UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008 |
OR
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-24681
HEALTH SYSTEMS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization) | 82-0513245 (IRS Employer Identification No.) |
405 N. Reo Street, Suite 300, Tampa, Florida 33609
(Address of principal executive offices, including zip code)
(813) 282-3303
(Registrant’s telephone number, including area code)
Indicate by check mark if the registrant (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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
As of August 11, 2008, the issuer had 7,408,846 shares of common stock outstanding.
HEALTH SYSTEMS SOLUTIONS, INC.
FORM 10-Q
INDEX
Page
PART I | |
| | | |
| ITEM 1. | FINANCIAL STATEMENTS | 1 |
| | | |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 10 |
| | | |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 15 |
| | | |
| ITEM 4T. | CONTROLS AND PROCEDURES | 16 |
| | | |
PART II | |
| | | |
| ITEM 1. | LEGAL PROCEEDINGS | 17 |
| | | |
| ITEM 1A. | RISK FACTORS | 17 |
| | | |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 17 |
| | | |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 17 |
| | | |
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 17 |
| | | |
| ITEM 5. | OTHER INFORMATION | 17 |
| | | |
| ITEM 6. | EXHIBITS | 18 |
PART I
ITEM 1. FINANCIAL STATEMENTS
HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2008 and December 31, 2007
(Unaudited)
ASSETS
| | | June 30, 2008 | | December 31, 2007 | |
Current assets: | | | | | |
| Cash | | $ | 459,483 | | $ | 1,218,620 | |
| Restricted cash | | | 325,211 | | | - | |
| Accounts receivable, net of allowance for doubtful accounts of $136,610 and $234,801, respectively | | | 2,361,787 | | | 898,928 | |
| Prepaids and other current assets | | | 194,491 | | | 138,890 | |
Total current assets | | | 3,340,972 | | | 2,256,438 | |
Property and equipment, net of accumulated depreciation and amortization of $745,805 and $635,459, respectively | | | 409,580 | | | 442,879 | |
| Security deposits and other assets | | | 96,278 | | | 96,278 | |
| Deferred financing cost, net of accumulated amortization of $65,922 and $28,332, respectively | | | 236,015 | | | 273,604 | |
Total assets | | $ | 4,082,845 | | $ | 3,069,199 | |
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities: | | | | | |
| Current portion of capital lease obligation | | $ | 24,906 | | $ | 23,932 | |
| Accounts payable | | | 521,028 | | | 639,881 | |
| Accrued expenses | | | 1,263,401 | | | 1,404,310 | |
| Deferred revenue | | | 2,145,337 | | | 962,788 | |
| Client deposits | | | 86,142 | | | 96,350 | |
| Note payable - bank | | | 229,000 | | | 229,000 | |
Total current liabilities | | | 4,269,814 | | | 3,356,261 | |
| Capital lease obligation, net of current portion | | | 27,948 | | | 40,705 | |
Total liabilities | | | 4,297,762 | | | 3,396,966 | |
Stockholders’ deficiency: | | | | | | | |
| Preferred Stock - 15,000,000 shares authorized; | | | | | | | |
| Series C Convertible - 4,625,000 shares issued and outstanding | | | 9,250,000 | | | 9,250,000 | |
| Series D Convertible - 1,425,000 and 837,500 shares issued and outstanding, respectively | | | 2,850,000 | | | 1,675,000 | |
| Common Stock $.001 par value - 150,000,000 shares authorized; 7,408,846 and 7,365,361 issued and outstanding, respectively | | | 7,409 | | | 7,365 | |
| Additional paid-in capital | | | 14,754,939 | | | 14,431,040 | |
| Accumulated deficit | | | (27,077,265 | ) | | (25,691,172 | ) |
Total stockholders' deficiency | | | (214,917 | ) | | (327,767 | ) |
Total liabilities and stockholders' deficiency | | $ | 4,082,845 | | $ | 3,069,199 | |
See accompanying notes to the consolidated financial statements.
HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | | | | | | | | | | | | |
| | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | | |
Net Sales | | $ | 3,544,212 | | $ | 1,415,018 | | $ | 6,495,078 | | $ | 3,001,124 | |
Cost of Sales | | | 1,794,565 | | | 1,152,624 | | | 3,768,860 | | | 2,356,937 | |
Gross profit | | | 1,749,647 | | | 262,394 | | | 2,726,218 | | | 644,187 | |
| | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | |
| Selling and marketing | | | 398,796 | | | 543,885 | | | 730,397 | | | 1,069,246 | |
| Research and development | | | 323,323 | | | 368,455 | | | 607,567 | | | 748,164 | |
| General and administrative | | | 1,328,566 | | | 538,048 | | | 2,548,578 | | | 977,637 | |
| Depreciation and amortization | | | 58,121 | | | 40,701 | | | 115,313 | | | 77,054 | |
| Impairment of development costs | | | 25,500 | | | - | | | 65,475 | | | - | |
| Interest | | | 22,101 | | | 8,121 | | | 44,980 | | | 34,007 | |
Total operating expenses | | | 2,156,407 | | | 1,499,210 | | | 4,112,310 | | | 2,906,108 | |
Net loss | | | (406,760 | ) | | (1,236,816 | ) | | (1,386,092 | ) | | (2,261,922 | ) |
| | | | | | | | | | | | | | |
| Deemed preferred stock dividend | | | - | | | 20,955 | | | - | | | 198,892 | |
| | | | | | | | | | | | | | |
Net loss applicable to common shareholders | | $ | (406,760 | ) | $ | (1,257,771 | ) | $ | (1,386,092 | ) | $ | (2,460,813 | ) |
| | | | | | | | | | | | | | |
Basic and diluted net loss per share | | $ | (0.05 | ) | $ | (0.19 | ) | $ | (0.19 | ) | $ | (0.38 | ) |
| | | | | | | | | | | | | | |
Basic and diluted weighted average shares outstanding | | | 7,405,501 | | | 6,581,621 | | | 7,385,431 | | | 6,394,882 | |
See accompanying notes to the consolidated financial statements.
HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
| | | Six Months Ended | |
| | | June 30, 2008 | | June 30, 2007 | |
| | | | | | |
| Cash flows from operating activities: | | | | | |
| | | | | | |
| Net loss | | $ | (1,386,092 | ) | $ | (2,261,921 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
| Stock based compensation expense | | | 245,669 | | | 18,898 | |
| Depreciation and amortization of property and equipment | | | 115,315 | | | 77,054 | |
| Amortization of software development costs | | | - | | | 902,623 | |
| Amortization of financing fees | | | 37,590 | | | - | |
| Loss on disposal of assets | | | 2,095 | | | 2,158 | |
| Impairment of software development | | | 65,475 | | | - | |
| Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | | (1,364,667 | ) | | 146,728 | |
| Allowance for doubtful accounts | | | (98,192 | ) | | (144,282 | ) |
| Royalties and referral fees receivable | | | - | | | 6,900 | |
| Prepaid expenses and other current assets | | | (55,600 | ) | | (49,416 | ) |
| Security deposits | | | - | | | (1,617 | ) |
| Accounts payable | | | (118,853 | ) | | 29,403 | |
| Accrued expenses | | | (62,637 | ) | | (2,212 | ) |
| Deferred revenue | | | 1,182,548 | | | (74,256 | ) |
| Reserve for customer refunds | | | - | | | (80,604 | ) |
| Customer deposits | | | (10,207 | ) | | 12,741 | |
| Net cash used in operating activities | | | (1,447,556 | ) | | (1,417,803 | ) |
| | | | | | | | |
| Cash flow from investing activities: | | | | | | | |
| Increase in restricted cash | | | (325,211 | ) | | - | |
| Earn out payment related to purchase of CareKeeper Software | | | - | | | (77,207 | ) |
| Purchase of property and equipment | | | (84,111 | ) | | (91,811 | ) |
| Increase in software development costs | | | (65,475 | ) | | (419,672 | ) |
| Net cash used in investing activities | | | (474,797 | ) | | (588,690 | ) |
| | | | | | | | |
Cash flow from financing activities: | | | | | | | |
| Repayment of capital lease obligation | | | (11,784 | ) | | (10,912 | ) |
| Proceeds from the issuance of Common Stock | | | - | | | 675 | |
| Proceeds from the issuance of Preferred Stock | | | 1,175,000 | | | 1,500,000 | |
| Net cash provided by financing activities | | | 1,163,216 | | | 1,489,763 | |
| | | | | | | | |
| Decrease in cash | | | (759,137 | ) | | (516,730 | ) |
| Cash, beginning of period | | | 1,218,620 | | | 558,764 | |
| Cash, end of period | | $ | 459,483 | | $ | 42,034 | |
| | | | | | | | |
| Supplemental cash flow data: | | | | | | | |
| Cash paid during the period for interest expense | | $ | 7,390 | | $ | 34,007 | |
| | | | | | | | |
| Non cash financing and investing activities: | | | | | | | |
| Issuance of commons stock to members of acquired company | | $ | 78,273 | | $ | 25,381 | |
| Equipment acquired under capital lease | | $ | - | | $ | 35,053 | |
| Increase in software development costs as a result of an accrued | | | | | | | |
earn out payment to sellers of an acquired company | | $ | 65,475 | | $ | 77,207 | |
See accompanying notes to the consolidated financial statements.
HEALTH SYSTEMS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2008
1. Nature of the Business
We are a technology and services company dedicated to bringing innovation to the health care industry. Our objective is to leverage our understanding of current and next-generation technologies to offer value-added products and services which will generate improved clinical, operational and financial outcomes for our clients. Our portfolio of products and services extends across many segments of health care including home health care, medical staffing, acute and post-acute facilities, and telehealth/telemedicine. Our business is grouped into three segments: technology solutions, software and consulting.
2. Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements which present the results of operations of Health Systems Solutions, Inc. and subsidiaries (“HSS” or the “Company”), for the three and six months ended June 30, 2008 and 2007 have been prepared using accounting principals generally accepted in the United States of America. All material intercompany transactions and accounts have been eliminated in consolidation. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes of the Company as of and for the year ended December 31, 2007. The results of operations for the three and six months ended June 30, 2008 may not be indicative of the results to be expected for the fiscal year ending December 31, 2008.
3. Summary of Significant Accounting Policies
Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period.
Allowance for doubtful accounts: The allowance for doubtful accounts is based on assessments of the collectability of client accounts and the aging of the accounts receivable. If there is a deterioration of a major client’s credit worthiness or actual defaults are higher than the historical experience, our estimates of the recoverability of amounts due could be adversely affected. We regularly review the adequacy of the allowance for doubtful accounts through identification of specific receivables where it is expected that payments will not be received. We maintain an unallocated reserve that is applied to all amounts that are not specifically identified. In determining specific receivables where collections may not be received, we review past due receivables and give consideration to prior collection history and changes in the client’s overall business condition. The allowance for doubtful accounts reflects our best estimate as of the reporting dates. Changes may occur in the future, which may require us to reassess the collectability of amounts due and to provide additional allowances in excess of that currently provided.
