U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR I5(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE
30, 1999 Commission File No.:
001-15179
H-QUOTIENT, INC.
(Exact name of small business issuer as specified in its charter)
Virginia 54-1947753
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
12030 Sunrise Valley Drive, Suite 205, Reston, VA 20191
(Address and zip code of registrant's principal executive offices)
(703) 716-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO
--- ---p
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 7,526,784 shares of its $.0001
par value common stock as of June 30, 1999.
H-QUOTIENT INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
PART I: FINANCIAL INFORMATION (unaudited)
Item 1 : PAGE
Condensed Consolidated Balance Sheet as of June 30, 1999,
December 31, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1999 4
Condensed Consolidated Statements of Operations for the three
and six months periods ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and June 30, 1998 6
Notes to Unaudited Condensed Consolidated Financial 7
Statements for the six months ended June 30, 1999
Item 2:
Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
H-QUOTIENT, INC.
Consolidated Balance Sheets
June 30, 1999 December 31, 1998
------------ ------------
(unaudited) (audited)
Assets
Current assets:
Cash .................................................................. $ 284,541 $ 1,776
Contracts receivable .................................................. 117,640 70,332
Due from officers ..................................................... 25,368 9,985
Prepaid expenses and other current assets ............................. 73,014 --
------------ ------------
Total current assets ............................................. 500,563 82,093
Property and equipment, net ........................................... 89,882 67,776
Capitalized software, net of accumulated .............................. 317,754 69,308
amortization of $-0- in 1998 and $10,546
as of June 30, 1999
Intangibles, net ...................................................... 13,367
Deposits .............................................................. 59,490 6,860
------------ ------------
Total assets ..................................................... $ 981,056 $ 226,037
============ ============
Liabilities and Shareholders' Accumulated Deficit
Current liabilities:
Accounts payable ...................................................... $ 762,499 $ 923,306
Accrued expenses ...................................................... 998,864 1,901,458
Short-term debt ....................................................... 1,773,717 1,337,130
Deferred revenues ..................................................... 538,063 238,225
------------ ------------
Total current liabilities ........................................ 4,073,143 4,400,119
Commitments and contingencies ............................................ -- --
Shareholders' accumulated deficit:
Common stock, $.0001 par value authorized
50,000,000 shares (90,000,000 shares authorized at June 30, 1999),
5,110,075 shares outstanding at December 31, 1998 and 7,526,784
shares outstanding at June 30, 1999, respectively ................ 753 511
Additional paid-in capital ............................................ 8,217,851 7,122,555
Accumulated deficit ................................................... (11,310,691) (11,297,148)
------------ ------------
Total shareholders' accumulated deficit .......................... (3,092,087) (4,174,082)
Total liabilities and shareholders' accumulated
deficit ................................................ $ 981,056 $ 226,037
============ ============
See accompanying notes to financial statements.
H-QUOTIENT, INC.
Consolidated Statements of Shareholders' Accumulated Deficit
Common Stock Additional Total
Accumulated Paid in Accumulated Shareholders'
Shares Amount Capital Deficit (Deficit)
------------ ------------ ------------ ------------ ------------
December 31, 1996 ........................... 3,162,591 316 5,104,137 (6,464,087) (1,359,634)
Issuance of common stock:
Reg A Issuance @ $2.00 ................ 271,984 28 543,940 543,968
Stock Issuance @ $0.84 ................ 100,000 10 83,893 83,903
Sale of Stock for notes @ $0.33 ....... 1,065,747 107 354,590 354,697
Sale of Stock for notes @ $1.01 ....... 77,428 8 78,202 78,210
Stock Issuance - Rule 144 ............. 37,594 4 75,184 75,188
Stock Issuance - Rule 144 ............. 97,435 10 194,860 194,870
Warrants (Regulation D offering) ...... -- -- 265,188 265,188
Net Loss for 1997 ........................... (3,148,673) (3,148,673)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 ................ $ 4,812,779 $ 483 $ 6,699,994 $ (9,612,760) $ (2,912,283)
============ ============ ============ ============ ============
Issuance of common stock:
Warrants (Regulation D offering) ...... 145,000 145,000
Net loss for the six months ended
