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 SEPTEMBER 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: 19,735,005 of its $.0001 par
value common stock as of September 30, 2000.
<PAGE>
H-QUOTIENT INC.
FORM 10-QSB
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
INDEX
PART I: FINANCIAL INFORMATION (unaudited)
Item 1 : PAGE
Condensed Consolidated Balance Sheet as of September 30, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Operations for the nine month periods
ended September 30, 2000, and September 30, 1999, and the three month
periods ended September 30, 2000 and September 30, 1999 3
Condensed Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2000 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000, and the nine months ended September 30, 2000 5
Notes to Unaudited Condensed Consolidated Financial 6
Statements for the nine months ended September 30, 2000
Item 2:
Management's Discussion and Analysis of Financial Condition 15
and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities and Use of Proceeds 20
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 21
<PAGE>
<TABLE>
H-QUOTIENT, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<CAPTION>
ASSETS
30-Sep-00 31-Dec-99
------------ ------------
(unaudited) (audited)
Current assets:
<S> <C> <C>
Cash $ 8,356 $ 15,729
Investment in equity securities 1,550,003 2,915,322
Contracts receivable, less allowance for doubtful accounts
of $18,790 127,751 671,724
Due from officers 23,608 --
Costs and estimated earnings in excess of billings --
on uncompleted contracts 644,113 36,145
Notes Receivable 782,000 --
Advances for Escrow 1,171,432 --
Prepaid expenses 1,838,447 41,503
------------ ------------
Total current assets 6,145,710 3,680,423
------------ ------------
Property and equipment, net 170,257 77,031
Capitalized software, net 345,760 371,959
Non-marketable securities 2,044,734
Deposits and other assets 56,086 68,631
------------ ------------
Total assets $ 8,762,546 $ 4,198,044
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 318,171 $ 464,547
Accrued expenses 1,593,918 1,561,383
Short-term debt 298,666 275,130
Billings in excess of costs and estimated earnings on
uncompleted contracts -- 205,302
Deferred revenues 95,897 123,778
------------ ------------
Total current liabilities 2,306,651 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; 19,735,005 and 12,464,866 shares issued and
outstanding at September 30, 2000 ((unaudited), and
December 31, 1999, respectively 1,974 1,247
Additional paid-in capital 14,726,116 12,191,130
Accumulated deficit (8,272,195) (10,624,473)
------------ ------------
Total shareholders' equity (accumulated deficit) 6,455,895 1,567,904
------------ ------------
Total liabilities and shareholders' equity $ 8,762,546 $ 4,198,044
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
H-QUOTIENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
<CAPTION>
Nine months ended Three months ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Dataqual Group:
Software sales $ 652,679 $ 425,736 $ 85,062 $ 202,828
Maintenance and service income 394,026 518,904 131,342 196,373
------------ ------------ ------------ ------------
1,046,704 944,640 216,403 399,201
Quotient Capital:
Gain of securities sales 1,568,976 -- 1,300,000 --
------------ ------------ ------------ ------------
Total revenues 2,615,680 944,640 1,516,403 399,201
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales and services 520,876 216,750 107,045 123,705
Selling and marketing 165,730 183,785 48,744 71,675
General and administrative 820,493 700,606 227,513 255,096
------------ ------------ ------------ ------------
Total operating expenses 1,507,099 1,101,141 383,301 450,476
------------ ------------ ------------ ------------
Operating income (loss) 1,108,581 (156,501) 1,133,102 (51,275)
Other income (expense) :
Interest expense (14,339) (69,929) (4,780) (20,166)
Interest income 27,917 -- -- --
Other income (expense) -- -- -- --
------------ ------------ ------------ ------------
Total other expense 13,578 (63,929) (4,780) (20,166)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes and
extraordinary item 1,122,159 (220,430) 1,128,322 (71,441)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Income (loss) before extraordinary item 1,122,159 (220,430) 1,128,322 (71,441)
Extraordinary item 1,230,119 582,921 78,855 447,476
------------ ------------ ------------ ------------
Net income (loss) $ 2,352,278 $ 362,491 $ 1,207,177 $ 376,035
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.15 $ 0.05 $ 0.07 $ 0.05
------------ ------------ ------------ ------------
Diluted $ 0.13 $ 0.05 $ 0.06 $ 0.05
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
Basic 15,233,393 6,789,508 17,241,108 7,748,624
------------ ------------ ------------ ------------
Diluted 17,732,943 6,789,508 19,361,764 7,748,624
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
