U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR I5(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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: 15,005,209 shares of its $.0001
par value common stock as of June 30, 2000.
<PAGE>
H-QUOTIENT INC.
FORM 10-QSB
FOR THE SIX MONTHS ENDED JUNE 30, 2000
INDEX
PART I: FINANCIAL INFORMATION (unaudited)
Item 1 : PAGE
Condensed Consolidated Balance Sheet as of June 30, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Operations for the three month periods
ended June 30, 2000 and June 30, 1999, and
the six month periods ended June 30, 2000 and June 30, 1999 3
Condensed Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2000 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and the six months ended June 30, 2000 5
Notes to Unaudited Condensed Consolidated Financial 6
Statements for the six months ended June 30, 2000
Item 2:
Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 17
Item 2: Changes in Securities and Use of Proceeds 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 19
<PAGE>
<TABLE>
H QUOTIENT, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<CAPTION>
ASSETS
30-Jun-00 31-Dec-99
------------ ------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash $ 10,018 $ 15,729
Investment in equity securities 4,075,968 2,915,322
Contracts receivable, less allowance for doubtful accounts
of $18,790 165,801 671,724
Due from officers 19,667 --
Costs and estimated earnings in excess of billings --
on uncompleted contracts 468,687 36,145
Notes Receivable 999,253 --
Other current assets 93,217 41,503
------------ ------------
Total current assets 5,832,611 3,680,423
------------ ------------
Property and equipment, net 152,737 77,031
Capitalized software, net 319,256 371,959
Deposits 68,631 68,631
------------ ------------
Total assets $ 6,373,235 $ 4,198,044
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 291,221 $ 464,547
Accrued expenses 1,552,023 1,561,383
Short-term debt 169,810 275,130
Billings in excess of costs and estimated earnings on
uncompleted contracts
-- 205,302
Deferred revenues 136,875 123,778
------------ ------------
Total current liabilities 2,149,929 2,630,140
------------ ------------
Commitments and contingencies -- --
Shareholders' accumulated deficit:
Preferred stock, $.0001 par value, 10,000,000 shares
authorized; 100 shares issued and outstanding -- --
Common stock, $.0001 par value, 90,000,000 shares
authorized; 15,005,209 and 12,464,866 shares issued and
outstanding at June 30, 2000 ((unaudited), and
December 31, 1999, respectively 1,501 1,247
Additional paid-in capital 13,701,177 12,191,130
Accumulated deficit (9,479,372) (10,624,473)
------------ ------------
Total shareholders' equity (accumulated deficit) 4,223,306 1,567,904
------------ ------------
Total liabilities and shareholders' equity $ 6,373,235 $ 4,198,044
============ ============
See accompanying notes to consolidated financial statements.
2
</TABLE>
<PAGE>
<TABLE>
H QUOTIENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
<CAPTION>
Six months ended Three months ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Dataqual Group:
Software sales $ 561,617 $ 222,908 249,630 32,100
Maintenance and service income 262,684 322,531 131,318 285,877
------------ ------------ ------------ ------------
824,301 545,439 380,948 317,977
Quotient Capital:
Gain of securities sales 268,976 -- -- --
------------ ------------ ------------ ------------
Total revenues 1,093,277 545,439 380,948 317,977
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales and services 421,974 93,045 159,932 54,085
Selling and marketing 137,391 112,109 43,428 66,167
General and administrative 584,651 445,510 346,309 252,928
------------ ------------ ------------ ------------
Total operating expenses 1,144,016 650,664 549,669 373,180
------------ ------------ ------------ ------------
Operating income (loss) (50,739) (105,225) (168,721) (55,203)
Other income (expense) :
Interest expense (9,559) (43,763) (4,780) (13,930)
Interest income 27,917 -- -- --
Other income (expense) -- 135,445 -- 136,405
------------ ------------ ------------ ------------
Total other expense 18,358 91,682 (4,780) 122,475
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes and
extraordinary item (32,382) (13,543) (173,501) 67,272
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Income (loss) before extraordinary item (32,382) (13,543) (173,501) 67,272
Extraordinary item 1,177,483 -- 965,410 --
------------ ------------ ------------ ------------
Net income (loss) $ 1,145,101 $ (13,543) 791,909 67,272
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.08 $ (.00) 0.06 0.01
------------ ------------ ------------ ------------
Diluted $ 0.07 $ (.00) 0.05 0.01
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
Basic 13,543,989 6,028,047 14,387,841 4,812,779
