10-QSB
Form 10-QSB
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 June 30, 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 August 15, 1997: 2,101,326 shares of Common Stock, $ . 01 par value.
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
June 30, 1997 ................................................. 3
Condensed Statements of Operations - Three Months and
Six Months ended June 30, 1996 and 1997 and period from
inception (July 20, 1994) to June 30, 1997 .................... 4
Condensed Statements of Cash Flows - Six Months ended
June 30, 1996 and 1997 and period from inception (July
20, 1994) to June 30, 1997 .................................... 5
Notes to Financial Statements - June 30, 1997 .................. 6
Item 2. Management's Discussion and Analysis
or Plan of Operations ......................................... 8
Part II. OTHER INFORMATION
Item 3. Other Information .............................................. 10
Item 4. Exhibits and Reports on Form 8-K ............................... 10
SIGNATURES .............................................................. 11
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HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
CONDENSED BALANCE SHEET
AS AT JUNE 30, 1997
ASSETS
Current assets:
Cash and cash equivalents 4,186,000
Prepaid expenses and other current assets 69,000
----------
Total current assets 4,255,000
----------
Captialized software costs 476,000
Furniture and equipment (net of accumulated depreciation) 233,000
Organizational costs (net of accumulated amortization) 15,000
----------
TOTAL 4,979,000
==========
LIABILITIES
Current liabilities:
Accounts payable 158,000
Accrued expenses 19,000
Other current liabilities 2,000
----------
Total current liabilities 179,000
----------
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 (3,661,000)
----------
Total stockholders' equity 4,800,000
----------
TOTAL 4,979,000
==========
See notes to condensed financial statements.
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HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
CONDENSED STATEMENT OF OPRATIONS
July 20,
1994
Three Months Ended Six Months Ended (Inception)
June 30 June 30, to
------------------------ ------------------------ June 30,
1996 1997 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 51,000 424,000 320,000 688,000 2,400,000
---------- ---------- ---------- ---------- ----------
Total costs and expenses 51,000 424,000 320,000 688,000 2,875,000
---------- ---------- ---------- ---------- ----------
(Loss) from operations (51,000) (424,000) (320,000) (688,000) (2,875,000)
Interest (expense) (17,000) -- (34,000) (406,000) (746,000)
Interest income -- 44,000 -- 68,000 80,000
---------- ---------- ---------- ---------- ----------
Net(loss) (68,000) (380,000) (354,000) (1,026,000) (3,541,000)
========== ========== ========== ========== ==========
Pro forma net (loss) per share (0.18) (0.96)
========== ==========
Net (loss) per share (0.22) (0.73)
========== ==========
Pro forma weighted average shares outstanding 369,760 369,760
========== ==========
Weighted average shares outstanding 1,752,026 1,399,026
========== ==========
See notes to condensed financial statements.
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July 20,
1994
Six Months Ended (Inception)
June 30, to
------------------------ June 30,
1996 1997 1997
---------- ---------- ----------
Cash flows from operating activities:
Net (loss) (354,000) (1,026,000) (3,539,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization 12,000 30,000 120,000
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 35,000 64,000
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other current assets (55,000) (70,000)
(Increase) in other assets (5,000) (38,000)
Net (decrease) increase in accounts payable and accrued expenses (50,000) (11,000) 173,000
---------- ---------- ----------
Net cash (used in) operating activities (362,000) (670,000) (2,344,000)
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of fixed assets (42,000) (57,000) (328,000)
Capitalized software costs (188,000) (149,000) (476,000)
---------- ---------- ----------
Net cash (used in) investing activities (230,000) (206,000) (804,000)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 47,000 6,900,000 7,319,000
Proceeds from the sale of preferred stock 550,000
Proceeds from borrowings - notes payable - stockholders 402,000 1,194,000
Proceeds from Bridge notes 1,000,000
Repayment of Bridge notes (1,000,000) (1,000,000)
Initial public offering expenses (25,000) (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 424,000 4,529,000 7,334,000
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH (168,000) 3,653,000 4,186,000
Cash - beginning of period 279,000 533,000
---------- ---------- ----------
Cash - end of period 111,000 4,186,000 4,186,000
========== ========== ==========
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
See notes to condensed financial statements.
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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 six-month period ended June 30, 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.
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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 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 of $ .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.
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Item 2. Management's Discussion and Analysis or Plan of Operations
Safe Harbor Language
Certain statements made herein that are not historical are forward-looking
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimate" "project" "intend" "expect" "believe" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements involve known and unknown risks and uncertainties. Many factors could
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward looking statements, including, among
others, changes in general economic and business conditions, inability to
establish and maintain market acceptance to the Companys products, loss of
market share and pressure on prices resulting from competition, introduction of
competing products and implementation of industry standards by other companies,
lack of development and general system failure of the private wide-area network
currently in use, regulatory obstacles to the use of the Internet for
communications, inability to manage growth, inability to develop distribution
networks and loss of major distributors and OEM partners, inability to attract
and retain qualified personnel, and the inability to protect the Company's
proprietary technology. For additional information regarding these and other
risks and uncertainties associated with the Company's business, reference is
made to the Company's reports filed from time to time with the Securities and
Exchange Commission.
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.
The Company has generated only nominal revenues to date from the placement
of test products and has incurred substantial operating losses. From inception
through June 30, 1997, the Company sustained cumulative net losses of
$3,661,000, including dividends on preferred shares of $120,000. These losses
have resulted primarily from general and administrative expenses, including
salaries, marketing, and professional fees which have aggregated $2,875,000
since inception. Such operating expenses increased from $51,000 during the three
months ended June 30, 1996 to $ 424,000 during the three months ended June 30,
1997. Salary expenditures will drop from current levels due to headcount
reductions and management changes that occured during the second quarter of
1997.
For the six month period ended June 30, 1997, the Company sustained
operational losses of $688,000 generated primarily from administrative and
professional fees. Such loss is an increase from the $320,000 loss sustained
during the six months ended June 30, 1996. The company expects the
administrative portion of this expense to decrease during the second half of
1997, however marketing and promotion expenses may increase.
Based on feedback from current test sites, the Company expects to revamp
it's sales and marketing program during the fourth quarter of 1997. The new
program will redirect it's focus from the military to other market segments
targeted by the Company. Related marketing expenses will impact the Company's
results of operations during the fourth quarter of 1997, some of which will be
offset by lower administrative costs.
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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 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
notes issued in a bridge financing and $170,000 to repay advances from officers,
directors and principal stockholders), the net proceeds to the Company were
approximately $4,411,000. At June 30, 1997, the Company had working capital of $
4,076,000.
Going Forward
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 lowering the cost of each
Intellifit system and adjusting the price points to make the system more
attractive to additional markets. The Company will continue to market the
IntelliFit System to certain target markets including commercial health clubs,
hospital facilities, corporations, insurance companies and health maintenance
organizations. 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.
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PART II
Item 3. Other Information
Effective May 31, 1997, Steven Gumins, Chief Executive Officer of the
Company, and Deborah Griffin, Chief Operating Officer of the Company, 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 4. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K were filed during the three months ended
June 30, 1997.
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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: August 15, 1997 by: /s/ Gregory L. Zink
------------------------------------
Gregory L. Zink, President
/s/ Theodore Lanes
------------------------------------
Theodore Lanes, Chief Financial Officer
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