3
<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>
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 425,000 43 318,708 318,750
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 @ $.58 per share 1,007,795 101 586,135 586,236
Stock Issuance - Rule 144
@ $1.00 per share 75,000 8 74,992 75,000
@ $1.50 per share 475,000 48 712,452 712,500
@ $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 4,862,655 486 486
Net income for September 30, 2000 2,352,278 2,352,278
---------- ------------ ------------ ------------ ------------
September 30, 2000 19,735,005 1,974 14,726,116 (8,272,195) 6,455,895
========== ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and the
nine monthes ended September 30, 1999
<CAPTION>
30-Sep-00 30-Sep-99
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,352,278 $ (220,429)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 65,236 43,836
Amortization 80,530 27,418
Gain on sale of equipment -- --
Stock issued for current expenses 19,500 1,000
Unrealized loss on securities -- --
Realized gain on sale of securities (987,347) --
Extraordinary gain (290,928) --
Changes in operating assets and liabilities:
(Increase)/decrease in:
Contracts receivable 543,973 (107,471)
Note receivable (1,953,432) --
Due from officers (23,608) 6,089
Costs and estimated earnings in excess of billings (607,171) --
Prepaid expenses and other current assets (93,899) (60,087)
Deferred charges and other assets -- (58,788)
Increase/(decrease) in:
Accounts payable (146,376) 174,292
Accrued expenses (22,798) 145,337
Billings in excess of costs and estimated earnings (205,302) 58,875
Deferred revenues (27,881) (23,419)
----------- -----------
Net cash used in operating activities (1,297,225) (13,347)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (137,824) (61,591)
Proceeds from sale of equipment -- 1,550
Capitalized software (52,855) (368,352)
----------- -----------
Net cash used in investing activities (190,679) (428,393)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants 864,296 --
Proceeds from sale of common stock 598,935 678,332
Proceeds from notes payable -- 60,000
Proceeds from temporary advances 170,855 --
Repayment of notes payable (147,845) (275,000)
Repayment to related parties -- --
Repayment of temporary advances -- --
----------- -----------
Net cash provided by financing activities 1,486,241 463,332
----------- -----------
Net increase in cash (1,662) 21,593
Cash at beginning of period 10,018 1,776
----------- -----------
Cash at end of period $ 8,356 $ 23,369
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
H-QUOTIENT, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 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 noncancelable 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 to each element
according to its actual selling price.
6
<PAGE>
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.
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.
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.
Cash Equivalents - For 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 September 30, 2000, and December 31, 1999.
Concentration 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 government entities. The carrying amount
of the contract receivable approximates its 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. There have been no
capitalized software costs up through the none months ended September 30, 2000.
Related accumulated amortization and amortization charges were $130,190 and
$80,530 respectively for the nine months ended September 30, 2000, $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 those products, including
the costs of maintenance and customer support required at the time of sale, is
less than the carrying amount of the 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 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 statements 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 officer 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>
Earnings Per Share - Basic earnings per share are 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 continue 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 230,626 shares of common
stock of Internet Guide, Inc., (a development stage company) which were 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 $2,076,889, which were received in May 2000 and September
2000 as payment for a Note Receivable and in exchange for commercial trade
credits which are carried as prepaid travel and inventory costs. These shares
are stated at their carrying value. The 519,283 shares of Worldtech Waste
Management, Inc., were received in exchange for 45,000 shares common stock of
Computone Corp. and for a reduction in price of $3.00 per share of an additional
77,400 shares of Computone Corp. common stock, which we received in May 2000 as
partial payment of the above referenced note receivable.