June 30, 1998 (unaudited) ............. (684,507) (684,507)
------------ ------------ ------------ ------------ ------------
June 30, 1998 (unaudited) ................... 4,812,779 483 6,844,994 (10,297,267) (3,451,790)
============ ============ ============ ============ ============
Issuance of common stock:
Warrants Reg D 506 Issuance (unaudited) 75,000 75,000
Sale of Stock for notes @ $0.68 ....... 297,926 28 202,561 202,589
Net Loss for the six months ended
December 31, 1998 ..................... (999,881) (999,881)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 ................ 5,110,705 511 7,122,555 (11,297,148) (4,174,082)
============ ============ ============ ============ ============
Issuance of common stock:
Regulation D offering
@ $0.50 per share (unaudited) ....... 1,727,079 173 883,365 883,538
@ $0.25 per share (unaudited) ....... 560,000 56 139,944 140,000
Stock Issuance - Rule 144
@ $0.75 per share (unaudited) ....... 30,000 3 22,497 22,500
@ $0.50 per share (unaudited) ....... 99,000 10 49,490 49,500
Net loss for the six months ended
June 30, 1999 (unaudited) ............. (13,543) (13,543)
------------ ------------ ------------ ------------ ------------
June 30, 1999 (unaudited) ............. 7,526,784 753 8,217,851 (11,310,691) (3,092,087)
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
H-QUOTIENT, INC.
Consolidated Statements of Operations
Six Months Ended Three months ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Software sales .................. $ 222,908 $ -- $ 193,008 $ --
Maintenance and service income .. 322,531 150,986 124,969 78,382
----------- ----------- ----------- -----------
Total revenues ............. 545,439 150,986 317,977 78,382
Operating expenses:
Cost of sales and services ...... 93,045 163,493 54,085 68,142
Selling and marketing ........... 112,109 93,425 66,167 32,340
General and administrative ...... 445,510 521,622 252,928 191,399
----------- ----------- ----------- -----------
Total operating expenses ... 650,664 778,540 373,180 291,881
----------- ----------- ----------- -----------
Operating loss .................. (105,225) (627,554) (55,203) (213,499)
Other expense/(income):
Interest expense ................ 43,763 45,285 13,930 23,808
Other expense/(income) .......... (135,445) 11,668 (136,405) (335)
----------- ----------- ----------- -----------
Total other expense/(income) (91,682) 56,953 (122,475) 23,473
----------- ----------- ----------- -----------
Net income (loss) ..................... $ (13,543) $ (684,507) $ 67,272 $ (236,972)
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted: ............... $ (0.00) $ (0.14) $ 0.01 $ (0.05)
----------- ----------- ----------- -----------
Weighted Average of
Common shares outstanding ............. 6,397,260 4,812,779 7,162,930 4,812,779
=========== =========== =========== ===========
See accompanying notes to financial statements.
H-QUOTIENT, INC.
Consolidated Statements of Cash Flows
Six months ended
June 30,
1999 1998
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss ................................ $ (13,543) $ (684,507)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ............................ 24,761 19,554
Amortization ............................ 13,221 (15,643)
Nonrecurring charges, net ............... -- --
Changes in operating assets and liabilities:
(Increase)/Decrease in:
Contracts receivable .................... (47,309) 26,200
Due from affiliate ...................... -- --
Due from officers ....................... (15,383) (505)
Prepaid expenses and other current assets (70,014) --
Deferred charges and other assets ....... (55,631) --
Increase/(Decrease) in:
Accounts payable ........................ (160,807) 97,615
Accrued expenses ........................ (127,928) 226,797
Deferred revenues ....................... 297,508 74,429
----------- -----------
Net cash (used) in/provided by operating
activities ........................... (155,125) (256,061)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment ..... (48,788) --
Disposals of property and equipment, net 1,549 --
Additions to intangibles ................ (275,031) --
----------- -----------
Net cash used in investing activities ... (322,270) --
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock ...... 1,095,537 145,000
Proceeds from notes payable ............. --
Repayment of notes payable .............. (220,000) (20,000)
Repayment of convertible debt ........... -- --
Repayment of related parties ............ (115,377)
Proceeds from related parties ........... -- 120,074
----------- -----------
Net cash provided by financing activities ...... 760,160 245,074
----------- -----------
Net increase in cash ........................... 282,765 (10,986)
Cash at beginning of period .................... 1,776 (1,838)
----------- -----------
Cash at end of period .......................... $ 284,541 $ (12,824)
=========== ===========
See accompanying footnotes to consolidated financial statements.
