was incorporated in Virginia on
June 14, 1999, was organized to develop, market, install and maintain integrated
software and hardware systems. The Company markets its products to private and
public healthcare facilities throughout the United States. The Company's
business is derived from a merger with Integrated Healthcare Systems, Inc.
("IHS") in which all the issued and outstanding shares of common stock of IHS
was exchanged for an equal number of shares of the $.0001 par value common stock
of the Company.
Basis of Presentation of Interim Information
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company. All intercompany transactions have been eliminated.
In the opinion of the management of the Company, the accompanying unaudited
condensed consolidated financial statements include all material adjustments,
including all normal recurring adjustments, considered necessary to present
fairly the financial position of and operating results for the periods
presented. The financial statements and notes are presented as permitted by Form
10-QSB, do not include certain information included in financial statements for
the year ended December 31, 1998 and the quarter ending March 31, 1999
(unaudited) which were included in the Company's recently filed Form 10-SB. It
is the Company's opinion that when the interim statements are read in
conjunction with the December 31, 1998 audit report included in Form 10-SB, the
disclosures are adequate to make the information presented not misleading.
Interim results are not necessarily indicative of results for a full year or any
future period.
Accounting Estimates - The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the associated amounts of revenues and expenses during the period
reported. Actual results could differ from the estimates.
Revenue Recognition and Deferred Revenue - The Company follows the guidelines as
promulgated under Statement of Position (SOP) 97-2, 98-4 and 98-9 in recognizing
revenue on software sales and other services. Management believes that
implementation of SOP 98-4 and 98-9 does materially affect the financial
statements.
Software System Sales - Revenue form software system sales that do not require
significant production, modification or customization are recognized when all of
the following criteria are met:
7
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Execution of a written contract;
Delivery of product;
The fee is fixed or determinable and
Collectibility is reasonably assured
If a software system sale includes multiple elements, the sale price is
allocated to each element according to its actual selling price.
Revenue from software system sales requiring significant modification or
customization are recognized using the percentage of completion method based
upon the costs incurred relative to total estimated costs.
Contract costs include all direct material, labor costs, subcontract and those
indirect costs related to contract performance, such as equipment cost,
supplies, insurance, payroll taxes and other general costs. General,
administrative and overhead costs are charged to expense as incurred. Provision
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
estimated profitability, and final contract settlements may result in revisions
to costs and income, which are recognized in the period in which the revisions
are determined.
Long-term contracts include certain key elements and consist of the following:
I-Link Enterprise;
Central Data Repository (CDR) or data warehouse;
PC-based intelligent node or server;
On-going support and training;
Dataqual system (optional).
The Company offers non-specific upgrades to customers with annual support
agreements for a specific product when they are completed and available for
release. If an upgrade leads to a new product, the upgrade is considered a new
sale.
Revenues from consulting services are recognized as performed. Revenues derived
from maintenance contracts are initially deferred and subsequently recognized as
revenue ratably over the terms of the contracts, which are typically from one to
two years.
Deferred revenues represent either billings related to, or payments received
from customers, for software system sales prior to customer delivery and
acceptance, and maintenance service fees billed in advance.
Cash Equivalents - For the purposes of the consolidated statements of cashflows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
8
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Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to a concentration of credit risk consist principally of temporary
cash investments and contracts receivable. The Company has cash investment
policies that restrict placement of these investments to financial institutions
evaluated as highly creditworthy. The Company generally does not require
collateral on contracts receivable as the Company's customer base consists of
large, well established companies and governmental entities. The carrying amount
of the accounts receivable approximates their net realizable value.
Property and Equipment - Property and equipment are stated at cost. Depreciation
of property and equipment is determined using the straight-line method over the
estimated useful lives of the assets, as follows:
Office and computer equipment. 2-5 years
Furniture and fixtures 3-7 years
Capitalized Software Costs - The capitalized costs of acquired technology and
software development are amortized using the greater of the ratio of current
gross revenues to total current and anticipated revenues or the straight-line
method over its estimated useful life of four years on a product by product
basis. The carrying amount of acquired technology and software development is
periodically reviewed by the Company for impairment. Impairment is recognized
when the future gross revenues from products, reduced by the estimated future
costs of completing and disposing of that product, including the costs of
maintenance and customer support required at the time of sale, is less than the
carrying amount of that product.