Software development costs: We capitalize certain costs of software developed or obtained for internal use in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 98-1, Accounting for the Costs of Corporate Software Developed or Obtained for Internal Use SOP 98-1. Software development costs are capitalized when application development begins, it is probable that the project will be completed, and the software will be used as intended. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. Our policy provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with developing or obtaining internal use software and consulting fees directly associated with the development of software. Capitalized personnel costs and consulting fees are limited to the time directly spent on such projects. Capitalized costs are ratably amortized using the straight-line method, over the estimated useful lives of the related applications of three years. We make on-going evaluations of the recoverability of our capitalized software by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, we write off the amount that the unamortized software development costs exceed net realizable value. For software that is developed for sale, we follow Financial Accounting Standards Board (“FASB”) Statement No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”. All research and development costs are expensed until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers.
Customer concentration: One of our customers accounted for approximately 61% of our revenues during the six months ended June 30, 2008.
Revenue recognition: We follow the provisions of the SEC Staff Accounting Bulletin No. 104. We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, fees are fixed or determinable, collection is reasonably assured and all other significant obligations have been fulfilled. The corporate strategy is to provide services on a recurring transaction pricing basis. We believe this is a value-based model that more directly relates to our clients’ recognition of revenue. The transaction pricing model differs from the typical licensed software model in that the implementation of transaction-priced services does not result in large up front software license fee revenues but results in a gradual recognition of revenue earned on a transaction by transaction basis over time. This is a similar model to that used by the mobile phone industry. The benefit occurs in the future years where leverage is obtained as a client grows and continues to pay transaction fees year over year, whereas under the licensed sale model the only revenue realized in the future years are support and maintenance fees.
Within the consulting group, we recognize revenue using the percentage of completion following Accounting Research Bulletin (“ARB”) 45 and SOP 81-1. Management believes that its estimates of costs to complete and the extent of progress toward completion of a project are reasonably dependable. We prepare a budget for each project that estimates total labor hours for programming, quality assurance, testing, implementation, training and service to complete all the obligations to deliver a project. We recognize the product revenue as the labor hours expended over the total labor hours budgeted times the total fixed fee.
Our revenue is classified into two categories: recurring and non-recurring. We generate recurring revenue from several sources, including the processing of clinical assessments which, as mandated by Medicare, require home health care agencies to collect assessment data on all patients requiring home health care at the start-of-care and at discharge, the processing of data related to Medicare clinical episodes completed during care delivery, the provision of outsourcing services, such as software hosting and other business services, and the sale of maintenance and support for our proprietary software products. Recurring services revenue is typically billed and recognized monthly over the contract term, typically two to three years. Recurring software maintenance revenue is typically based on one-year renewable contracts. Software maintenance and support revenues are recognized ratably over the contract period. We record cash payments received in advance or at the beginning of a contract as deferred revenue. We generate non-recurring revenue from the licensing of our software. Under SOP 97-2, software license revenue is recognized upon the execution of a license agreement, upon delivery of the software, when fees are fixed or determinable, when collectability is probable and when all other significant obligations have been fulfilled. For software license agreements in which client acceptance is a significant condition of earning the license fees, revenue is not recognized until acceptance occurs. For multiple element arrangements, such as software license, consulting services, outsourcing services and maintenance, and where vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method.” Under the residual method, the total fair value of the undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2. Also, the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. For arrangements in which VSOE does not exist for each undelivered element, including specified upgrades, revenue for the delivered element is deferred and not recognized until VSOE is available for the undelivered element or delivery of each element has occurred. When multiple products are sold within a discounted arrangement, a proportionate amount of the discount is applied to each product based on each product’s fair value or relative list price. We also generate non-recurring revenue from implementation fees and training. This non-recurring revenue is charged to clients on a fee basis usually based upon time spent.
We recognize software licensing fees and implementation fees in the month that the client goes live and we recognize training, consultation, advisory and support revenue in the month that the service is performed. We currently recognize cancellations, allowances or discounts as they occur. This practice is based on factors that include, but are not limited to, historical cancellations and analysis of credit memo activities. Cancellations, allowances and discounts are not material.
Recent accounting pronouncements: In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). This statement was effective as of the beginning of fiscal 2008. SFAS 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how fair value measurements were developed. SFAS 157 clarifies the principle that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company specific data. The adoption of SFAS 157 did not have a material impact on our results of operations and financial positions.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 was effective as of the beginning of fiscal 2008 and had no impact on our results of operations and financial position.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), and SFAS No. 160, “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statement.
SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. We are currently assessing the impact that SFAS 141(R) will have on our results of operations and financial position.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,”which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company beginning January 1, 2009. We believe that, for the foreseeable future, this statement will have no impact on our financial statements once adopted.
4. Preferred Stock Purchase Agreement
We entered into a Preferred Stock Purchase Agreement dated as of October 31, 2005, with our principal shareholder, SIBL, to acquire 4,625,000 shares of our Series C Preferred Stock, together with five-year warrants to purchase 1,387,500 shares of our common stock at an exercise price of $0.002 per share. We agreed to issue to SIBL our Series C Convertible Preferred Stock at a price of $2.00 per share together with warrants to purchase 3/10 of a share of common stock for each share of Series C Preferred Stock purchased. Each share of Series C Preferred Stock is convertible into one-half share of common stock and is entitled to one-half vote per share. In the event of liquidation, holders of the Series C Preferred Stock shall be entitled to receive, before any distribution of assets shall be made to the holders of any common stock, an amount equal to the stated value per preferred share. As of October 29, 2007, SIBL had purchased all of the securities issuable under this agreement.