H-QUOTIENT, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Quarterly Period Ended June 30, 1999
1. Organization
H-QUOTIENT, Inc. and Subsidiary (the "Company") was incorporated in Virginia on
June 14, 1999, was organized to develop, market, install and maintain integrated
software and hardware systems. The Company markets its products to private and
public healthcare facilities throughout the United States. The Company's
business is derived from a merger with Integrated Healthcare Systems, Inc.
("IHS") in which all the issued and outstanding shares of common stock of IHS
was exchanged for an equal number of shares of the $.0001 par value common stock
of the Company.
2. Basis of Presentation of Interim Information
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company. All intercompany transactions have been eliminated.
In the opinion of the management of the Company, the accompanying unaudited
condensed consolidated financial statements include all material adjustments,
including all normal recurring adjustments, considered necessary to present
fairly the financial position of and operating results for the periods
presented. The financial statements and notes are presented as permitted by Form
10-QSB, do not include certain information included in financial statements for
the year ended December 31, 1998 and the quarter ending March 31, 1999
(unaudited) which were included in the Company's recently filed Form 10-SB. It
is the Company's opinion that when the interim statements are read in
conjunction with the December 31, 1998 audit report included in Form 10-SB, the
disclosures are adequate to make the information presented not misleading.
Interim results are not necessarily indicative of results for a full year or any
future period.
Accounting Estimates - The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the associated amounts of revenues and expenses during the period
reported. Actual results could differ from the estimates.
Revenue Recognition and Deferred Revenue - The Company recognizes revenue
derived from software system sales that require significant modification or
customization based upon the percentage of completion method of accounting for
contracts using labor costs as the basis. Revenues from software system sales
with little or no modification or customization are recognized upon delivery of
the software.
Revenues from consulting services are recognized as performed. Revenues derived
from maintenance contracts are initially deferred and subsequently recognized as
revenue ratably over the terms of the contracts, which are typically from one to
two years.
Deferred revenues represent either billings related to, or payments received
from customers, for software system sales prior to customer delivery and
acceptance, and maintenance service fees billed in advance.
Cash Equivalents - For the purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to a concentration of credit risk consist principally of temporary
cash investments and contracts receivable. The Company has cash investment
policies that restrict placement of these investments to financial institutions
evaluated as highly creditworthy. The Company generally does not require
collateral on contracts receivable as the Company's customer base consists of
large, well established companies and governmental entities. The carrying amount
of the accounts receivable approximates their net realizable value.
Property and Equipment - Property and equipment are stated at cost. Depreciation
of property and equipment is determined using the straight-line method over the
estimated useful lives of the assets, as follows:
Office and computer equipment. 2-5 years
Furniture and fixtures 3-7 years
Capitalized Software Costs - The capitalized costs of acquired technology and
software development are amortized using the greater of the ratio of current
gross revenues to total current and anticipated revenues or the straight-line
method over its estimated useful life of four years on a product by product
basis. The carrying amount of acquired technology and software development is
periodically reviewed by the Company for impairment. Impairment is recognized
when the future gross revenues from products, reduced by the estimated future
costs of completing and disposing of that product, including the costs of
maintenance and customer support required at the time of sale, is less than the
carrying amount of that product.
Research and development costs consist principally of salaries and benefits paid
to the Company's employees. The Company's policy is to expense all research and
development costs as incurred until technological feasibility is established.
Commencing with the establishing of technological feasibility and concluding at
the time the product is ready for release, software development costs are
capitalized. Technological feasibility is defined as being established when
product design and a working model of the software product has been completed
and tested. The Company's products have met technological feasibility criteria
and, accordingly, the Company has capitalized these costs.
Intangible Assets - Amortization of intangible assets is determined using the
straight-line method over the estimated useful lives of the assets, as follows:
Financing costs 5 years
Maintenance contracts 2 years
Customer lists 2 years
Copyrights 4 years
Annually, the Company makes an assessment of the remaining fair market value of
intangible assets. Declines in fair market value considered to be other than
temporary are expensed immediately.