The following is information on investments in equity securities as of September
30, 2000:
<TABLE>
<CAPTION>
Carrying Value
Shares of ----------------
common Price Realized
Company stock held per share Fair Value Unrealized Loss Gain
--------------------------- ------------- ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Internet Guide, Inc. 233,515 $ 6.50 $ 1,517,848 - -
Worldtech Waste Mgmt. 519,283 $ 1.01 $ 526,889 - -
Veridien Corp. 4,687,500 $ 0.16 $ 750,000 - -
Veridien Corp. 8,000,000 $ 0.10 $ 800,000 - -
$ 3,587,131
================
</TABLE>
9
<PAGE>
Notes Receivable:
Notes receivable consist of the following:
September
30, 2000
Unsecured notes in a real estate portfolio with annual
interest at prime plus 1.5% due at various dates
thru June 30, 2002 $ 732,000
Unsecured note from an officer with
Annual interest at 6% due December 31,
2000 50,000
------------
$ 782,000
Advances for Escrow:
Advances made for Acquisition escrow 1,171,432
------------
(See Item 5. "Other Information") $ 1,171,432
Property and Equipment -
Property and equipment consists of the following:
September December 31,
30, 2000 1999
-------------- ---------------
Office and computer equipment $ 328,043 $ 190,218
Furniture and fixtures 7,291 7,291
-------------- ---------------
335,334 197,509
Less: accumulated depreciation (165,078) (120,478)
-------------- ---------------
$ 170,256 $ 67,776
============== ===============
Depreciation expense of property and equipment was $23,962 and $55,147 for the
nine months ended September 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:
10
<PAGE>
Year Ending
December 31, 2000 106,776
December 31, 2001 44,490
----------
$ 213,552
Rent expense is as follows:
Three months ended September 30, 2000 (unaudited) $ 26,695
Three months ended September 30, 1999 (unaudited) $ 26,695
Nine months ended September 30, 2000 (unaudited) $ 80,084
Nine months ended September 30, 1999 (unaudited) $ 28,962
Short term debt -
Short-term debt consists of the following:
September December
30, 2000 31, 1999
--------- -----------
Unsecured note payable to a bank with interest
at prime plus 1%. $ - $ 70,000
Note to a former law firm of the Company with
interest at 9% due throughout 1999 and 1998. 52,500 105,000
Unsecured non-interest bearing demand note
payable to an individual 35,320
-
Unsecured promissory notes payable with
interest at 15%. 64,810 64,810
--------- -----------
$ 117,310 $ 275,310
Uncompleted Contracts -
Nine months ended September
30, 2000
---------------------------
Costs incurred on uncompleted contracts $ 885,850
Gross profit recognized to date on uncompleted
Contracts 831,055
--------------
1,716,905
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<PAGE>
Less: Billings to date 1,072,793
--------------
$ 644,112
==============
Included in accompanying balance sheets under
the following captions:
Costs and estimated earnings in excess
of billing on uncompleted contracts $ 644,112
Billings in excess of cost and estimated
earnings on uncompleted contracts
--------------
$ 644,112
==============
12
<PAGE>
Earnings Per Share
The following data shows the amounts used in computing basic and diluted
earnings per share for the nine months ended September 30, 2000, (unaudited) and
1999 (unaudited) and for the three months ended September 30, 2000, (unaudited)
and 1999 (unaudited) respectively .
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss) to Common shareholders $ 2,352,278 $ 362,491 $ 1,207,177 $ 376,035
Weighted average number of outstanding
common shares - basis 15,233,393 6,789,508 17,241,108 7,748,624
Dilutive effect of warrants to purchase
common shares 2,499,550 - 2,120,656 -
------------ ------------ ------------- ------------
Diluted common shares outstanding 17,732,943 6,789,508 19,361,764 7,748,624
============ ============ ============= ============
Net income (loss) - basic $ 0.15 $ 0.05 $ 0.07 $ 0.05
- diluted 0.13 0.05 0.06 0.05
============ ============ ============= ============
</TABLE>
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 was subsequently paid in full on May 20, 2000 via cash of $330,000 and
stock in 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. The gain of $987,546 resulting
from this sale was deferred and recognized in the three-month period ending June
30, 2000.
On September 30, 2000, we sold 200,000 shares of common stock of Internet Guide,
Inc., at $13.00 per share in exchange for 8,000,000 shares of Veridien Corp.
common stock, which is subject to restrictions under Rule 144 of the Securities
Act of 1933, $1,068,000 in prepaid commercial trade credits, which we will apply
to computer equipment and travel expenses, and $732,000 in a series of notes
receivable, with annual interest of prime plus 1.5% per annum. These notes are
performing according to terms and
13
<PAGE>
accordingly they are recorded at face value. The gain on the sale of the 200,000
shares of Internet Guide, Inc., is recognized in the current period.
Supplemental Information to the Condensed Consolidated Statement of Cash Flows
Supplemental disclosure regarding noncash financing activities are as follows:
For the nine month and the three month periods ended September 30, 2000
(unaudited):
In exchange for $1,691,000 in commercial trade credits, we issued
415,000 shares of our common stock and 82,154 shares of Internet Guide, Inc.,
common stock that we owned. (See Item 2. "Changes in Securities and Use of
Proceeds" and the Related Party Transactions and Investment in Securities
sections of the Notes to the Condendsed Consolidated Financial Statements
(unaudited).
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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 nine months ended
September 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 1934, 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., were 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.
DataQuotient(R) is being adapted from DataQual(R) for the extended-care market.
DataQual's companion product, I-Link, an interface engine, is designed to
interconnect and extract data from any and all hospital information systems in
the hospitals. I-Link Enterprise is a system of servers installed on a
hospital's 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.