On August 17, 2007, we entered into a Preferred Stock Purchase Agreement with SIBL whereby SIBL agreed to acquire 1,425,000 shares of our Series D Preferred Stock, together with five-year warrants to purchase 427,500 shares of our common stock at an exercise price of $0.001 per share. Each share of Series D Preferred Stock is initially convertible into one-half share of our common stock. SIBL agreed to pay $2.00 per share of preferred stock acquired, and the warrants were issued for no additional consideration. The proceeds from the sale of the Series D Preferred Stock pursuant to this agreement are to be used for working capital, subject to SIBL’s approval of each funding in its sole discretion; provided, however, that SIBL will not have discretion to reject our requests for sales of up to an aggregate of 250,000 shares of preferred stock provided we are in compliance with the agreement. In 2007, we sold 837,500 shares of Series D Preferred Stock to SIBL and received proceeds of $1,675,000. During the quarter ended June 30, 2008, we sold 587,500 shares of Series D Preferred Stock to SIBL, representing the balance of the securities issuable under the related Preferred Stock Purchase Agreement, and received proceeds of $1,175,000.
5. Convertible Debenture
On August 17, 2007, we entered into a Convertible Debenture Purchase Agreement with SIBL, whereby SIBL agreed to acquire up to $5,000,000 of our convertible debentures. The debentures will be purchased incrementally at such time as requests are made by us and subject to various conditions. The proceeds from the sale of the debenture(s) are to be used for working capital and/or acquisitions, in any case subject to the approval of SIBL. Each debenture that will be issued will be due four years from the date of issuance and will be convertible at any time at the option of SIBL into shares of Series D Preferred Stock, in the aggregate 2,500,000 shares, subject to adjustments. In consideration for entering into this agreement and making these funds available upon request, SIBL received five-year warrants to purchase 1,250,000 shares of our common stock at an exercise price of $1.00 per share. The value of these warrants, $301,936, is recorded as a financing fee and is being amortized over four years. As of June 30, 2008, we have not sold any debentures to SIBL in connection with this agreement.
6. Equity Transactions
The selling shareholders of CareKeeper Software, Inc. are entitled to receive shares of common stock in 2007, 2008 and 2009, subject to the satisfaction of certain conditions. The number of shares is determined by operating revenues generated by CareKeeper during each of the fiscal years. During 2007 and 2008, we issued 50,704 and 43,485 shares, respectively to the selling stockholders of Carekeeper Software, Inc. with an aggregate value of $103,705.
7. Stock Based Compensation
Effective January 1, 2006, we began recording compensation expense associated with stock-based awards and other forms of equity compensation in accordance with SFAS No. 123-R, “Share-Based Payment” (“SFAS 123R”), as interpreted by SEC Staff Accounting Bulletin No. 107. We adopted the modified prospective transition method provided under SFAS 123R, and consequently have not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock-based awards recognized in 2007 includes (1) amortization related to the remaining unvested portion of stock-based awards granted prior to January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”); and (2) amortization related to stock-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior to January 1, 2006, we accounted for stock-based awards using the “disclosure only” alternative described in SFAS 123R and FASB Statement No. 148, “Accounting for Stock-Based Compensation”.
We reserved 3,210,000 shares of common stock under the amended 2003 Management and Director Equity Incentive and Compensation Plan (“Plan”). Shares may be awarded from the Plan in the form of options or restricted stock. As of June 30, 2008, there were 3,020,812 options to purchase common stock and 120,000 shares of unvested restricted common stock outstanding. Since the plan’s inception, 1,250 options to purchase shares of common stock have been exercised and issued. As of June 30, 2008, 67,938 shares are available for additional grants.
We estimate the fair value of the options by using the Black-Scholes pricing model and using the following variables: exercise price, expiration date, share price on the date of grant, volatility, cancelation rate and risk-free interest rate on the date of grant share. The following assumptions were used for grants during the six months ended June 30, 2008 and 2007:
| | | 2008 | | 2007 | |
| Expected dividend yield | | | 0.0 | % | | 0.0 | % |
| Risk-free interest rate | | | 4.4 | % | | 5.0 | % |
| Cancelation rate | | | 11.0 | % | | 0.0 | % |
| Expected volatility | | | 163.7 | % | | 161.9 | % |
We recorded $134,227 and $245,669 of stock-based compensation expense relative to stock options and restricted shares for the three and six months ended June 30, 2008, in accordance with SFAS 123R. As of June 30, 2008, the total future option expense not yet recognized in the consolidated statement of operations is $2,152,105. A summary of stock option activity for the six months ended June 30, 2008 is presented as follows:
| | | Number of Options | | Weighted Average Exercise Price | |
| Balance at December 31, 2007 | | | 2,771,842 | | $ | 1.06 | |
| Granted | | | 377,500 | | | 2.48 | |
| Exercised | | | -- | | | -- | |
| Forfeited | | | (128,530 | ) | | 1.40 | |
| Balance at June 30, 2008 | | | 3,020,812 | | $ | 1.23 | |
| Options exercisable at June 30, 2008 | | | 80,219 | | $ | 2.26 | |
The weighted average fair value of options issued during the six months ended June 30, 2008, using the Black Scholes calculation was $2.48 per share.
