U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the period ended March 31, 1997
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______ to ______
Commission file number 0-29044
Heuristic Development Group, Inc.
(Name of Small Business Issuer in Its Charter)
Delaware 95-4491750
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17575 Pacific Coast Highway, Pacific Palisades, California 90272
- ---------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(310) 230-3394
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's common equity as
of May 20, 1997: 2,101,326 shares of Common Stock, $.01 par value.
<PAGE>
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
March 31, 1997 ................................................. 3
Condensed Statements of
Operations - Three Months ended
March 31, 1996 and 1997 and period from
inception (July 20, 1994)
to March 31, 1997 .............................................. 4
Condensed Statements of Cash
Flows - Three months ended March 31, 1996
and 1997 and period from inception (July 20, 1994)
to March 31, 1997 .............................................. 5
Notes to Financial Statements - March 31, 1997 ................... 6
Item 2. Management's Discussion and Analysis
or Plan of Operations ...................................... 8
Part II. OTHER INFORMATION
Item 5. Other Information ............................................ 10
Item 6. Exhibits and Reports on Form 8-K ............................. 10
SIGNATURES ............................................................ 11
-2-
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
CONDENSED BALANCE SHEET
AS AT MARCH 31, 1997
A S S E T S
Current assets:
Cash and cash equivalents ............................. $ 4,662,000
Prepaid expenses and other current assets ............. 35,000
-----------
Total current assets ........................... 4,697,000
Capitalized software costs ............................... 391,000
Furniture and equipment (net of accumulated
depreciation) ......................................... 242,000
Organizational costs (net of accumulated amortization) ... 17,000
-----------
T O T A L ...................................... $ 5,347,000
===========
L I A B I L I T I E S
Current liabilities:
Accounts payable ...................................... $ 91,000
Accrued expenses ...................................... 73,000
Other current liabilities ............................. 4,000
-----------
Total current liabilities ...................... 168,000
-----------
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value,
authorized 5,000,000 shares;
issued and outstanding none
Common stock - $.01 par value, authorized
20,000,000 shares; issued and
outstanding 2,101,326 shares (includes
349,370 shares held in
escrow) ............................................... 21,000
Additional paid-in capital ............................... 8,440,000
(Deficit) accumulated during
the development stage ................................ (3,282,000)
-----------
Total stockholders' equity ..................... 5,179,000
-----------
T O T A L ...................................... $ 5,347,000
===========
See notes to condensed financial statements.
-3-
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
July 20,
1994
Three Months Ended (Inception)
March 31, to
---------------------- March 31,
1996 1997 1997
----- ------ -----
Costs and expenses:
Research and development:
Direct expenditures .......... $ 338,000
Payments under research
services agreement ......... 137,000
-----------
Total research and
development ........... 475,000
General and administrative ..... $ 269,000 $ 265,000 1,976,000
----------- ----------- -----------
Total costs and
expenses .............. 269,000 265,000 2,451,000
----------- ----------- -----------
(Loss) from operations ............ (269,000) (265,000) (2,451,000)
Interest (expense) ................ (17,000) (406,000) (746,000)
Interest income ................... 23,000 36,000
----------- ----------- -----------
NET (LOSS) ........................ $ (286,000) $ (648,000) $(3,161,000)
=========== =========== ===========
Pro forma net (loss) per share .... $ (.74)
===========
Net (loss) per share .............. $ (.61)
===========
Pro forma weighted average shares
outstanding .................... 385,090
===========
Weighted average shares
outstanding .................... 1,064,488
===========
See notes to condensed financial statements.