Research and development costs consist principally of salaries and benefits paid
to the Company's employees. The Company's policy is to expense all research and
development costs as incurred until technological feasibility is established.
Commencing with the establishing of technological feasibility and concluding at
the time the product is ready for release, software development costs are
capitalized. Technological feasibility is defined as being established when
product design and a working model of the software product has been completed
and tested. The Company's products have met technological feasibility criteria
and, accordingly, the Company has capitalized these costs.
Intangible Assets - Amortization of intangible assets is determined using the
straight-line method over the estimated useful lives of the assets, as follows:
Financing costs 5 years
Maintenance contracts 30 months
Customer lists 30 months
Copyrights 30 months
Annually, the Company makes an assessment of the remaining fair market value of
9
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intangible assets. Declines in fair market value considered to be other than
temporary are expensed immediately.
Income Taxes - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for differences between the basis
of assets and liabilities for financial statement and income tax purposes. The
differences relate primarily to depreciable assets (use of different
depreciation methods and lives for financial statement and income tax purpose),
and officers salary and legal contingencies accrued but not paid (deductible for
financial statement purpose but not for income tax purpose). Deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be deductible or taxable when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses and tax credits that are available to offset future taxable
income.
Dividend Policy - The Company has not paid any dividends since its inception and
does not anticipate paying any dividends in the foreseeable future.
Earnings Per Share - Basic earnings per share is computed by dividing net income
by the weighted average number of shares outstanding for the period. Diluted
earnings per share include the dilutive effect of warrants and contingent
shares.
Stock-Based Compensation - The Company continues to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APS) No. 25, "Accounting for Stock Issued to Employees".
Compensation cost for stock options and other equity instruments, if any, is
measured as the excess of the quoted market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.
Restricted stock, if any, is recorded as compensation cost over the requisite
vesting periods based on the market value of the date granted.
Statement of Financial Accounting Standards ("SFAS") No. 123 " Accounting for
Stock-Based Compensation", established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. The Company has elected to remain on its current method of
accounting as described above, and has adopted the disclosure requirements of
SFAS No. 123.
Going Concern - The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as a going
concern. The Company has incurred significant operating losses, and has a
working capital deficiency of $(3,575,580) at June 30, 1999 (unaudited). These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The condensed consolidated unaudited financial statements do not
include any adjustments relating to the recoverability and classification of
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recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
The Company has formulated plans and strategies to address its financial
condition and increase profitability, including the raising additional capital
through the exercise of certain previously issued warrants following the
registration of the shares of common stock underlying these warrants, new funds
generated from the installation of new versions of its I-Link Enterprise and
Dataqual software under prior existing and new contracts and restructuring
negotiated settlements with creditors. There is no assurance, however, that the
registration of the shares underlying the warrants will be completed, and if not
completed, that the Company will raise alternative capital sufficient to enable
the Company to continue its operations as contemplated over the next twelve
months.
Lease Commitments - Beginning May 21, 1999, the Company entered into a two year
sublease agreement for office space. Future minimum lease payments as of
December 31, 1998 under operating leases with terms greater than one year are as
follows:
Year Ending
December 31, 1999 $ 62,286
December 31, 2000 106,776
December 31, 2001 44,490
---------
$ 213,552
Rent expense is as follows:
Three months ended June 30, 1999 (unaudited) $ 18,064
Three months ended June 30, 1998 (unaudited) $ 11,148
Six months ended June 30, 1999 (unaudited) $ 28,962
Six months ended June 30, 1998 (unaudited) $ 18,351
Billings in Excess of Costs and Estimated Earnings
Six months ended
June 30, 1999
--------------
Costs incurred on uncompleted contracts $ 83,579
Gross profit recognized to date on uncompleted
Contracts 316,795
--------------
400,374
Less: Billings to date (822,480)
==============
$ (422,106)
==============
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Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess
of billing on uncompleted contracts $ -
Billings in excess of cost and estimated
earnings on uncompleted contracts (422,106)
==============
$ (422,106)
==============
Supplemental Information to Statements of Cash Flows - Supplemental disclosure
of cash flows and noncash investing and financing activities are as follows:
Six months ended June 30, 1999 (unaudited):
o Exchange of debt and expenses totaling $457,706 into 915,412 shares of
common stock of the Company under a Regulation D Rule 504 offering.