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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 and the extended-care 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 Complete development of DataQuotient, continue sales and commence
installations in extended-care facilities.
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.
o Continue portfolio investment activity through our subsidiary Quotient Capital
Corporation.
Results of Operations
Three Months ended September 30, 2000, Compared With Three Months ended
September 30, 1999
Revenues for the three months ended September 30, 2000, increased to $1,561,403
from $399,201 for the three months ended September 30, 1999. The increase of
$1,117,202 is primarily a result of revenue derived from the sale of securities.
This gain was partially offset by the completion of contracts with two of our
customers with whom we have additional on-going contracts.
The cost of sales and services for the three months ended September 30, 2000,
decreased to $107,045 from $123,705 for the three months ended September 30,
1999. The decrease of $16,660 resulted primarily from capitalizing research and
development costs incurred for our DataQuotient software product, and a
reduction in technical personnel costs.
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Selling and marketing expenses for the three months ended September 30, 2000,
decreased to $48,744 from $71,675 for the three months ended September 30, 1999.
This decrease of $22,931 is a result from a decrease in salaried marketing
personnel.
General and administrative expenses for the three months ended September 30,
2000, decreased to $227,513 from $255,096 for the three months ended September
30, 1999. The decrease of $27,853 primarily resulted from decreases in personnel
costs and legal and accounting fees.
Interest expense, net, for the three months ended September 30, 2000, was
$4,780, as compared to $20,166 for the three months ended September 30, 1999.
The decrease in interest expense of $15,386 resulted from reductions in notes
payable in our on-going debt settlement efforts.
Extraordinary items, net for the three months ended September 30, 2000,
decreased to $78,855 as compared to $447,476 for the three months ended
September 30, 1999. The decrease resulted because most of our commercial debts
were settled in previous periods.
Net profit for the three months ended September 30, 2000, and the three months
ended September 30, 1999, were $1,207,177 and $376,035 respectively.
Nine Months ended September 30, 2000, Compared With Nine Months ended September
30, 1999
Revenues for the nine months ended September 30, 2000, increased to $2,615,680
from $944,640 for the nine months ended September 30, 1999. The increase of
$1,671,040 is primarily a result of revenue derived from long term contracts,
sales of Dataqual software upgrades and $1,568,976 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 nine months ended September 30, 2000,
increased to $520,876 from $216,750 for the nine months ended September 30,
1999. The increase of $304,126 resulted primarily from increased technical and
support staff for the I-Link Enterprise contracts and with new Dataqual
installations in the first and second quarters of this year as well as a
reduction in capitalized research and development costs for our DataQual and
I-Link Enterprise software systems. These increases were partially offset with a
reduction in personnel costs in the third quarter of this year and an increase
in new capitalized research and development costs for our DataQuotient software.
Selling and marketing expenses for the nine months ended September 30, 2000,
decreased to $165,730 from $183,785 for the nine months ended September 30,
1999. This decrease of $18,055 resulted from increased efficiencies associated
with our marketing outreach program and is partially offset by a reduction in
salaried marketing personnel.
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General and administrative expenses for the nine months ended September 30,
2000, increased to $820,493 from $700,606 for the nine months ended September
30, 1999. The increase of $119,887 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 nine months ended September 30, 2000, was
$14,339, as compared to $69,929 for the nine months ended September 30, 1999.
The decrease in interest expense of $55,590 resulted from reductions in notes
payable in our debt settlement efforts last year and continuing throughout this
year in which $210,394 of our outstanding notes payable were paid.
Interest income for the nine months ended September 30, 2000, was $27,917, as
compared to $-0- for the nine months ended September30, 1999.
Extraordinary items, net for the nine months ended September 30, 2000, increased
to $1,230,119 as compared to $-0- for the nine months ended September 30, 1999.
The increase resulted primarily from the net gain derived from the payment of a
note receivable and from settlements with various creditors. (See "Related Party
Transactions" in the Notes (unaudited) to the Condensed Consolidated Financial
Statements.)
Net profit (loss) for the nine months ended September 30, 2000, and the nine
months ended September 30, 1999, were $2,352,278 and $362,491 respectively.
Liquidity and Capital Resources
Working capital at September 30, 2000, was $3,839,059 as compared to $3,682,682
at June 30, 2000, and $1,050,283 at December 31, 1999.
We have funded our operations and working capital needs through profits, private
equity placements, and the exercise of investor warrants.