-4-
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 20,
1994
Three Months Ended (Inception)
March 31, to
---------------------- March 31,
1996 1997 1997
------ ------ -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ................................................................ $ (286,000) $ (648,000) $(3,161,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization ......................................... 13,000 15,000 105,000
Value of preferred stock charged to research and development .......... 50,000
Amortization of loan acquisition costs ................................ 95,000 160,000
Amortization of debt discount ......................................... 297,000 500,000
Fair value of options granted ......................................... 236,000
Accrued interest on notes payable - stockholders ...................... 17,000 64,000
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other current assets ............. (6,000) (21,000) (36,000)
(Increase) in other assets .......................................... (38,000)
Net (decrease) increase in accounts payable and accrued expenses .... (78,000) (21,000) 163,000
----------- ----------- -----------
Net cash (used in) operating activities ........................... (340,000) (283,000) (1,957,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets ............................................... (41,000) (53,000) (324,000)
Capitalized software costs ................................................ (64,000) (391,000)
----------- ----------- -----------
Net cash (used in) investing activities ........................... (41,000) (117,000) (715,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options ................ 10,000 6,900,000 7,319,000
Proceeds from sale of preferred stock ..................................... 550,000
Proceeds from borrowings - notes payable - stockholders ................... 194,000 1,194,000
Proceeds from Bridge notes ................................................ 1,000,000
Repayment of Bridge notes ................................................. (1,000,000) (1,000,000)
Initial public offering expenses .......................................... (1,201,000) (1,399,000)
Repayment of notes payable - stockholders ................................. (170,000) (170,000)
Loan acquisition costs .................................................... (160,000)
----------- ----------- -----------
Net cash provided by financing activities ......................... 204,000 4,529,000 7,334,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH .............................................. (177,000) 4,129,000 4,662,000
Cash - beginning of period ................................................... 279,000 533,000
----------- ----------- -----------
CASH - END OF PERIOD ......................................................... $ 102,000 $ 4,662,000 $ 4,662,000
=========== =========== ===========
Supplemental and noncash disclosures:
Preferred stock issued in connection with assignment agreement ............ $ 50,000
Warrants issued in connection with Bridge notes ........................... 500,000
Common stock issued for repayment of long-term debt and interest .......... $ 1,084,000 1,084,000
Common stock issued for preferred stock and accrued dividends ............. 122,000 122,000
Initial public offering expenses charged to additional paid-in capital .... 198,000
Interest paid ............................................................. 14,000 14,000
</TABLE>
See notes to condensed financial statements.
-5-
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions for Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Registrant Company annual
report on Form 10-KSB for the year ended December 31, 1996.
(NOTE B) - The Company:
Heuristic Development Group (the "Company") is a development stage company
incorporated in Delaware in July 1994. The Company is engaged in the
development, marketing and sale of the IntelliFit System, a computerized system
which generates personalized exercise prescriptions based on, among other
things, an individual's weight, ability, medical history, goals, fitness level
and exercise preferences and tracks and records fitness progress. The IntelliFit
System interacts with a user by applying algorithms to an individual's personal
profile and adjusting a user's exercise prescription based on progress,
frequency of workouts and other variables. The Company believes that this
interactive feature helps motivate users to continue exercising, and allows
users to reach their goals more quickly.
To date, the Company has been engaged primarily in research and development
activities relating to the IntelliFit System and has conducted only limited
marketing activities. The Company believes that product development necessary to
initiate commercial sales has been substantially completed although development
efforts aimed at enhancements and upgrades will be ongoing. The Company
completed it's initial public offering in February 1997 and realized net
proceeds of $4.7 million. There can be no assurance that the Company will
successfully commercialize the IntelliFit System, generate any significant
revenues or ever achieve profitable operations.
(continued)
-6-
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Sale of Common stock:
On February 14, 1997, the Company sold 1,200,000 units. These units
consisted of 1,200,000 shares of common stock, 1,200,000 Redeemable Class A
Warrants and 1,200,000 Redeemable Class B Warrants resulting in net proceeds to
the Company of $4.7 million. Each unit ("Unit") offered by the Company, consists
of one common stock, $.01 par value ("Common Stock"), one redeemable class A
warrant ("Class A Warrants") and one redeemable class B warrant ("Class B
Warrants"). The components of the Units will be transferable separately
immediately upon issuance. Each Class A Warrant entitles the holder to purchase
one share of Common Stock and one Class B Warrant at an exercise price of $6.50,
subject to adjustment, at any time until February 14, 2002. Each Class B Warrant
entitles the holder to purchase one share of Common Stock at an exercise price
of $8.75, subject to adjustment, at any time until February 14, 2002. Commencing
one year from the date of issuance the Class A Warrants and Class B Warrants
(collectively, the "Warrants") are subject to redemption by the Company at a
redemption price $.05 per Warrant on 30 days' written notice, provided the
closing bid price of the Common Stock averages in excess of $9.10 and $12.25 per
share, respectively, for any 30 consecutive trading days ending within 15 days
of the notice of redemption.
-7-
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
Results of Operations
The Company remains in the development stage. Since its inception in July
1994, the Company's efforts have been devoted to research, development and
design of products, marketing activities and raising capital. The Company is
currently capitalizing certain research and development costs and will begin
amortizing those costs when revenue is recognized.