------------ ------------ ------------ ------------
Diluted 15,826,466 6,028,047 16,157,545 4,812,779
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
</TABLE>
<PAGE>
<TABLE>
H QUOTIENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders' Equity (Accumulated Deficit)
Six months ended June 30, 2000 (unaudited) and the year ended December 31, 1999
<CAPTION>
Common Stock Additional Accumulated Total
------------------------ paid in income shareholders'
Shares Amount capital (deficit) equity (deficit)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 5,110,705 $ 511 $ 7,489,905 $ (11,664,498) $ (4,174,082)
Issuance of common stock:
Regulation D offering @ $0.60 per share 446,389 45 267,788 -- 267,833
Regulation D offering @ $0.50 per share 1,431,411 143 720,557 -- 720,700
Pro-rata additional shares 59,278 6 -- -- 6
Warrants exercised (Regulation D offering)
@ $0.25 per share 460,000 46 114,954 -- 115,000
@ $0.25 per share 100,000 10 24,990 -- 25,000
@ $0.50 per share 99,000 10 49,490 -- 49,500
@ $0.75 per share 30,000 3 22,497 -- 22,500
Stock issuance - Rule 144
@ $1.00 per share 500,000 50 499,950 -- 500,000
@ $0.50 per share 122,000 12 60,988 -- 61,000
@ $0.69 per share 390,909 39 268,749 -- 268,788
@ $0.88 per share 40,000 4 34,996 -- 35,000
@ $0.84 per share 16,667 2 14,062 -- 14,064
@ $0.94 per share 41,500 4 38,903 -- 38,907
@ $0.78 per share 36,205 4 28,280 -- 28,284
@ $1.00 per share 67,188 7 67,181 -- 67,188
@ $0.78 per share 10,762 1 8,407 -- 8,408
@ $0.81 per share 11,732 1 9,532 -- 9,533
@ $1.41 per share 4,020 -- 5,653 -- 5,653
@ $2.00 per share 2,350 -- 4,700 -- 4,700
Warrants exercised (Regulation D offering)
@ $1.00 per share 2,999,750 300 2,999,450 -- 2,999,750
@ $0.50 per share 300,000 30 149,970 -- 150,000
Stock issuance - Rule 144
@ $1.75 per share 185,000 19 323,731 -- 323,750
Less: shares sold in exchange for note
receivable (See note14) -- -- (1,013,603) -- (1,013,603)
Net income for 1999 -- -- -- 1,040,025 1,040,025
December 31, 1999 12,464,866 $ 1,247 $ 12,191,130 $ (10,624,473) $ 1,567,904
Issuance of common stock:
Warrants exercised @ $.75 per share 375,000 38 281,213 281,250
Warrants exercised @ $.80 per share 250,000 25 199,975 -- 200,000
Warrants exercised @ $1.06 per share 8,309 1 8,807 8,808
Warrants exercised @ $5.00 per share 30,100 3 150,497 150,500
Warrants exercised @ $.38 per share 1,007,795 101 386,135 386,236
Stock Issuance - Rule 144
@ $2.38 per share 34,065 3 81,072 81,075
@ $3.00 per share 6,500 1 19,499 19,500
@ $4.00 per share 60,715 6 242,854 242,860
@ $5.031 per share 35,000 4 139,996 140,000
@ $0.0001 par value per share 732,859 73 73
Net income for June 30, 2000 1,145,101 1,145,101
----------- ----------- ------------ ------------- ------------
June 30, 2000 15,005,209 1,501 13,701,177 (9,479,372) 4,223,306
=========== =========== ============ ============= ============
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and the year ended December 31, 1999
<CAPTION>
30-Jun-00 31-Dec-99
----------- -----------
(unaudited) (audited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,145,101 $ 1,040,025
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 41,274 55,147
Amortization 52,703 49,660
Gain on sale of equipment -- (1,550)
Stock and warrants issued for current expenses 19,500 272,494
Unrealized loss on securities -- 33,751
Realized gain on sale of securities (987,347) (93,903)
Extraordinary gain (212,073) (1,275,322)
Changes in operating assets and liabilities:
(Increase)/decrease in:
Contracts receivable 505,922 (601,392)
Note receivable (999,253) --
Due from officers (9,682) 9,985
Costs and estimated earnings in excess of billings (432,542) (36,145)
Prepaid expenses and other current assets (51,714) (6,503)
Deferred charges and other assets 83,540 (64,040)
Increase/(decrease) in:
Accounts payable (180,291) (234,501)
Accrued expenses 148,744 413,434
Billings in excess of costs and estimated earnings (205,302) 205,302
Deferred revenues 82,980 (114,447)
----------- -----------
Net cash used in operating activities (998,441) (348,005)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (96,242) (64,402)
Proceeds from sale of equipment -- 1,550
Capitalized software -- (352,311)
Net cash used in investing activities (96,242) (415,163)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of warrants 386,236 --
Proceeds from sale of common stock 864,293 1,007,121
Proceeds from notes payable 330,000 --
Proceeds from related parties --
Repayment of notes payable (105,320) (230,000)
Repayment of related parties -- --
----------- -----------
Net cash provided by financing activities 1,088,973 777,121
----------- -----------
Net increase in cash (5,711) 13,953
Cash at beginning of period 15,729 1,776
----------- -----------
Cash at end of period $ 10,018 $ 15,729
=========== ===========
See accompanying notes to consolidated financial statements.