Cash at September 30, 2000, was $8,356, a decrease of $15,013 from September 30,
1999. During the nine months ended September 30, 2000, we used $1,297,255 net
cash in our operating activities as compared to using $13,347 for the nine
months ended September 30, 1999. This net change in the use of cash in
operations of $1,310,572 was the result of an increase in operating expenses and
notes receivable, primarily related to funding of an escrow account per the
terms of the pending Information Resource Products, Inc., acquisition. (See Item
5. "Other Information").
During the nine months ended September 30, 2000, we used $190,679 for investing
activities as compared to $428,393, for the nine months ended September 30,
1999. The decrease of $237,714 in the use of cash for investing activities
resulted primarily from an
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overall decrease in capitalized research and development costs associated with
bringing new software products to market, which was partially offset by an
increase in computer equipment purchases.
During the nine months ended September 30, 2000, we generated net cash of
$1,486,241 from financing activities as compared to $463,332 for the nine months
ended September 30, 1999. The increase of $1,022,909 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, software
development and customer support, as well as associated office support staff.
We had, at September 30, 2000, working capital of $3,839,059. We believe, that
with cash generated from operations and portfolio security sales that we will
meet our current operational and business plans for the next 12 months.
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 had 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 four judgments totaling $30,000 plus interest entered against
us.
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These judgments, which are disputed, have been fully accrued on our books. There
is one judgment with a balance remaining of $52,500 plus interest for which a
settlement has been negotiated.
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"), a wholly owned subsidiary of ours
from September 1994 through December 1996. 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,
including one ex-employee suit which our legal counsel regards as frivolous and
without merit. 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 $586,236 in cash and
cancellation of an additional 387,176 warrants with a net exercise price of $.58
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
From July through September 2000 we issued 4,729,796 shares of our common stock
which are subject to restrictions under Rule 144 of the Securities Act of 1933.
Of these shares, 50,000 were issued upon exercise of warrants at $.75 per share
in exchange for $37,500 in cash, 75,000 shares were issued for $75,000 in cash,
60,000 shares were issued for prepaid services, 415,000 shares were issued at
$1.50 per share exchange for
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$622,500 in commercial trade credits. (See "Related Parties Transactions" in the
Notes (unaudited) section of the Condensed Consolidated Financial Statements),
an estimated 4,054,163 shares under two stock distributions for shareholders of
record as of July 31, 2000, and August 31, 2000, which are subject to
shareholder compliance with the terms of the distribution (See Item 5. "Other
Information") and 75,633 shares under the Class A Redeemable warrants exchange
program (See Item 5. "Other Information".)
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 September 30, 2000, we generated $1,586,976 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. An additional 75,633 shares issued during the
three month period ended September 30, 2000, which completed the issuance of all
shares under the warrant exchange program. In total 808,492 shares were issued.
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.
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 will not be completed until MD
Home.com completes its web site and other requirements under the agreement.
On April 20, 2000, we announced an agreement in principle to purchase all of 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 seller's 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.
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.
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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.
November 15, 2000 By: /s/ Douglas A. Cohn
Douglas A. Cohn
Chairman and Chief Executive Officer
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Exhibit 27.1
This schedule contains summary financial information extracted from the
unaudited condensed consolidated balance sheet as of September 30, 2000 and the
unaudited condensed consolidated statement of operations for the nine months
ended September 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: September 30, 2000
Cash: 8,356
Securities: 1,550,003
Accounts receivables: 146,551
Allowances for doubtful accounts: 18,790
Notes Receivable 1,953,432
Costs and estimates in excess of billing 644,113
Officer Advances 23,608
Prepaids and other current assets 1,838,447
Inventory: 0
Total current assets: 6,145,720
Non-marketable securities 2,044,734
Property, plant & equipment: 335,334
Accumulated depreciation: 165,078
Total assets: 8,762,546
Total current liabilities: 2,306,651
Common stock: 1974
Other stockholders' equity: 6,455,895
Total liabilities and stockholders' equity: 8,772,546
Net sales of tangible products: 652,679
Total revenues: 2,615,680
Cost of tangible goods sold: 0
Total costs and expenses applied to sales and revenue: 520,876
Other costs and expenses: 986,233
Provision for doubtful accounts and notes: 0
Interest and amortization of debt discount: (13,578)
Income before taxes and other items: 1,122,159
Income tax expense: 0
Income/loss continuing operations: 1,112,159
Discontinued operations: 0
Extraordinary items: 1,230,119
Cumulative effect-changes in accounting principles: 0
Net income or loss: 2,252,278
Earnings per share-primary: 0.07
Earnings per share-fully diluted: 0.06
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