Income Taxes - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for differences between the basis
of assets and liabilities for financial statement and income tax purposes. The
differences relate primarily to depreciable assets (use of different
depreciation methods and lives for financial statement and income tax purpose),
and officers salary and legal contingencies accrued but not paid (deductible for
financial statement purpose but not for income tax purpose). Deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be deductible or taxable when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses and tax credits that are available to offset future taxable
income.
Dividend Policy - The Company has not paid any dividends since its inception and
does not anticipate paying any dividends in the foreseeable future..
Earnings Per Share - Basic earnings per share is computed by dividing net income
by the weighted average number of shares outstanding for the period. Diluted
earnings per share include the dilutive effect of warrants and contingent
shares.
3. Going Concern
The accompanying unaudited condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
incurred significant operating losses, and has a working capital deficiency of
$(3,575,580) at June 30, 1999 (unaudited). These factors raise substantial doubt
about the Company's ability to continue as a going concern. The condensed
consolidated unaudited financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
The Company has formulated plans and strategies to address its financial
condition and increase profitability, including the raising additional capital
through the exercise of certain previously issued warrants following the
registration of the shares of common stock underlying these warrants, new funds
generated from the installation of new versions of its I-Link Enterprise and
Dataqual software under prior existing and new contracts and restructuring
negotiated settlements with creditors. There is no assurance, however, that the
registration of the shares underlying the warrants will be completed, and if not
completed, that the Company will raise alternative capital sufficient to enable
the Company to continue its operations as contemplated over the next twelve
months.
4. Lease Commitments
Beginning May 21, 1999, the Company entered into a two year sublease agreement
for office space. Future minimum lease payments as of December 31, 1998 under
operating leases with terms greater than one year are as follows:
Year Ending
December 31, 1999 $ 62,286
December 31, 2000 106,776
December 31, 2001 44,490
------
$213,552
Rent expense is as follows:
Three months ended June 30, 1999 (unaudited) $ 18,064
Three months ended June 30, 1998 (unaudited) $ 11,148
Six months ended June 30, 1999 (unaudited) $ 28,962
Six months ended June 30, 1998 (unaudited) $ 18,351
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited financial statements and related notes for the quarterly period ended
June 30, 1999, and with the Company's audited financial statements and
accompanying notes for the year ended December 31, 1998. This report contains
forward-looking statements, such as statements of the Company's business plans,
strategies, anticipated strategies, levels of capital expenditures, liquidity
and anticipated financing needed to effect the business plan within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements include, but are
not limited to, the discussions of the Company's operations, liquidity and
capital resources. Although the Company believes that the expectations reflected
in the forward-looking statements are reasonable, there can be no assurances
that such expectations will prove to be accurate. All shares of the Company's
operations are subject to a number of uncertainties risks and other influences
many of which are outside the control of the Company and cannot be predicted
with any degree of accuracy. In light of these significant uncertainties
inherent in the forward-looking statements made herein, the inclusion of such
statements should not be regarded as a representation by the Company or any
other person that the objectives and the plan of the Company will be achieved.
Actual results could differ materially from those anticipated in forward-looking
statements which are made as of the date of this report. The Company assumes no
obligation to update them. The discussion contained herein relates to the
financial statements, which have been prepared in accordance with GAAP.
Overview
H-QUOTIENT, Inc. is a Virginia corporation, incorporated on May 20, 1999, and is
the successor by merger to Integrated Healthcare Systems, Inc. ("IHS") which was
a Delaware corporation organized in 1993 under the name of Travel Technologies
International, Inc. Our business, which we acquired from IHS through the merger,
is the designing, development, selling and maintenance of computer software
systems for the management of patient care in hospitals.
Our business and assets were owned and operated by IHS until June 14, 1999 the
effective date of the merger. Our principal products consist of DataQual(R),
which includes I-Linksm and I-Linksm Enterprise, which includes the Central Data
Repository. DataQual is a software system designed to capture information on
quality of care, risk management, costs and other aspects of the management of
patients in hospitals. DataQual's companion product, I-Linksm, an interface
engine, is designed to interconnect and extract data from any and all hospital
information systems in the hospitals. I-Linksm Enterprise is a system of servers
installed on a hospitals local area network (LAN), which acts as an intelligent
node on a wide area network, to extract, cleanse, group and map hospital wide
data. This data is then transmitted over an Intranet/Virtual Private Network to
a Central Data Repository. We believe there is a great need in the healthcare
industry for products of this type, and we intend to exploit that need.
