U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR I5(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
------- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 8,267,823 shares of its $.0001
par value common stock as of September 30, 1999.
H-QUOTIENT INC.
FORM 10-QSB
FOR THE SIX MONTHS ENDED September 30, 1999
INDEX
PART I: FINANCIAL INFORMATION (unaudited)
Item 1: PAGE
Condensed Consolidated Balance Sheet as of September 30, 1999,
December 31, 1998 and September 30, 1998 3
Condensed Consolidated Statements of Operations for the three
and nine months periods ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 1999 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and September 30, 1998 6
Notes to Unaudited Condensed Consolidated Financial
Statements for the nine months ended September 30, 1999 7
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 2: Changes in Securities and Use of Proceeds 19
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 21
H QUOTIENT, INC.
Consolidated Balance Sheets
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited) (audited)
Assets
Current assets:
Cash ................................................................. $ 23,368 $ 1,776
Securities held for trade ............................................ 812,196 --
Contracts receivable ................................................. 177,803 70,332
Due from officers .................................................... 3,897 9,985
Prepaid expenses and other current assets ............................ 60,087 --
------------ ------------
Total current assets ............................................ 1,077,351 82,093
Property and equipment, net .......................................... 83,611 67,776
Capitalized software, net of accumulated ............................. 397,034 69,308
amortization of $-0- in 1998 and $24,585
as of September 30, 1999
Intangibles, net ..................................................... 16,365
Deposits ............................................................. 59,490 6,860
------------ ------------
Total assets .................................................... $ 1,633,852 $ 226,037
============ ============
Liabilities and Shareholders' Accumulated Deficit
Current liabilities:
Accounts payable ..................................................... $ 561,700 $ 923,306
Accrued expenses ..................................................... 1,680,504 1,901,458
Short-term debt ...................................................... 688,804 1,337,130
Deferred revenues .................................................... 122,307 238,225
Billings in excess of costs and estimated earnings ................... 151,374 --
------------ ------------
Total current liabilities ....................................... 3,204,690 4,400,119
Shareholders' accumulated deficit:
Common stock, $.0001 par value authorized
50,000,000 shares (90,000,000 shares authorized at September 30,
1999), 5,110,075 shares outstanding at December 31, 1998 and
8,267,823 shares
outstanding at September 30, 1999, respectively ................. 828 511
Additional paid-in capital ........................................... 9,730,339 7,489,905
Accumulated deficit .................................................. (11,302,006) (11,664,498)
------------ ------------
Total shareholders' accumulated deficit ......................... (1,570,838) (4,174,082)
Total liabilities and shareholders' accumulated
deficit ............................................... $ 1,633,852 $ 226,037
============ ============
See accompanying notes to financial statements.
H-QUOTIENT, INC.
Consolidated Statements of Operations
Nine Months Ended Three months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Software sales ................................. $ 425,736 $ -- $ 202,828 $ --
Maintenance and service income ................. 518,904 211,953 196,373 60,967
----------- ----------- ----------- -----------
Total revenues ............................ 944,640 211,953 399,201 60,967
Operating expenses:
Cost of sales and services ..................... 216,750 198,655 123,705 35,162
Selling and marketing .......................... 183,785 154,134 71,675 60,709
General and administrative ..................... 700,606 869,829 255,096 103,190
----------- ----------- ----------- -----------
Total operating expenses .................. 1,101,141 1,222,618 450,476 199,061
----------- ----------- ----------- -----------
Operating loss ................................. (156,500) (1,010,665) (51,275) (138,094)
Other expense/(income):
Interest expense ............................... 63,929 69,584 20,166 24,299
Other expense/(income) ......................... -- -- -- --
----------- ----------- ----------- -----------
Total other expense/(income) .............. 63,929 69,584 20,166 24,299
----------- ----------- ----------- -----------
Operating income (loss), before extraordinary item ... $ (220,429) $(1,080,249) $ (71,441) $ (162,393)
----------- ----------- ----------- -----------
Extraordinary items, net ............................. 582,921 -- 447,476 --
----------- ----------- ----------- -----------
Net Income (loss) .................................... 362,492 (1,080,249) 376,035 # (162,393)
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted: .............................. $ 0.05 $ (0.22) $ 0.05 $ (0.03)
----------- ----------- ----------- -----------
Weighted Average of
Common shares outstanding ............................ 6,789,508 4,812,779 7,748,624 4,812,779