The following table summarizes information about employee stock options outstanding at June 30, 2008:
| | Options Outstanding | | | | | | Options Exercisable | |
| | Range of Exercise Price | | | Number Outstanding at June 30, 2008 | | | Weighted Average Remaining Contractual Life | | | Weighted Average Exercise Price | | | Number Exercisable at June 30, 2008 | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | | | |
| $ | 2.00 | | | 28,750 | | | 1.02 years | | $ | 2.00 | | | 28,250 | | $ | 2.00 | |
| | 3.50 | | | 37,500 | | | 1.84 years | | | 3.50 | | | 28,125 | | | 3.50 | |
| | 3.90 | | | 5,750 | | | 1.86 years | | | 3.90 | | | 4,313 | | | 3.90 | |
| | 0.33 | | | 20,937 | | | 2.75 years | | | 0.33 | | | 15,594 | | | 0.33 | |
| | 1.01 | | | 7,875 | | | 2.87 years | | | 1.01 | | | 3,938 | | | 1.01 | |
| | 1.00 | | | 2,542,500 | | | 9.18 years | | | 1.00 | | | - | | | 1.00 | |
| | 2.55 | | | 340,000 | | | 9.62 years | | | 2.55 | | | - | | | 2.55 | |
| | 1.85 | | | 37,500 | | | 9.94 years | | | 1.85 | | | - | | | 1.85 | |
| | | | | 3,020,812 | | | | | $ | 1.20 | | | 80,219 | | $ | 2.26 | |
8. Segment Information
In accordance with the provisions of SFAS No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, a company is required to disclose selected financial and other related information about its operating segments. Operating segments are components of an enterprise about which separate financial information is available and is utilized by the chief operating decision maker (“CODM”) related to the allocation of resources and in the resulting assessment of the segment’s overall performance. The measure used by the Company’s CODM is a business segment’s net income. For the six months ended June 30, 2008, we had three reportable segments, Technology Solutions, Software and Consulting. Prior to October 1, 2007, our only reportable segment was Software.
For the three and six months ended June 30, 2008 and 2007, the results of operations for the reportable segments are follows:
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2008 | | 2007 | | 2008 | | 2007 | |
| Revenue | | | | | | | | | |
| Software | | $ | 1,224,788 | | $ | 1,415,018 | | $ | 2,407,262 | | $ | 3,001,124 | |
| Technology solutions | | | 2,283,745 | | | - | | | 3,967,477 | | | - | |
| Consulting | | | 35,679 | | | - | | | 120,338 | | | - | |
| Total revenue | | | 3,544,212 | | | | | | 6,495,076 | | | 3,001,124 | |
| Operating Expenses | | | | | | | | | | | | | |
| Labor | | | | | | | | | | | | | |
| Software | | | 1,341,963 | | | 1,434,205 | | | 2,810,824 | | | 2,928,153 | |
| Technology solutions | | | 1,333,311 | | | - | | | 2,733,392 | | | - | |
| Consulting | | | 146,529 | | | - | | | 288,569 | | | - | |
| Non-Labor | | | | | | | | | | | | | |
| Software | | | 829,987 | | | 1,217,629 | | | 1,502,120 | | | 2,334,893 | |
| Technology solutions | | | 290,266 | | | - | | | 533,744 | | | - | |
| Consulting | | | 8,916 | | | - | | | 12,520 | | | - | |
| Total operating expenses | | | 3,950,972 | | | 2,651,834 | | | 7,881,169 | | | 5,263,046 | |
| Net Income (loss) | | | | | | | | | | | | | |
| Software | | | (947,162 | ) | | (1,236,816 | ) | | (1,905,682 | ) | | (2,261,922 | ) |
| Technology solutions | | | 660,168 | | | - | | | 700,341 | | | - | |
| Consulting | | | (119,766 | ) | | - | | | (180,751 | ) | | - | |
| Net loss | | $ | (406,760 | ) | $ | (1,236,816 | ) | $ | (1,386,092 | ) | $ | (2,261,922 | ) |
9. Subsequent Events
Effective August 1, 2008, Briggs Medical and HSS entered into a settlement agreement which is subject to court approval. We reserved $180,000 during the second quarter of 2008 for legal settlement costs related to the Briggs Medical case.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
This Management’s Discussion and Analysis includes statements that are forward-looking. These statements are based on current expectations, estimates, forecasts, projections and assumptions that are subject to risks and uncertainties. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual future results may differ materially and adversely from those expressed in any forward-looking statements. Readers are referred to risks and uncertainties identified below and in the documents filed by us with the U.S. Securities and Exchange Commission ("SEC"), specifically the most recent reports on Forms 10-K, 10-KSB, 10-Q, 10-QSB and 8-K, each as it may be amended from time to time. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Overview
We are a technology and services company dedicated to bringing innovation to the health care industry. Our objective is to leverage our understanding of current and next-generation technologies to offer value-added products and services which will generate improved clinical, operational and financial outcomes for our clients. Our portfolio of products and services extends across many segments of health care including home health care, medical staffing, acute and post-acute facilities and telehealth/telemedicine. Our business is grouped into three segments: technology solutions, software and consulting.
Our fastest growing segment is Technology Solutions which consists of HSS Consultancy LLC, our New York-based subsidiary which offers innovative high-end development and post-implementation support for complex projects across a wide spectrum of applications. We design, develop, distribute and support applications that we believe are better designed and more functional and can be produced more rapidly than our clients are able to produce by themselves. Our engineers and programmers are cross-trained and are able to apply a diverse set of disciplines to solve technical challenges. We currently perform these services for Philips Healthcare, formerly branded as Philips Medical Systems, a subsidiary of Philips Electronics North America Corporation (“Philips”), one of the world’s largest and most sophisticated health care technology companies.