5
</TABLE>
<PAGE>
H-QUOTIENT, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Six Months Ended June 30, 2000
Organization
H-Quotient, Inc. and Subsidiary (the "Company") was incorporated in the
Commonwealth of Virginia on May 12, 1999 as a wholly-owned subsidiary of
Integrated Healthcare Systems, Inc. ("IHS"). On June 14, 1999, IHS executed a
downstream merger in which all the issued and outstanding shares of common stock
of IHS were exchanged for an equal number of shares of the $.0001 par value
common stock of the Company. The Company develops, markets, installs and
maintains integrated software and hardware systems. The Company markets its
products to private and public healthcare facilities 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, 1999 which was included in the Company's recently
filed Form 10KSB. It is the Company's opinion that when the interim statements
are read in conjunction with the December 31, 1999 audit report included in Form
10KSB, 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's revenue recognition
policies are in compliance with American Institute of Certified Public
Accountants Statements of Position 97-2, 98-4 and 98-9, Software Revenue
Recognition. The Company sells software systems under noncancellablle sales
agreements. Revenue from a software system sale is recognized when a sales
agreement is in force, the product has been delivered, the sales price is fixed
and determinable collectibility is reasonably assured. If a software system sale
includes multiple elements, the sale price is allocated
6
<PAGE>
to each element according to its actual selling price.
Revenues from software system sales requiring significant modification or
customization are recognized using the percentage of completion method based on
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.
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 the 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 cash
flows, the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments - The Company considers the recorded value
of its financial assets and liabilities, consisting principally of contracts
receivable, investments in equity securities, accounts payable, accrued
expenses, and debt to approximate the fair value of the respective assets and
liabilities at June 30, 2000 and December 31, 1999.
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.
7
<PAGE>
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 Company capitalizes software development costs
incurred subsequent to the internal release of the product for acceptance
testing. Upon the general release of the product to customers, development costs
for that product are amortized over periods not exceeding four years, based on
the economic life of the product. Capitalized software costs amounted to
$352,311 and $69,308 in 1999 and 1998, respectively. Related accumulated
amortization and amortization charges were $49,660 in 1999 and none in 1998. 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.
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 2 years
Customer lists 2 years
Copyrights 4 years
Annually, the Company makes an assessment of the remaining fair market value of
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.
8
<PAGE>
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.
Investment in Equity Securities - The Company holds 430,626 shares of common
stock of Internet Guide, Inc. (a development stage company) which was acquired
in December 1999. The transaction was a related party transaction as an officer
and director of the Company is also an officer, director and significant
shareholder of Internet Guide, Inc. Accordingly, equity securities for Internet
Guide, Inc. are stated at their carrying value. The Company held additional
securities valued at $1,648,800 which were received in May, 2000 as partial
payment of a Note Receivable.