o Exchange of accounts payable of $49,500 into 99,000 shares of common
stock of the Company issued subject to Rule 144.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited financial statements and related notes for the six months ended June
30, 1999, and with the Company's audited financial statements and accompanying
notes for the year ended December 31, 1998. This report contains forward-looking
statements, such as statements of the Company's plans, objectives, expectations
and intentions, within the meaning of the Securities Exchange Act of 1933, as
amended. Actual results could differ materially from those anticipated in
forward-looking statements and are made as of the date of this report. The
Company assumes no obligation to update them. The discussion contained herein
relates to the financial statements, which have been prepared in accordance with
GAAP.
Overview
H-Quotient, Inc. is a Virginia corporation, incorporated on May 20, 1999, and is
the successor by merger to Integrated Healthcare Systems, Inc. ("IHS") which was
a Delaware corporation organized in 1993 under the name of Travel Technologies
International, Inc. Our business, which we acquired from IHS through the merger,
is the designing, development, selling and maintenance of computer software
systems for the management of patient care in hospitals.
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Our business and assets were owned and operated by IHS until June 14, 1999 the
effective date of a downstream merger between the companies. The 7,526,784
shares of outstanding common stock, (par value $.0001) of Integrated Healthcare
Systems, Inc. was exchanged for 7,526,784 shares of H-Quotient, Inc. common
stock, (par value $.0001).
Our principal products consist of DataQual(R), which includes I-Linksm and
I-Linksm Enterprise, which includes the Central Data Repository. DataQual is a
software system designed to capture information on quality of care, risk
management, costs and other aspects of the management of patients in hospitals.
DataQual's companion product, I-Linksm, an interface engine, is designed to
interconnect and extract data from any and all hospital information systems in
the hospitals. I-Linksm Enterprise is a system of servers installed on a
hospitals local area network (LAN), which acts as an intelligent node on a wide
area network, to extract, cleanse, group and map hospital wide data. This data
is then transmitted over an Intranet/Virtual Private Network to a Central Data
Repository. We believe there is a great need in the healthcare industry for
products of this type, and we intend to exploit that need.
Our Business Strategy
We hope to capitalize on the ever-increasing demand in the healthcare industry
for improved patient information by becoming a leading provider of software
information products and services to the industry. We intend to concentrate at
this time on the acute care hospital market, which constitutes over 60% of the
existing market for patient care information delivery software. Our strategy
includes the following key elements:
o Continue sales and installation of DataQual with the I-Link interface engine
and provide enhancements of those products through additional research and
development.
o Continue sales and installation of I-Link Enterprise and the Central Data
Repository and enhancements of this product through additional research and
development.
o Expanded marketing of these products through direct implementation contracts
and joint marketing agreements with additional hospital associations and others,
as well as the expansion of our direct sales efforts focused on individual and
groups of hospitals.
o Maintenance of our existing client base by providing support, software
upgrades and consulting services.
o Expansion of our operations through strategic merger and acquisitions.
Results of Operations
Three Months ended June 30, 1999 Compared With Three Months ended June 30,
1998
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Revenues for the three months ended June 30, 1999 increased to $317,977 from
$78,382 for the three months ended June 30, 1998. The increase of $239,595 is
primarily a result from new contracts recently signed for I-Link Enterprise
software systems and completion of the testing phase of the new version of the
Dataqual software product, was partially offset by a decrease in service revenue
from DOS based Dataqual products under support contracts.
The cost of sales and services for the three months ended June 30, 1999
decreased to $54,085 from $68,142 for the three months ended June 30, 1998. The
decrease of $14,057 resulted primarily from lower direct costs of supporting
existing customers which was partially offset by increased costs associated with
implementing new contracts.
Selling and marketing expenses for the three months ended June 30, 1999
increased to $66,167 from $32,340 for the three months ended June 30, 1998. This
increase of $33,827 is a result from increased costs associated with an expanded
marketing outreach program.
General and administrative expenses for the three months ended June 30, 1999
increased to $252,928 from $191,399 for the three months ended June 30, 1998.
The increase of $61,529 primarily resulted from an increase in legal and
accounting fees associated with the filing of a registration statement.