Our Business Strategy
We hope to capitalize on the ever-increasing demand in the healthcare industry
for improved patient information by becoming a leading provider of software
information products and services to the industry. We intend to concentrate at
this time on the acute care hospital market, which constitutes over 60% of the
existing market for patient care information delivery software. Our strategy
includes the following key elements:
o Continue sales and installation of DataQual with the I-Link interface engine
and provide enhancements of those products through additional research and
development.
o Continue sales and installation of I-Link Enterprise and the Central Data
Repository and enhancements of this product through additional research and
development.
o Expanded marketing of these products through direct implementation contracts
and joint marketing agreements with additional hospital associations and others,
as well as the expansion of our direct sales efforts focused on individual and
groups of hospitals.
o Maintenance of our existing client base by providing support, software
upgrades and consulting services.
o Expansion of our operations through strategic merger and acquisitions.
Results of Operations
Three Months ended June 30, 1999 Compared With Three Months ended June 30,
1998
Revenues for the three months ended June 30, 1999 increased to $317,977 from
$78,382 for the three months ended June 30, 1998. The increase of $239,595 is
primarily a result from an increase in software and service income from
recently contracts signed.
The cost of sales and services for the three months ended June 30, 1999
decreased to $54,085 from $68,142 for the three months ended June 30, 1998. The
decrease of $14,057 resulted primarily from lower direct costs of supporting
existing customers which was partially offset by increased costs associated with
implementing new contracts.
Selling and marketing expenses for the three months ended June 30, 1999
increased to $66,167 from $32,340 for the three months ended June 30, 1998. This
increase of $33,827 is a result from increased costs associated with an expanded
marketing outreach program.
General and administrative expenses for the three months ended June 30, 1999
increased to $252,928 from $191,399 for the three months ended June 30,
1998. The increase of $61,529 primarily resulted from an increase in legal and
accounting fees associated with the filing of a registration statement.
Interest expense, net, for the three months ended June 30, 1999 was
$13,930, as compared to $23,808 for the three months ended June 30, 1998. The
decrease in interest expense of $9,878, resulted primarily from an offset of
interest income of $3,794, conversion of debt instruments and repayment of notes
payable.
Other income, net for the three months ended June 30, 1999 increased to $136,405
in income from $335 in income for the three months ended June 30, 1998. The
increase of $136,070 in income resulted primarily from an increase in debt
forgiveness income.
Net profit for the three months ended June 30, 1999 and the three months ended
June 30, 1998 were $67,272 and $(236,972), respectively.
Six Months Ended June 30, 1999 Compared With Six Months Ended June 31, 1998
Revenues for the six months ended June 30, 1999 increased to $545,493 from
$150,986 for the six months ended June 30, 1998. The increase of $394,453,
resulted primarily from revenue generated by performance under contracts
recently signed.
The cost of sales and services for the six months ended June 30, 1999 decreased
to $93,945 from $163,493 for the six months ended June 30, 1998. The decrease of
$70,488 resulted primarily from an increase in capitalized research and
development costs and reduced costs associated with supporting existing
customers, which was partially offset by increased costs associated with
implementing new contracts.
Selling and marketing expenses for the six months ended June 30, 1999 increased
to $112,109 from $93,425 for the six months ended June 30, 1998. This increase
of $18,684 resulted primarily from increased costs associated with an expanded
marketing outreach program.
General and administrative expenses for the six months ended June 30, 1999
decreased to $445,510 from $521,622 for the six months ended June 30, 1998. The
decrease of $76,112 resulted primarily from a decrease in expense from
contingent liabilities which were offset by increased legal and accounting fees
associated with filing of a registration statement.
Interest expense, net, for the six months ended June 30, 1999 was $43,763, as
compared to $45,285 for the six months ended June 30, 1998. The decrease of
$1,522 in interest expense resulted primarily from an interest income offset of
$4,631, a reduction in notes payable, which was partially offset by a onetime
interest charge related to prepayment of a note payable.