Our Software segment develops, markets, sells and supports proprietary products to health care companies and has a strong presence in the home health care market. These products are designed to assist health care organizations, home health care agencies and other related companies to manage and compete more effectively in the Medicare, Medicaid, private pay and managed care environments. We also provide medical staffing companies with software solutions that track candidate recruiting, scheduling and back office management. We offer several comprehensive proprietary software solutions including:
| · | HSS Advantage - A transactional fee-based software solution that allows clients to process patients’ clinical assessments in an electronic format, audit for errors and transmit submissions for reimbursement. |
| · | HSS Analyzer - Utilizes a client’s existing data to provide management reporting and analytics for revenue optimization and enables the client to increase business efficiencies. |
| · | VividNet™ and Vivid Care™ - Software for the private duty and medical staffing markets that offers scheduling, billing/accounts receivable, and workflow/human resources management. (VividNet™ is web-based and Vivid Care™ is server-based). |
| · | VividCall™ - An integrated telephony solution used for site visit verification and broadcast messaging. |
Our newly formed Consulting segment was created to leverage our proprietary software products and expertise in the home health care market to provide our clients with performance analyses and professional services to help maximize their revenue opportunities and increase the quality of patient care. Our consulting services include:
| · | Performance Advisors - A consulting service that utilizes our existing products and services and our Medicare/Medicaid expertise to help our clients maximize their revenue opportunities while increasing the quality of patient care. |
| · | Professional Services - A service that designs, develops and implements customized software solutions. The offerings in this category can range from adding client-specified functionality to existing HSS software products to building applications from the ground up to meet the unique needs of our clients. |
Through these segments, we offer a suite of solutions and services that enable us to serve companies within the health care industry.
Recent Developments
Effective April 30, 2008, the following directors resigned as members of our Board of Directors: Randall Frapart, Wayne LeRoux and Batsheva Schreiber. Effective May 1, 2008 the following directors were elected to our Board of Directors: Jack Price (former President of Phillips Medical Systems North America), Kathryn Bowles (Associate Professor and Director of the Health Informatics Minor at the University of Pennsylvania School of Nursing and the NewCourtland Center for Transitions and Health) and Dr. Michael Breiner (board-certified plastic surgeon who founded the Southwest Virginia Center for Cosmetic, Plastic and Reconstructive Surgery).
Effective May 1, 2008, we signed a ten year lease agreement for approximately 10,000 square feet of office space in New York City to occupy the entire 6th Floor of 42 West 39th Street, located between Fifth Avenue and Avenue of the Americas in Midtown Manhattan.
On June 16, 2008, we hired Robert S. Herbst to serve as our General Counsel and Corporate Secretary.
On July 31, 2008, our lease for office space located in Dunwoody, Georgia expired and was not renewed.
Effective August 1, 2008, Briggs Medical and HSS entered into a settlement agreement which is subject to court approval. We reserved $180,000 during the second quarter of 2008 for legal settlement costs related to the Briggs Medical case.
Results of Operations
The following table sets forth certain financial data expressed as a percentage of net sales for each of the periods indicated.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2008 | | 2007 | | 2008 | | 2007 | |
| Net sales | | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| Cost of sales | | | 51 | % | | 81 | % | | 58 | % | | 80 | % |
| Gross profit | | | 49 | % | | 19 | % | | 42 | % | | 20 | % |
| Operating expenses: | | | | | | | | | | | | | |
| Selling and marketing | | | 11 | % | | 38 | % | | 11 | % | | 36 | % |
| Research and development | | | 9 | % | | 26 | % | | 9 | % | | 24 | % |
| General and administration | | | 37 | % | | 38/ | % | | 39 | % | | 33 | % |
| Depreciation and amortization | | | 2 | % | | 3 | % | | 2 | % | | 3 | % |
| Impairment | | | 1 | % | | -- | | | 1 | % | | -- | |
| Interest | | | 1 | % | | 1 | % | | 1 | % | | 1 | % |
| Total operating expenses | | | 61 | % | | 106 | % | | 63 | % | | 96 | % |
| Deemed preferred stock dividend | | | | | | 1 | % | | | | | 6 | % |
| Net loss | | | (11 | )% | | (89 | )% | | (21 | )% | | (81 | )% |
The following table reflects revenues for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007.
| | | | Three Months Ended June 30, | | | | | | | | | Six Months Ended June 30, |
| | | | 2008 | | | 2007 | | | Change | | | Change % | | | 2008 | | | 2007 | | | Change | | Change % |
Recurring revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Clinical assessment revenue | | $ | 498,312 | | $ | 833,816 | | $ | (335,504 | ) | | (40 | )% | $ | 1,011,627 | | $ | 1,787,283 | | $ | (775,656 | ) | (43)% |
| Technology solutions | | | 2,283,745 | | | - | | | 2,283,745 | | | - | | | 3,967,477 | | | - | | | 3,967,477 | | - |
| Hosting revenue | | | 34,048 | | | 36,985 | | | (2,936 | ) | | (8 | )% | | 69,140 | | | 77,523 | | | (8,383 | ) | (11)% |
| IVR | | | 121,350 | | | 118,123 | | | 3,227 | | | 3 | % | | 231,584 | | | 222,469 | | | 9,115 | | 4% |
| Software maintenance revenue | | | 332,742 | | | 265,068 | | | 67,674 | | | 26 | % | | 629,368 | | | 528,953 | | | 100,416 | | 19% |
| Performance Advisors | | | 35,679 | | | - | | | 35,679 | | | 100 | % | | 120,338 | | | - | | | 120,338 | | 100% |
| Other | | | 4,393 | | | 9,091 | | | (4,698 | ) | | (52 | )% | | 13,070 | | | 13,943 | | | (872 | ) | (6)% |
| Total recurring revenue | | $ | 3,310,270 | | $ | 1,263,082 | | | 2,047,188 | | | 162 | % | $ | 6,042,605 | | $ | 2,630,170 | | | 3,412,435 | | 130% |
Non recurring revenue | | | | | | | | | | | | | |
| Licensed software sales | | $ | 131,944 | | $ | 45,167 | | $ | 86,777 | | | 192 | % | $ | 262,748 | | $ | 132,445 | | $ | 130,302 | | | 98 | % |
| Training and Implementation | | | 100,176 | | | 103,856 | | | (3,680 | ) | | (4 | )% | | 187,901 | | | 228,907 | | | (41,006 | ) | | (18 | )% |
| Other | | | 1,823 | | | 2,914 | | | (1,091 | ) | | (37 | )% | | 1,824 | | | 9,602 | | | (7,778 | ) | | (81 | )% |
| Total non recurring revenue | | $ | 233,942 | | $ | 151,936 | | $ | 82,006 | | | 54 | % | $ | 452,473 | | $ | 370,954 | | $ | 81,518 | | | 22 | % |
| Total revenue | | $ | 3,544,212 | | $ | 1,415,018 | | $ | 2,129,194 | | | 150 | % | $ | 6,495,078 | | $ | 3,001,124 | | $ | 3,493,953 | | | 116 | % |
We classify revenues as recurring and non-recurring. Recurring revenues include maintenance fees, ongoing consulting and advisory services, and a variety of hosting services that we are contracted to provide to our clients on an ongoing basis. Our contracts have initial terms within a range of one to four years with provisions for renewal. Most recurring revenues are somewhat variable as they are dependent on the volume of transactions or amount of services we provide.