The following is information on investments in equity securities as of June 30,
2000:
<TABLE>
<CAPTION>
Carrying Value
----------------
Shares of
common Price Unrealized Realized
Company stock held per share Fair Value Loss Gain
-------------------- ------------- ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Internet Guide, Inc. 430,626 $ 6.50 $ 2,799,072 -- --
Computone, Inc. $ 4.10 $ 526,896 --
128,400
Veridien Corporation 4,687,500 $ 0.16 $ 750,000 -- --
-------------
$ 4,075,968
=============
</TABLE>
9
<PAGE>
Property and Equipment -
Property and equipment consists of the following:
June 30, December 31,
2000 1999
--------- ------------
Office and computer equipment $ 286,561 $ 190,218
Furniture and fixtures 7,291 7,291
--------- ---------
293,852 197,509
Less: accumulated depreciation (141,116) (120,478
--------- ---------
$ 152,736 $ 67,776
========= =========
Depreciation expense of property and equipment was $20,637 and $55,147 for the
three months ended June 30, 2000 and the year ended December 31, 1999,
respectively.
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, 2000 106,776
December 31, 2001 44,490
---------
$ 213,552
Rent expense is as follows:
Three months ended June 30, 2000 (unaudited) $ 26,695
Three months ended June 30, 1999 (unaudited) $ 11,148
Six months ended June 30, 2000 (unaudited) $ 53,390
Six months ended June 30, 1999 (unaudited) $ 28,962
10
<PAGE>
<TABLE>
Short term debt -
Short-term debt consists of the following:
<CAPTION>
June 30, December
2000 31, 1999
--------- --------
<S> <C> <C>
Unsecured note payable to a bank with interest at prime plus 1% $ -- $ 70,000
Legal settlement to a former law firm of the Company with interest at 9% due
throughout 1999 and 1998. This note is in default 105,000 105,000
Unsecured non-interest bearing demand note payable to an individual 35,320
--
Unsecured promissory notes payable with interest at 15% 64,810 64,810
-------- --------
$169,810 $275,310
<CAPTION>
Uncompleted Contracts -
Six months ended
June 30, 2000
----------------
<S> <C>
Costs incurred on uncompleted contracts $ 743,300
Gross profit recognized to date on uncompleted
Contracts 798,180
--------------
1,541,480
Less: Billings to date 1,072,793
--------------
$ 468,687
==============
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess
of billing on uncompleted contracts $ 468,687
Billings in excess of cost and estimated
earnings on uncompleted contracts
--------------
$ 468,687
==============
</TABLE>
11
<PAGE>
Earnings Per Share
The following data shows the amounts used in computing basic and diluted
earnings per share for the three months ended June 30, 2000 (unaudited) and 1999
(unaudited) and the year December 31, 1999 and 1998 respectively .
<TABLE>
<CAPTION>
Three months ended
June 30,
-------------------------------
1999 1998 2000 1999
------------ ------------ ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss) to Common shareholders $ 1,040,025 $ (1,684,388) $ 791,909 $ (236,972)
Weighted average number of outstanding
common shares - basis 7,841,237 4,936,915 14,387,841 4,812,779
Dilutive effect of warrants to purchase
common shares 3,690,047 -- -- --
------------ ------------ ------------- ------------
Diluted common shares outstanding 11,531,284 4,936,915 16,157,5457 4,812,779
============ ============ ============= ============
Net income (loss) - basic $ 0.13 $ (0.34) $ 0.06 $ (0.05)
- diluted
============ ============ ============= ============
</TABLE>
For 1998 and the six months ended June 30, 1999, warrants to purchase shares of
common stock are not included in computing diluted earnings per share because
their effects are antidilutive.
Related Party Transactions -
On December 31, 1999, the Company sold 150,000 shares of common stock of
Internet Guide, Inc. at $10.375 per share and 185,000 shares of common stock of
the Company at $1.75 per share plus had debt of $70,833 paid on behalf of the
Company, in exchange for a promissory note totaling $1,950,833. The promissory
note is secured by underlying securities and collateralized by additional
securities held by a third-party Trust. The promissory note accrues interest at
an annual rate of seven percent (7%) calling for payments due in January,
February and March 2000. The payment terms were renegotiated calling for two
equal payments on April 30th and May 31st, 2000. The promissory note was
subsequently paid in full on May 20, 2000 via cash of $330,000 and stocks in
publicly traded companies with a fair value of $1,648,800. The Company has
accounted for these transactions as if the Company exchanged common shares of
common stock of the Company for a promissory note receivable. As these
transactions are considered related party transactions, accordingly, the gain of
$987,546 resulting
12
<PAGE>
from this sale was deferred and recognized in the current period.
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, 2000, and with the Company's audited financial statements and accompanying
notes for the year ended December 31, 1999. 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 12, 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.