Other income, net for the six months ended June 30, 1999 increased to $135,445
in income from $11,558 in expense for the six months ended June 30, 1998. The
increase of $147,003 resulted primarily from an increase in debt forgiveness
income.
Net Profit for the six months ended June 30, 1999 and the six months ended June
30, 1998 were $(13,543) and $(684,507), respectively.
Liquidity and Capital Resources
Working capital (deficit) at June 30, 1999 was $(3,572,580) as compared to
$(3,564,057) at June 30, 1998 and $(4,318,026) at December 31, 1998.
We have funded our operations and working capital needs through a series of
private equity and debt offerings, the exercise of investor warrants, and
payments received under new contracts.
Cash and cash equivalents at June 30, 1999 were $ 284,541, an increase of
$297,365 from June 30, 1998. During the six months ended June 30, 1999, we used
$155,125 net cash in our operating activities as compared to using $256,061, for
the six months ended June 30, 1998. This net change in the use of cash in
operations of $100,936 was the result of an increase in operating revenue and a
decrease in operating expenses.
During the six months ended June 30, 1999, we used $322,270 for investing
activities as compared to $-0-, for the six months ended June 30, 1998. The
increased use of cash for investing activities resulted from an increase in the
acquisition of computer equipment and an increase in intangible assets resulting
from capitalizing certain research and development costs associated with
bringing new software products to market.
During the six months ended June 30, 1999, we generated net cash of $760,160
from financing activities as compared to $245,074 for the six months ended June
30, 1998. The increase of $515,086 resulted from funds raised in a Regulation D,
Rule 504 private placement of common stock and the exercise of investor
warrants.
We lease office space on a two-year sublease basis and could be required to move
and/or add more space after this two-year period. The major capital expenditures
we may incur are for computers and related local area network hardware and
software and travel for sales representatives and key support and installation
personnel. Our recent upgrade of the DataQual software is being initially
marketed to our existing hospital customers. We also intend to invest
approximately $250,000 in personnel to expand and enhance sales, software
development and customer support, as well as associated office support staff.
We have frequently not been able to make timely payments to our trade and other
creditors. As of June 30, 1999, we had past due obligations for which there were
claims and judgments of approximately $1,592,000. Deferred payment terms have
been negotiated with many of our vendors and critical services have not been
suspended, nor has there been cancellation of orders due to delays in product
delivery as a result. We intend to use the cash generated from operations, if
any, to pay our trade and other creditors. We may have an opportunity to
discount or reduce some of the trade and other creditor's debts. We, in all
likelihood, will need to raise additional funds either from loans or additional
equity and/or debt offerings during the next twelve months, however, there are
no assurances that we will be able to raise capital sufficient to enable us to
continue our operations as contemplated.
From January 1999 to May 1999, the Company issued, 1,727,079 shares of common
stock under Regulation D, Rule 504 at an adjusted price of $.50 per share in
exchange for $883,538 in cash, debt conversion and other expenses. From January
1999 to March 1999, 446,389 shares issued at $.60 were subject to a post
issuance adjustment to $.50 per share resulting in an additional 54,398 shares
being issued per the adjustment.
In May and June 1999 we issued 460,000 shares of our common stock to holders of
warrants issued in the Regulation D, Rule 506 offering upon exercise of 460,000
warrants at an issuance price of $0.25 per share. These warrant had previously
been purchased at price of $1.00 per warrant, for an aggregate price of $1.25
per share, and pursuant to an agreement to reduce the exercise price of the
warrants from $.75 to $.25 per share for a period of 60 days. In conjunction
with these transactions, we also issued 100,000 shares of our common stock to
the placement agent at $.50 per share, net of commissions and in exchange for
$25,000 in cash.
In June 1999 we issued 99,000 shares of our common stock to holders of warrants
at an exercise price of $0.50 per share in exchange for debt repayment and
30,000 shares of our common stock to a holder of warrants at an exercise price
of $0.75 per share in exchange for $22,500 in cash.