Nonrecurring revenues include product sales (software and related modules), implementation services and training fees. These revenues do not have a correlation to past revenues and as a result are less predictive of future revenues.
Three Months Ended June 30, 2008 as Compared to Three Months Ended June 30, 2007
For the three months ended June 30, 2008, revenue increased $2,129,194 or 150% to $3,544,212 from $1,415,018. The increase was attributable to revenues earned in our technology solutions segment, $2,283,745 compared with zero revenues during the same period in 2007 as we initiated technology solutions services on October 1, 2007. Our software sales and maintenance revenue contributed $86,777 and $67,674 in revenue, respectively, a 50% increase from the same period in 2007. The increase was somewhat offset by a decline in clinical assessment revenue of $335,504 or 40%. This decline in revenue is attributable to a 61% decrease in the number of assessments we processed for our clients during the quarter in 2008. One customer accounted for 95% of this decline. We are working to replace these lost revenues by collaborating with several of our larger clients to offer enhanced services and solutions that meet their business needs.
Cost of sales increased by 56% or $641,940 to $1,794,565 for the three months ended June 30, 2008 compared with $1,152,624 for same period in 2007. Labor and consulting costs increased $682,455 and $373,718, respectively, as a result of our technology solutions segment. There was no similar cost of sales for the same period in 2007 as we initiated technology solutions services on October 1, 2007. The increase in cost of sales was partially offset by a reduction in amortization of development costs of $463,567. As a percentage of revenue, cost of sales represented 51% in 2008 compared with 79% in 2007.
Selling and marketing expenses decreased $145,089 or 27% to $398,796 for the three months ended June 30, 2008 compared with $543,885 for same period in 2007. Costs for labor and consulting accounted for $105,049 or 72% of the decrease as a result of staffing reductions. Marketing and communication expenses decreased $17,964 in 2008 compared with 2007.
Research and development costs decreased $45,132 or 12% to $323,323 in 2008 from $368,455 in 2007. Labor and consulting increased $26,443 and was offset by decreases in travel, recruiting and other overhead costs $17,400, $12,800 and $41,375, respectively.
General and administrative expenses increased $790,518 or 147% to $1,328,566 for the three months ended June 30, 2008 from $538,048 for the three months ended June 30, 2007. Labor, travel and stock based compensation increased $248,193, $62,358 and $51,459, respectively, in 2008 compared with the same period in 2007. Legal costs increased $67,816 principally as a result of that litigation that we settled in August 2008.. During the second quarter, we took possession of 10,000 square feet of office space in Manhattan that increased our occupancy costs by $57,551. In addition, we expensed $180,000 as a reserve for certain litigation that we anticipated settling.
Six Months Ended June 30, 2008 as Compared to Six Months Ended June 30, 2007
For the six months ended June 30, 2008, revenue increased $3,493,954 or 116% to $6,495,078 from $3,001,124. The increase was attributable to revenues earned by HSS Consultancy in our technology solutions segment, $3,967,477 compared with zero revenues during the same period in 2007 as it did not begin operating until October 1, 2007. Our software sales, performance advisors, and maintenance revenue contributed $130,302, $120,338, and $100,416 to the increase in revenue, respectively. The increase was offset by a decline in clinical assessment revenue of $775,656 or 43% compared to the same period in the previous year. This decline in revenue is attributable to a 57% decrease in the number of assessments we processed for our clients for the six month period in 2008, as compared to the same period in 2007. One customer accounted for 96% of this decline. We are working to recover these lost revenues by collaborating with our clients to offer services and solutions that meet their business needs.
Cost of sales increased by 60% or $1,411,923 to $3,768,860 for the six months ended June 30, 2008 compared with $2,356,937 for same period in 2007. There was an increase of $1,336,531 in labor and $853,665 in consulting, as a result of additional revenue in our technology solutions segment. There was no similar cost of sales for the same period in 2007 as we initiated technology solutions services on October 1, 2007. The increase in cost of sales was partially offset by a reduction in amortization of development costs of $902,623. As a percentage of revenue, cost of sales represented 58% in 2008 compared with 79% in 2007.
Selling and marketing expenses decreased $338,849 or 32% to $730,937 for the six months ended June 30, 2008 compared with $1,069,246 for same period in 2007. Labor and consulting accounted for $254,512 or 75% of the decrease. Marketing expenses including advertising and trade shows decreased $45,470 in 2008 compared with 2007.