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 7,526,284
shares of outstanding common stock (par value $.0001) of Integrated Healthcare
Systems, Inc. was exchanged for 7,526,284 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
13
<PAGE>
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:
- Continue sales and installation of DataQual with the I-Link interface engine
and provide enhancements of those products through additional research and
development.
- Continue sales and installation of I-Link Enterprise and the Central Data
Repository and enhancements of this product through additional research and
development.
- 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.
- Maintenance of our existing client base by providing support, software
upgrades and consulting services.
- Expansion of our operations through strategic merger and acquisitions.
Results of Operations
Three Months ended June 30, 2000 Compared With Three Months ended June 30, 1999
Revenues for the three months ended June 30, 2000 increased to $380,948 from
$317,977 for the three months ended June 30, 1999. The increase of $62,971 is
primarily a result of increases in revenue derived from long term contracts.
The cost of sales and services for the three months ended June 30, 2000
increased to $159,932 from $54,085 for the three months ended June 30, 1999. The
increase of $105,847 resulted primarily from increased technical and support
staff for the I-Link Enterprise contracts and with new Dataqual installations.
Selling and marketing expenses for the three months ended June 30, 2000
decreased to $43,428 from $66,167 for the three months ended June 30, 1999. This
decrease of $11,088 is a result from by a decrease in salaried marketing
personnel.
General and administrative expenses for the three months ended June 30, 2000
increased to $346,309 from $252,928 for the three months ended June 30, 1999.
The increase of $93,381 primarily resulted from an increases in professional
services fees related to our annual audit and preparation of our annual report
and proxy statement.
Interest expense, net, for the three months ended June 30, 2000 was $4,780, as
compared to $13,930 for the three months ended June 30, 1999. The decrease in
interest expense of
14
<PAGE>
$9,150 resulted from reductions in notes payable in our debt settlement efforts
last year and in the first quarter of this year
Extraordinary items, net for the three months ended June 30, 2000 increased to
$965,410 as compared to $-0- for the three months ended June 30, 1999. The
increase resulted primarily from the net gain derived from the payment of a note
receivable. (See "Related Party Transactions" in the Notes (unaudited) to the
Condensed Consolidated Financial Statements.)
Net profit for the three months ended June 30, 2000 and the three months ended
June 30, 1999 were $765,690 and $67,272, respectively.
Six Months ended June 30, 2000 Compared With Six Months ended June 30, 1999
Revenues for the six months ended June 30, 2000 increased to $1,093,277 from
$549,669 for the six months ended June 30, 1999. The increase of $543,608 is
primarily a result of revenue derived from long term contracts, sales of
Dataqual software upgrades and $268,976 in revenue generated by our new
subsidiary, Quotient Capital Corporation from realized gains on securities sold.
(See Part II, Item 5 "Other Information").
The cost of sales and services for the six months ended June 30, 2000 increased
to $421,974 from $93,045 for the six months ended June 30, 1999. The increase of
$328,929 resulted primarily from increased technical and support staff for the
I-Link Enterprise contracts and with new Dataqual installations as well as a
reduction in capitalized which resulted from completion of the production
versions of I-Link Enterprise and Dataqual..
Selling and marketing expenses for the six months ended June 30, 2000 increased
to $137,391 from $112,109 for the six months ended June 30, 1999. This increase
of $25,282 is a result from increased costs associated with a new marketing
outreach program and is partially offset by a reduction in salaried marketing
personnel.
General and administrative expenses for the six months ended June 30, 2000
increased to $584,651 from $445,510 for the six months ended June 30, 1999. The
increase of $139,141 primarily resulted from an increases in rent expense,
depreciation expense for computer equipment and amortization of capitalized
software costs, as well as professional services fees associated with our annual
audit and preparation of our annual report and proxy statement.
Interest expense, net, for the six months ended June 30, 2000 was $9,559, as
compared to $43,763 for the six months ended June 30, 1999. The decrease in
interest expense of $34,204 resulted from reductions in notes payable in our
debt settlement efforts last year and continuing into the first quarter and
second quarter of this year in which $131,539 of our outstanding notes payable
were paid.
Interest income for the six months ended June 30, 2000 was $27,917, as compared
to $-0-
15
<PAGE>
for the six months ended June 30, 1999.
Extraordinary items, net for the six months ended June 30, 2000 increased to
$1,177,483 as compared to $-0- for the six months ended June 30, 1999. The
increase resulted primarily from the net gain derived from the payment of a note
receivable and from the settlement with various creditors. See "Related Party
Transactions" in the Notes (unaudited) to the Condensed Consolidated Financial
Statements.)