Interest expense, net, for the three months ended June 30, 1999 was $13,930, as
compared to $23,808 for the three months ended June 30, 1998. The decrease in
interest expense of $9,878, resulted primarily from an offset of interest income
of $3,794, conversion of debt instruments and repayment of notes payable.
Other income, net for the three months ended June 30, 1999 increased to $136,405
in income from $335 in income for the three months ended June 30, 1998. The
increase of $136,070 in income resulted primarily from an increase in debt
forgiveness income related to the settlement of a judgement claim. See "Legal
Proceedings".
Net profit for the three months ended June 30, 1999 and the three months ended
June 30, 1998 were $67,272 and $(236,972), respectively.
Six Months Ended June 30, 1999 Compared With Six Months Ended June 31, 1998
Revenues for the six months ended June 30, 1999 increased to $545,493 from
$150,986 for the six months ended June 30, 1998. The increase of $394,453,
resulted primarily from revenue generated under new contracts recently signed
for I-Link Enterprise software systems and completion of the testing phase of
the new version of the Dataqual software product, was partially offset by a
decrease in service revenue from DOS based Dataqual products under support
contracts.
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The cost of sales and services for the six months ended June 30, 1999 decreased
to $93,945 from $163,493 for the six months ended June 30, 1998. The decrease of
$70,488 resulted primarily from an increase in capitalized research and
development costs and reduced costs associated with supporting existing
customers, which was partially offset by increased costs associated with
implementing new contracts.
Selling and marketing expenses for the six months ended June 30, 1999 increased
to $112,109 from $93,425 for the six months ended June 30, 1998. This increase
of $18,684 resulted primarily from increased costs associated with an expanded
marketing outreach program.
General and administrative expenses for the six months ended June 30, 1999
decreased to $445,510 from $754,972 for the six months ended June 30, 1998. The
decrease of $309,462 was a resulted primarily from a decrease in expense from
contingent liabilities and investment banking fees which were offset by
increased legal and accounting fees associated with filing of a registration
statement.
Interest expense, net, for the six months ended June 30, 1999 was $43,763, as
compared to $45,285 for the six months ended June 30, 1998. The decrease of
$1,522 in interest expense resulted primarily from an interest income offset of
$4,631, a reduction in notes payable, which was partially offset by a onetime
interest charge related to prepayment of a note payable.
Other income, net for the six months ended June 30, 1999 increased to $135,445
in income from $11,558 in expense for the six months ended June 30, 1998. The
increase of $147,003 in income resulted primarily from an increase in debt
forgiveness income related to the settlement of a judgement claim. See "Legal
Proceedings".
Net Profit for the six months ended June 30, 1999 and the six months ended June
30, 1998 were $(13,543) and $(917,857), respectively.
Liquidity and Capital Resources
Working capital (deficit) at June 30, 1999 was $(3,572,580) as compared to
$(3,564,057) at June 30, 1998 and $(4,318,026) at December 31, 1998.
We have funded our operations and working capital needs through a series of
private equity and debt offerings, the exercise of investor warrants, and
payments received under new contracts.
Cash and cash equivalents at June 30, 1999 were $ 284,541, an increase of
$297,365 from June 30, 1998. During the six months ended June 30, 1999, we
generated net cash of $236,703 in our operating activities as compared to using
$256,061, for the six months ended June 30, 1998. This increase of cash
of $492,764 was primarily the result of an increase in collections of billings
in excess of earnings and estimated costs.
There were non-cash activities in which accrued expenses and accounts payable
were reduced through the exchange of common stock totaling $457,704. These
transactions are accounted for in the unaudited financial statements for the
three month and six month periods ended June 30, 1999. However, they are not
reflected in the above discussion regarding cash and cash equivalents and in the
Statement of Cash Flows. (See "Supplemental Information to Statement of Cash
Flows").
15
<PAGE>
During the six months ended June 30, 1999, we used $322,270 for investing
activities as compared to $-0-, for the six months ended June 30, 1998. The
increased use of cash for investing activities resulted from an increase in the
acquisition of computer equipment and an increase in intangible assets resulting
from capitalizing certain research and development costs associated with
bringing new software products to market.