We had, at June 30, 1999, a working capital (deficit) of $(3,572,580). We
believe that cash generated from operations will not be totally sufficient to
fund our current and past due cash requirements. We anticipate that it will be
likely that we will raise additional funds either by loan and/or additional
equity offerings. It is possible that we may have to curtail our current
operations and delay and/or cancel our business plans, however, management
believes that our current operational plans for the next twelve months will not
be curtailed or delayed because of the lack of sufficient financing. If
additional financing is required, there can be no assurances that we will be
able to obtain such additional financing, on terms acceptable to us and at the
times required by us, or at all.
We believe that our current staffing, cost structure, and current operating
plans will allow us an opportunity to compete effectively as a supplier of
information management software to the hospital market and possibly attain
profitability in future periods.
Net Operating Loss
For federal income tax purposes, we have net operating loss carryforwards of
approximately $7,900,000 as of December 31, 1998 and $8,300,000 (unaudited) as
of June 30, 1999. These carryforwards expire in the years 2009 and 2018,
respectively. We also have a capital loss carryforward of approximately
$1,560,000 which expires in 2001. The use of our net operating loss
carryforwards to offset taxable income, if achieved, may be subject to specified
annual limitations.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
A judgement in the amount of $162,147 was entered against the Company's
predecessor in March 1998 in Integrated Healthcare Systems, Inc. v. Gaskell, et
al, (Docket No. 98-1480), a case in the United States District Court Eastern
District of Virginia. The judgement was granted to a former owner of a onetime
subsidiary of the Company's predecessor and was based on the indemnification
provision in the stock purchase agreement by which he sold his interest in that
subsidiary to the Company's predecessor. The Company appealed that judgement
and, on June 14, 1999, the United States Court of Appeals for the Fourth Circuit
vacated the judgment. However, the appeals court also remanded the case back to
district court for further proceedings as to whether sanctions against the
Company should be imposed.
On May 14, 1999, the Company's predecessor and a judgement holder settled a
lawsuit with payments totaling $20,000 against a judgement for $80,000 plus
accrued interest on a note from a previous settlement which was in default. The
judgment, which has been released, stemmed from a lawsuit filed by Freer &
McGarry, PC, a law firm, in June 1995 against the Company's predecessor in the
Superior Court of the District of Columbia seeking recovery of $210,822.44,
which was alleged to be the reasonable value of legal services and expenses
claimed to have been supplied to the Company's predecessor.
Item 2. Changes in Securities and Use of Proceeds
From January 1999 to May 1999, the Company issued, 1,727,078 shares of common
stock under Regulation D, Rule 504 at an adjusted price of $.50 per share in
exchange for $863,539 in cash, debt conversion and other expenses. From January
1999 to March 1999, 446,389 shares issued at $.60 were subject to a post
issuance adjustment to $.50 per share resulting in an additional 74,398 shares
being issued from April 1999 to August 1999 per the adjustment.
In May and June 1999 we issued 460,000 shares of our common stock to holders of
warrants issued in the Regulation D, Rule 506 offering upon exercise of 460,000
warrants at an issuance price of $.25 per share. These warrant had previously
been purchased at price of $1.00 per warrant, for an aggregate price of $1.25
per share, and pursuant to an agreement to reduce the exercise price of the
warrants from $.75 to $.25 per share for a period of 60 days. In conjunction
with these transactions, we also issued 100,000 shares of our common stock to
the placement agent at $.50 per share, net of commissions for $25,000 in cash.
In June 1999 we issued 99,000 shares of our common stock to holders of warrants
at an exercise price of $0.50 per share in exchange for debt repayment and
30,000 shares of our common stock to a holder of warrants at an exercise price
of $0.75 per share in exchange for $22,500 in cash.
At June 30, 1999 warrants to purchase 12,066,755 shares of common stock
exercisable at varying dates through June 2004 at prices from $.75 to $7.00 per
share were outstanding. Of the 12,066,755 warrants, 7,526,784 warrants were
issued by the Company to the holders of IHS common stock as of June 14, 1999.
Each warrant allows the holder to purchase one share of the Company's common
stock at $5.00 for a period of five years expiring in June 2004.
Item 5: Other Information
None.
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H-QUOTIENT, Inc.
August 9, 1999 By: /s/ Michael J. Black
------------------------------------
Michael J. Black
Chairman and Chief Executive Officer