Research and development costs decreased $140,597 or 19% to $607,567 in 2008 from $748,164 in 2007. The decrease was the result of lower applied overhead for occupancy, supplies and sundry expenses. The decrease was slightly offset by an increase in labor and consulting of $5,455.
General and administrative expenses increased $1,570,941 or 161% to $2,548,579 for the six months ended June 30, 2008 from $977,637 for the six months ended June 30, 2007. Labor and consulting increased $971,416 in 2008 compared with the same period in 2007 as positions were added to support the growth of our operations. The other significant components of the increase were legal, travel, and communications costs of $138,711, $127,277 and $57,687, respectively. In addition, we expensed $180,000 as a reserve for certain litigation that we anticipated settling.
Liquidity and Capital Resources
Since November 2005, we have funded operations primarily through the issuance of convertible preferred stock that has provided us with aggregate net proceeds of $12,100,000.
Cash used in operations increased $29,752 for the six months ended June 30, 2008 to $1,447,555 compared with $1,417,803 used during the same period in 2007. This was primarily attributable to an increase in accounts receivable and a decrease in deferred revenue of $1,511,395 and $1,256,804, respectively. The increase in accounts receivable is primarily the result of a single invoice to our largest customer that was issued at the end of the period.
Cash used in investing activities decreased $113,893 to $474,797 for the six months ended June 30, 2008 compared with $588,690 for the same period in 2007. The decrease in investing activities was the result of a $354,197 decrease in capitalized development costs, a $7,700 decrease in the purchase of equipment, and a $77,207 decrease in additional consideration for CareKeeper in 2007. These were offset by the purchase of a $325,211 certificate of deposit to collateralize a letter of credit for our New York office space.
Cash used in financing activities decreased $326,547 to $1,163,216 for the six months ended June 30, 2008 compared to $1,489,763 of cash provided by financing activities for the six months ended June 30, 2007. We sold $1,500,000 of preferred stock during the first six months in 2007 compared with $1,175,000 for the same period in 2008. We entered into an agreement with SIBL to sell up to 1,425,000 shares of $2.00 Series D Convertible Preferred Stock that can be used to meet working capital needs. During April 2008, we completed the sale of this preferred stock by selling 587,500 shares and received $1,175,000 in net proceeds. These funds were used to meet working capital needs. As of June 30, 2008, we do not have additional availability with SIBL for funding under the Convertible Preferred Stock Agreement.
We have a $5,000,000 convertible debenture agreement with SIBL that can be drawn on for working capital or acquisitions, subject to various conditions.
We believe that the funds available from the debenture agreement will be sufficient to fund our working capital requirements for the next twelve months; however, funding by SIBL under this facility is subject to a number of conditions and there can be no assurance that we will be able to meet these conditions. If SIBL does not make funds available to us, we will require additional external funding. If we are unable to secure additional external financing on a timely basis, we will not have sufficient cash to fund our working capital and capital expenditure requirements and we will not be able to operate our business.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are subject to interest rate risk primarily associated with our borrowings to fund our strategy and to ensure liquidity for any future transactions. Interest rate risk is the risk that changes in interest rates could adversely affect earnings and cash flows. Specific interest rate risks may include the risk of increasing interest rates on short-term debt and the risk of increasing interest rates for planned new fixed rate long-term financings.
ITEM 4T. | CONTROLS AND PROCEDURES |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Change in Internal Control over Financial Reporting
During the quarter, we transitioned our treasury to an institution that provided better management tools than our legacy institution. The change enables us to have more seamless visibility into our daily banking activity and as a result improves our internal control over cash management.
There were no other changes in our internal control over financial reporting during our Company’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
On September 13, 2007, Briggs Medical Service Company, a Delaware corporation ("Briggs Medical"), served us with a summons and complaint filed in the United States District Court for the Middle District of Florida, Tampa Division, seeking damages and injunctive relief. On November 7, 2007, we made a motion to dismiss, and in response, Briggs amended their complaint. As amended, the complaint alleges that we (a) infringed various copyrighted medical forms which Briggs Medical alleges that it owns, (b) breached a 2003 Co-Development Agreement and associated "Statement of Work" between Briggs Corporation, an Iowa corporation, and Healthcare Quality Solutions, Inc. and (c) tortiously interfered with actual and prospective business relations between Briggs Medical and thousands of Briggs Medical's clients by inducing them to use other medical forms which Briggs Medical allege infringe its alleged copyrights. Effective August 1, 2008, Briggs Medical and HSS entered into a settlement agreement which is subject to court approval. We reserved $180,000 during the second quarter of 2008 for legal settlement costs.
There are currently no other material legal proceedings involving our company.
Not applicable
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None
None
Exhibit No. | | Description | | Method of Filing |
| 31.1 | | Rule 13a-14(a)/15d-4(a) Certification of Principal Executive Officer | | Filed herewith |
| | | | | |
| 31.2 | | Rule 13a-14(a)/15d-4(a) Certification of Principal Financial Officer | | Filed herewith |
| | | | | |
| 32.1 | | Section 1350 Certification of Principal Executive Officer | | Filed herewith |
| | | | | |
| 32.2 | | Section 1350 Certification of Principal Financial Officer | | Filed herewith |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated August 11, 2008
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| | HEALTH SYSTEMS SOLUTIONS, INC. |
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| | By: | /s/ Stan Vashovsky |
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Stan Vashovsky, Chairman and Chief Executive Officer (Principal Executive Officer) |
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| | By: | /s/ Michael G. Levine |
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Michael G. Levine, Chief Financial Officer Executive Vice President (Principal Financial Officer) |
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