During the six months ended June 30, 1999, we generated net cash of $428,332
from financing activities as compared to $245,074 for the six months ended June
30, 1998. The increase of $183,258 resulted from funds raised in a Regulation D,
Rule 504 private placement of common stock and the exercise of investor
warrants, which was offset by an increase in cash used for debt repayment.
Our sales of Dataqual and related service contracts are billed net due upon
receipt. Payment terms on I-Link Enterprise contracts are defined in the
contract and will vary according to specific contract terms. It is our practice
to require a substantial payment upon signing of any long term contract.
We lease office space on a two-year sublease basis and could be required to move
and/or add more space after this two-year period. The major capital expenditures
we may incur are for computers and related local area network hardware and
software and travel for sales representatives and key support and installation
personnel. Our recent upgrade of the DataQual software is being initially
marketed to our existing hospital customers. We also intend to invest
approximately $250,000 in personnel to expand and enhance sales, software
development and customer support, as well as associated office support staff.
We have frequently not been able to make timely payments to our trade and other
creditors. As of June 30, 1999, we had past due obligations for which there were
claims and judgments of approximately $1,592,000. Deferred payment terms have
been negotiated with many of our vendors and critical services have not been
suspended, nor has there been cancellation of orders due to delays in product
delivery as a result. We intend to use the cash generated from operations, if
any, to pay our trade and other creditors. We may have an opportunity to
discount or reduce some of the trade and other creditor's debts. We, in all
likelihood, will need to raise additional funds either from loans or additional
equity and/or debt offerings during the next twelve months, however, there are
no assurances that we will be able to raise capital sufficient to enable us to
continue our operations as contemplated.
We had, at June 30, 1999, a working capital (deficit) of $(3,572,580). We
believe that cash generated from operations will not be totally sufficient to
fund our current and past due cash requirements. We anticipate that it will be
likely that we will raise additional funds either by loan and/or additional
equity offerings. It is possible that we may have to curtail our current
operations and delay and/or cancel our business plans, however, management
believes that our current operational plans for the next twelve months will not
be curtailed or delayed because of the lack of sufficient financing. If
16
<PAGE>
additional financing is required, there can be no assurances that we will be
able to obtain such additional financing, on terms acceptable to us and at the
times required by us, or at all.
We believe that our current staffing, cost structure, and current operating
plans will allow us an opportunity to compete effectively as a supplier of
information management software to the hospital market and possibly attain
profitability in future periods.
Net Operating Loss
For federal income tax purposes, we have net operating loss carryforwards of
approximately $6,900,000 as of December 31, 1998 and $7,300,000 (unaudited) as
of June 30, 1999. These carryforwards expire in the years 2009 and 2018,
respectively. We also have a capital loss carryforward of approximately
$1,560,000 which expires in 2001. The use of our net operating loss
carryforwards to offset taxable income, if achieved, may be subject to specified
annual limitations.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
We currently have judgements entered against us by various creditors. Of these
judgements, six are uncontested and are immediately payable in the aggregate
amount of $245,000 plus accrued interest of approximately $60,000.
A judgement in the amount of $162,147 was entered against the Company's
predecessor in March 1998 in Integrated Healthcare Systems, Inc. v. Gaskell, et
al, (Docket No. 98-1480), a case in the United States District Court Eastern
District of Virginia. The judgement was granted to a former owner of a onetime
subsidiary of the Company's predecessor and was based on the indemnification
provision in the stock purchase agreement by which he sold his interest in that
subsidiary to the Company's predecessor. The Company appealed that judgement
and, on June 14, 1999, the United States Court of Appeals for the Fourth Circuit
vacated the judgment. However, the appeals court also remanded the case back to
district court for further proceedings as to whether sanctions against the
Company should be imposed.
On May 14, 1999, the Company's predecessor and a judgement holder settled a
lawsuit with payments totaling $20,000 against a judgement for $80,000 plus
accrued interest on a note from a previous settlement which was in default. The
judgment, which has been released, stemmed from a lawsuit filed by Freer &
McGarry, PC, a law firm, in June 1995 against the Company's predecessor in the
Superior Court of the District of Columbia seeking recovery of $210,822.44,
which was alleged to be the reasonable value of legal services and expenses
claimed to have been supplied to the Company's predecessor.