=========== =========== =========== ===========
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 and warrants:
Warrants issued in connection with
purchase of IST assets @ $.10 134,000 134,000
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 @ $2.00 135,029 14 270,044 270,058
Warrants pursuant to a Regulation D
offering @ $1.00 265,188 265,188
Net Loss for 1997 (3,282,673) (3,282,673)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 $ 4,812,779 $ 483 $ 6,833,994 $ (9,746,760) $ (2,912,283)
============ ============ ============ ============ ============
Issuance of common stock and warrants:
Warrants pursuant to a Regulation D
offering @ $1.00 145,000 145,000
Warrants issued for services @ $.75 233,350 233,350
Net loss for the nine months ended
September 30, 1998 (unaudited) (917,857) (917,857)
------------ ------------ ------------ ------------ ------------
September 30, 1998 (unaudited) 4,812,779 483 7,212,344 (10,664,617) (3,451,790)
============ ============ ============ ============ ============
Issuance of common stock and warrants:
Pursuant to Regulation D offering @ $1.00 50,000 50,000
Pursuant to Regulation D offering @ $.10 25,000 25,000
Stock Issuance - Rule 144 @ $.68 297,926 28 202,561 202,589
Net Loss for the three months ended
December 31, 1998 (999,881) (999,881)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 5,110,705 511 7,489,905 (11,664,498) (4,174,082)
============ ============ ============ ============ ============
Issuance of common stock:
Regulation D offering
@ $0.50 per share (unaudited) 1,857,079 186 948,352 948,538
@ $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) 149,000 15 74,485 74,500
@ $2.00 per share (unaudited) 500,000 50 999,950 1,000,000
@ $0.84 per share (unaudited) 16,667 2 14,062 14,064
@ $0.94 per share (unaudited) 41,500 4 38,902 38,906
@ $0.78 per share (unaudited) 2,872 1 2,242 2,243
Net income for the nine months ended
September 30, 1999 (unaudited) 362,492 362,492
------------ ------------ ------------ ------------ ------------
September 30, 1999 (unaudited) 8,267,823 828 9,730,339 (11,302,006) (1,570,839)
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
H-QUOTIENT, INC.
Consolidated Statements of Cash Flows
Nine months ended
September 30,
1999 1998
--------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $(220,429) $(1,080,249)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 43,836 29,331
Amortization 27,418 (15,643)
Stock and warrants issued for current expenses 1,000 233,350
Changes in operating assets and liabilities:
(Increase)/Decrease in:
Contracts receivable (107,471) 60,649
Due from affiliate -- --
Due from officers 6,089 (505)
Prepaid expenses and other current assets (60,087) --
Deferred charges and other assets (58,787) --
Increase/(Decrease) in:
Accounts payable 174,292 5,146
Accrued expenses 145,337 506,622
Deferred revenues (23,418) 17,507
Billings in excess of costs 58,875 --
---------- ----------
Net cash (used) in/provided by operating
activities (13,347) (243,792)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (61,591) --
Disposals of property and equipment, net 1,549 --
Additions to intangibles (368,351) --
---------- ----------
Net cash used in investing activities (428,393) --
---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock 678,332
Proceeds from sale of warrants 145,000
Proceeds from notes payable 60,000 90,000
Repayment of notes payable (275,000) (20,000)
Repayment of related parties (90,000)
Proceeds from related parties -- 120,074
---------- ----------
Net cash provided by financing activities 463,332 245,074
---------- ----------
Net increase in cash 21,593 1,282
Cash at beginning of period 1,776 (1,838)
---------- ----------
Cash at end of period $ 23,369 $ (556)
========== ==========
See accompanying footnotes to consolidated financial statements.
H-QUOTIENT, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 1999
Organization
HoQuotient, 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.
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 follows the guidelines as
promulgated under Statement of Position (SOP) 97-2, 98-4 and 98-9 in recognizing
revenue on software sales and other services. Management believes that
implementation of SOP 98-4 and 98-9 does materially affect the financial
statements.
Software System Sales - Revenue form software system sales that do not require
significant production, modification or customization are recognized when all of
the following criteria are met;
Execution of a written contract;
Delivery of product;
The fee is fixed or determinable and
Collectibility is reasonably assured
If a software system sale includes multiple elements, the sale price is
allocated to each element according to its actual selling price.
Revenue from software system sales requiring significant modification or
customization are recognized using the percentage of completion method based
upon the costs incurred relative to total estimated costs.
Contract costs include all direct material, labor costs, subcontract and those
indirect costs related to contract performance, such as equipment cost,
supplies, insurance, payroll taxes and other general costs. General,
administrative and overhead costs are charged to expense as incurred. Provision
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
estimated profitability, and final contract settlements may result in revisions
to costs and income, which are recognized in the period in which the revisions
are determined.