Net profit for the six months ended June 30, 2000 and the six months ended June
30, 1999 were $1,145,101 and $(13,543), respectively.
Liquidity and Capital Resources
Working capital at June 30, 2000 was $3,682,682 as compared to $1,050,283 at
December 31, 1999.
We have funded our operations and working capital needs through a series of
private equity, the exercise of investor warrants, and payments received under
new contracts.
Cash and cash equivalents at June 30, 2000 were $10,018, a decrease of $5,711
from December 31, 1999. During the six months ended June 30, 2000, we used
$998,441 net cash in our operating activities as compared to using $348,005, for
the six months ended June 30, 1999. This net change in the use of cash in
operations of $650,436 was the result of an increase in operating expenses and
notes receivable.
During the six months ended June 30, 2000, we used $96,242 for investing
activities as compared to $415,163, for the six months ended June 30, 1999. The
decrease of $318,921 in the use of cash for investing activities resulted
primarily from a decrease in capitalized research and development costs
associated with bringing new software products to market.
During the six months ended June 30, 2000, we generated net cash of $1,088,973
from financing activities as compared to $777,121 for the six months ended June
30, 1999, 1998. The increase of $311,852 resulted from capital raised though the
private placement of common stock and the exercise of investor warrants in the
period.
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. 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 $500,000 in personnel to expand and enhance sales,
16
<PAGE>
software development and customer support, as well as associated office support
staff.
As of June 30, 2000, we had past due obligations for which there were claims and
judgments of approximately $467,000, a decrease of $325,000 from December 31,
1999. 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, from the sale of marketable securities we own and our
own common stock to satisfy the remaining past due amounts. We may have an
opportunity to discount or reduce some of the trade and other creditor's debts.
We had, at June 30, 2000 working capital of $3,682,682. We anticipate that it
will be likely that we will raise additional funds through additional equity
offerings, primarily through the exercise of outstanding warrants. We believe,
that with cash generated from these offerings and from our operations that we
will meet our current operational and business plans for the next twelve months
and operations will not be curtailed or delayed because of the lack of
sufficient financing.
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
At December 31, 1999 and 1998, we has approximately $7,800,000 and $8,000,000,
respectively, in net operating loss carryforwards which expire at varying dates
between the years 2009 and 2018. We also have a capital loss carryforward of
approximately $1,468,720 which expires in 2001. The annual utilization of these
carryfowards are significantly limited under Section 382 of the Internal Revenue
Code as a result of ownership changes experienced by the Company. A valuation
allowance equal to the total deferred tax asset has been established in each
period due to the uncertainty regarding the realization of the net deferred tax
assets.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
We currently have three judgments totaling $135,000 plus interest entered
against us by creditors. These judgments, which are disputed, have been fully
accrued on our books.
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
17
<PAGE>
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 through March, 2000, we issued 705,814 shares of our common stock
which are subject to restrictions under Rule 144 of the Securities Act of 1933.
Of these shares, 663,309 were issued upon exercise of warrants at prices ranging
from $.75 per share to $5.00 per share in exchange for cash and marketable
securities; and we issued 9,415 shares for debt reduction, 4,500 shares for
services rendered and 24,000 for $60,000 in cash and 1,682 shares under the
non-qualified employee stock purchase plan from the fourth quarter of 1999, at
issuance prices ranging from $2.38 per share to $4.00 per share.
From April through June, 2000, we issued 1,834,529 shares of our common stock
which are subject to restrictions under Rule 144 of the Securities Act of 1933.
Of these shares, 1,007,795 were issued upon exercise of warrants at prices
ranging from $1.00 to $2.00 per share in exchange for $386,236 in cash and
cancellation of an additional 387,176 warrants with a net exercise price of $.38
per share, 732,859 shares under the Class A Redeemable warrant exchange program
(See Item 5. "Other Information", 35,000 shares for services rendered, 2,575
shares under the non-qualified employee stock purchase plan and 56,300 shares in
exchange for $225,000 in cash.