In addition, our former accountant sued us in April 1997 for collection of
$365,833 in fees. The case, M.R. Weiser & Co., LLP v. Integrated Healthcare
Systems, Inc., (Index No. 601937/97). is presently pending in the United States
17
<PAGE>
District Court for the Southern District of New York. We have answered the
complaint and asserted various affirmative defenses, among them claims that the
plaintiff has not given us full credit for payments made and that plaintiff's
charges were excessive and unreasonable. This action is pending and is in the
discovery phase.
On January 10, 1997 the Internal Revenue Service ("IRS") filed in the Circuit
Court for the County of Fairfax, Virginia a Notice of Federal Tax Lien in the
amount of $386,234.73 against us for employment withholding tax liabilities of
Integrated Systems Technology, Inc. ("IST") formerly a wholly owned subsidiary
of ours acquired in 1995. It is the opinion of our special counsel, Carr Goodson
Lee & Warner P.C., Washington D.C.; that there is no "alter ego" liability on
the part of us and that the lien filed against us is wrongful and should be
released. We have made efforts to get the lien released but the IRS has refused.
In the meantime, the IRS since the filing of the Notice, has not made any effort
to enforce it against us. In the event the lien is not released, we may have to
bring a suit against the IRS in the Federal courts for wrongful levy.
Other suits arising in the ordinary course of business are pending against us.
We believe the ultimate outcome of these actions will not result in a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
Item 2. Changes in Securities and Use of Proceeds
From January 1999 to May 1999, the Company issued, 1,727,079 shares of common
stock under Regulation D, Rule 504 at an adjusted price of $.50 per share in
exchange for $428,833 in cash and $457,704 in debt conversion and other
expenses. From January 1999 to March 1999, 446,389 shares issued at $.60 were
subject to a post issuance adjustment to $.50 per share resulting in an
additional 74,398 shares being issued from April 1999 to August 1999 per the
adjustment.
In May and June 1999 we issued 460,000 shares of our common stock to holders of
warrants issued in the Regulation D, Rule 506 offering upon exercise of 460,000
warrants at an issuance price of $.25 per share. These warrant had previously
been purchased at price of $1.00 per warrant, for an aggregate price of $1.25
per share, and pursuant to an agreement to reduce the exercise price of the
warrants from $.75 to $.25 per share for a period of 60 days. In conjunction
with these transactions, we also issued 100,000 shares of our common stock to
the placement agent at $.50 per share, net of commissions in exchange for
$25,000 in cash.
In June 1999 we issued 99,000 shares of our common stock to holders of warrants
at an exercise price of $0.50 per share in exchange for payment of accounts
payable and we issued 30,000 shares of our common stock to a holder of warrants
at an exercise price of $0.75 per share in exchange for $22,500 in cash.
At June 30, 1999 warrants to purchase 12,066,755 shares of common stock
18
<PAGE>
exercisable at varying dates through June 2004 at prices from $.75 to $7.00 per
share were outstanding. Of the 12,066,755 warrants, 7,526,784 warrants were
issued by the Company to the holders of IHS common stock as of June 14, 1999.
Each warrant allows the holder to purchase one share of the Company's common
stock at $5.00 for a period of five years expiring in June 2004.
Item 5: Other Information
None.
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
Pursuant to 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.
H-Quotient, Inc.
October 5, 1999 By: /s/ Michael J. Black
------------------------------------
Michael J. Black
Chairman and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed consolidated balance sheet as of June 30, 1999 and the
unaudited condensed consolidated statement of operations for the six months
ended June 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 284,541
<SECURITIES> 0
<RECEIVABLES> 127,641
<ALLOWANCES> 10,000
<INVENTORY> 0
<CURRENT-ASSETS> 500,563
<PP&E> 181,526
<DEPRECIATION> 91,643
<TOTAL-ASSETS> 981,056
<CURRENT-LIABILITIES> 4,073,143
<BONDS> 0
0
0
<COMMON> 689
<OTHER-SE> (3,092,087)
<TOTAL-LIABILITY-AND-EQUITY> 981,056
<SALES> 545,439
<TOTAL-REVENUES> 545,439
<CGS> 93,045
<TOTAL-COSTS> 650,664
<OTHER-EXPENSES> (135,445)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,763
<INCOME-PRETAX> (13,543)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,543)
<EPS-BASIC> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