From inception through March 31, 1997, the Company sustained cumulative
losses of $3,161,000. These losses have resulted primarily from general and
administrative expenses, including salaries, marketing and professional fees
which have aggregated $1,976,000 since inception. Such expenses decreased from
$269,000 during the three months ended March 31, 1996 to $265,000 during the
three months ended March 31, 1997, a decrease of 1.5%. The Company also
recognized a non-cash charge of $392,000 during the first quarter of 1997,
representing the unamortized debt discount and debt issuance costs associated
arising from the repayment of $1,000,000 principal amount of notes issued in a
bridge financing (the "Bridge Notes").
The Company expects to initiate a sales and marketing program during the
fourth quarter of 1997 aimed at commercializing the IntelliFit System, which
expenses will impact the Company's results of operations at such time. The
Company does not expect to generate any significant revenues during 1997 and
there can be no assurance that sales and marketing efforts to be undertaken by
the Company will be successful. Accordingly, the Company expects to continue to
incur losses for the foreseeable future.
Liquidity and Capital Resources
In February and March 1997, the Company completed an initial public
offering of units consisting of common stock and warrants (the "IPO") which
resulted in gross proceeds to the Company of $6,900,000. After deducting
underwriting discounts and commissions and other expenses of the IPO and the
repayment of an aggregate of $1,170,000 of outstanding indebtedness (including
$1,000,000 to repay the Bridge Notes and $170,000 to repay advances from
officers, directors and principal stockholders), the net proceeds to the Company
were approximately $4,411,000. At March 31, 1997, the Company had working
capital of $4,529,000.
In conjunction with the IPO, (i) all of the Company's outstanding preferred
stock together with the accrued dividends of $722,000 through August 31, 1996
were converted into 175,793 shares of common stock and (ii) notes payable to
stockholders together with accrued interest aggregating $1,084,000 were
converted into 263,921 shares of common stock.
-8-
<PAGE>
The Company believes that the proceeds from the IPO will be sufficient to
sustain planned operations for at least the next 12 months. During the next 12
months, the Company intends to focus its efforts on marketing the IntelliFit
System to certain target markets, including commercial health clubs, hospital
facilities, corporations, insurance companies, health maintenance organizations
and the military. The Company also intends to devote resources to enhancing the
IntelliFit System in order to enable the Company to effectively target the
rehabilitation market. The Company will also focus on the development of product
improvements and upgrades.
Release of Escrowed Shares and Options
In connection with the IPO, shareholders of the Company and holders of
options placed a portion of their shares and/or options in escrow pending the
Company's attainment of certain revenue or market price goals. The Securities
and Exchange Commission has taken the position with respect to the release of
securities from escrow that in the event any of the shares or options are
released from escrow to directors, officers, employees or consultants of the
Company, the release will be treated, for financial reporting purposes, as
compensation expense to the Company. Accordingly, the Company will, in the event
of the release of the escrowed securities recognize during the period in which
the earnings or market price targets are met, what could be a substantial
one-time charge which would substantially increase the Company's loss or reduce
or eliminate earnings, if any, at such time. Such charge to earnings will not be
deductible by the Company for income tax purposes. The amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity.
-9-
<PAGE>
PART II
Item 5. Other Information
Effective May 31, 1997, Steven Gumins, Chief Executive Officer of the
Company, and Deborah Griffin, Chief Operating Officer of the Company, have
resigned as officers and directors of the Company to pursue other business
interests. Mr. Gumins and Ms. Griffin will continue as consultants to the
Company through September and December 1997, respectively. Gregory Zink,
President of the Company, will assume the role of Acting Chief Executive
Officer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K were filed during the three months ended March
31, 1997.
-10-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HEURISTIC DEVELOPMENT GROUP, INC.
Date: May 20, 1997 By: /s/ Gregory L. Zink
--------------------------------
Gregory L. Zink, President
/s/ Theodore Lanes
--------------------------------
Chief Financial Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,662,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,697,000
<PP&E> 323,000
<DEPRECIATION> 81,000
<TOTAL-ASSETS> 5,347,000
<CURRENT-LIABILITIES> 168,000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> 5,158,000
<TOTAL-LIABILITY-AND-EQUITY> 5,347,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 265,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 406,000
<INCOME-PRETAX> (648,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (648,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (648,000)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