Item 4 - Submission of Matters to a Vote of Security Holders
a) The Company's 2000 Annual Meeting of Stockholders was held on June 16,
2000.
b) Proxies were solicited by management pursuant to Regulation 14 under
the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees for election to the board of
directors as listed in the proxy statement, and all such nominees were
elected pursuant to the vote of the stockholders.
c) Each matter voted upon
Election of directors to serve as Directors until the next Annual
Meeting of Stockholders as follows:
ABSTAIN
FOR AGAINST WITHHELD
Douglas A. Cohn 7,414,244 -0- -0-
Alan W. Grofe' 7,414,244 -0- -0-
Jack Anderson 7,414,244 -0- -0-
Dr. J. Brian Copley 7,414,244 -0- -0-
The total number of shares of Common Stock, $0.0001 par value,
outstanding as of May 26, 2000, the record date of the Annual Meeting, was
14,045,094.
Item 5: Other Information
We formed a new subsidiary, Quotient Capital Corporation in the first quarter of
2000. We began this new enterprise to manage and optimize the value of
investments owned by us. We immediately began realizing gains from Quotient
Capital Corporation and through June 30, 2000 we generated $286,9760 in revenue
derived from the sales of marketable securities. (See Part I: "Management's
Discussion and Analysis").
On February 29, 2000, we announced an exchange of common stock for approximately
5,000,000 Class A Redeemable Warrants issued to stock holders of record on June
14, 1999, a conversion rate of one share of common stock for every seven
warrants held. As of June 30, 2000, 732,859 shares of our common stock were
issued under the exchange program. In conjunction with this exchange program, we
announced a call of the remaining Class A Warrants pursuant to the call
provisions of the Warrant with October 3, 2000, as the redemption date.
18
<PAGE>
On April 5, 2000, we announced an agreement in principle with MD Home.com, a
healthcare internet portal and information resource company for medical
professionals to exchange 500,000 shares of our common stock which will be
subject to the restrictions of Rule 144 of the Securities Act of 1933 for
2,500,000 convertible preferred shares and 350,000 common stock purchase
warrants of MD Home.com. This transaction has not been completed as of the date
of this report.
On April 20, 2000, we announced an agreement in principle to purchase all the
outstanding stock of Information Resource Products, Inc. and IRP Systems, Inc.
for $3,900,000 plus $1,000,000, which is designated to purchase shares of our
common stock in the open market, 25,000 shares of our common stock which is to
be allocated to the sellers employees and 250,000 common stock purchase warrants
that are exercisable for a period of two years at $10.00 per share. The closing
of this acquisition is pending as of the date of this report.
None.
Item 6: Exhibits and Reports on Form 8-K
Form 8-K filed on May 31, 2000 stated that we received final payment on the note
receivable which is detailed in Item 5. Other Information and in the Notes to
the unaudited Condensed Consolidated Financial Statements..
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.
August 15, 2000 By: /s/ Douglas A. Cohn
Douglas A. Cohn
Chairman and Chief Executive Officer
19
<PAGE>
Exhibit 27.1
This schedule contains summary financial information extracted from the
unaudited condensed consolidated balance sheet as of June 30, 2000 and the
unaudited condensed consolidated statement of operations for the six months
ended June 30,2000, and is qualified in its entirety by reference to such
financial statements.
Period Type:
12 Months
Fiscal year end:
December 31, 2000
Period end:
June 30, 2000
<TABLE>
<CAPTION>
<S> <C>
Cash: 10,018
Securities: 4,075,968
Accounts receivables: 184,591
Allowances for doubtful accounts: 18,790
Notes Receivable 999,253
Costs and estimates in excess of billing 468,687
Prepaids and other current assets 112,884
Inventory: 0
Total current assets: 5,832,611
Property, plant & equipment: 293,852
Accumulated depreciation: 141,116
Total assets: 6,373,235
Total current liabilities: 2,176,148
Common stock: 1501
Other stockholders' equity: 4,195,586
Total liabilities and stockholders' equity: 6,373,235
Net sales of tangible products: 561,617
Total revenues: 824,301
Cost of tangible goods sold: 0
Total costs and expenses applied to sales and revenue: 421,974
Other costs and expenses: 722,042
Provision for doubtful accounts and notes: 0
Interest and amortization of debt discount: (18,358)
Income before taxes and other items: (32,382)
Income tax expense: 0
Income/loss continuing operations: (32,382)
Discontinued operations: 0
Extraordinary items: 1,151,264
Cumulative effect-changes in accounting principles: 0
Net income or loss: 1,145,101
Earnings per share-primary: 0.08
Earnings per share-fully diluted: 0.07
</TABLE>
20