Long-term contracts include certain key elements and consist of the following:
I-Link Enterprise;
Central Data Repository (CDR) or data warehouse;
PC-based intelligent node or server;
On-going support and training;
Dataqual system (optional).
The sales price for each element is allocated based upon vendor-specific
objective evidence of fair value. Vendor specific evidence of fair value is
determined based upon the price charged when the element is sold separately.
The Company offers non-specific upgrades to customers with annual support
agreements for a specific product when they are completed and available for
release.
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.
Stock-Based Compensation - The Company continues to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APS) No. 25, "Accounting for Stock Issued to Employees".
Compensation cost for stock options and other equity instruments, if any, is
measured as the excess of the quoted market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.
Restricted stock, if any , is recorded as compensation cost over the requisite
vesting periods based on the market value of the date granted.
Statement of Financial Accounting Standards ("SFAS") No. 123 " Accounting for
Stock-Based Compensation", established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. The Company has elected to remain on its current method of
accounting as described above, and has adopted the disclosure requirements of
SFAS No. 123.
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
$(2,127,309) at September 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 September30, 1999 (unaudited) $ 26,695
Three months ended September 30, 1998 (unaudited) $ 11,148
Nine months ended September 30, 1999 (unaudited) $ 28,962
Nine months ended September 30, 1998 (unaudited) $ 54,452
7. Billings in Excess of Costs and Estimated Earnings
Nine months ended
September 31, 1999
------------------
Costs incurred on uncompleted contracts $ 162,488
Gross profit recognized to date on uncompleted
Contracts 504,369
--------
668,857
Less: Billings to date (818,231)
========
$(151,374)
========
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess
of billing on uncompleted contracts $ -
Billings in excess of cost and estimated
earnings on uncompleted contracts (151,374)
========
$(151,374)
========
There was no long-term contract activity for the years ended December 31, 1998
and 1997.
12. Earnings Per Share
The following data shows the amounts used in computing basic and diluted
earnings per share for the years ended December 31, 1998 and 1997, and for Nine
months ended September 31, 1999 (unaudited) and 1998 (unaudited).
Nine months ended
September 31,
------------------------------
1998 1997 1999 1998
------------ ------------ ----------- ------------
(unaudited) (unaudited)
Net income (loss) to Common shareholders $(1,917,738) $(3,282,673) $ 363,492 $(1,080,249)
Weighted average number of outstanding
common shares - basis 4,936,915 3,578,054 6,789,508 4,812,779
Dilutive effect of warrants to purchase
common shares -- -- -- --
----------- ----------- ----------- -----------
Diluted common shares outstanding 4,936,915 3,578,054 6,028,047 4,812,779
=========== =========== =========== ===========
Net loss - basic and diluted $ (0.39) $ (0.92) $ 0.05 $ (0.22)
=========== =========== =========== ===========
Warrants to purchase shares of common stock are not included in computing
diluted earnings per share because their effects are antidilutive.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited financial statements and related notes for the nine months ended
September 30, 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 plans,
objectives, expectations and intentions, within the meaning of the Securities
Exchange Act of 1933, as amended. Actual results could differ materially from
those anticipated in forward-looking statements and are made as of the date of
this report. The Company assumes no obligation to update them. The discussion
contained herein relates to the financial statements, which have been prepared
in accordance with GAAP.
Overview
HoQuotient, 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 a downstream merger between the companies. The 7,526,784
shares of outstanding common stock (par value $.0001) of Integrated Healthcare
Systems, Inc. was exchanged for 7,526,784 shares of H Quotient, Inc. common
stock, (par value $.0001).
Our principal products consist of DataQual(R), which includes I-Linksm and
I-Linksm Enterprise, which includes the Central Data Repository. DataQual is a
software system designed to capture information on quality of care, risk
management, costs and other aspects of the management of patients in hospitals.
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 September 30, 1999 Compared With Three Months ended
September 30, 1998
Revenues for the three months ended September 30, 1999 increased to $399,201
from $60,967 for the three months ended September 30, 1998. The increase of
$338,234 is primarily a result of revenue derived from new contracts signed in
the first quarter for I-Link Enterprise software systems and related services
that was partially offset by a decrease in DOS based Dataqual products under
support contracts.
The cost of sales and services for the three months ended September 30, 1999
increased to $123,705 from $35,162 for the three months ended September 30,
1998. The increase of $88,543 resulted primarily from increased technical and
support staff for the I-Link Enterprise contracts and with new Dataqual
installations.
Selling and marketing expenses for the three months ended September 30, 1999
increased to $71,675 from $60,706 for the three months ended September 30, 1998.
This increase of $10,966 is a result from increased costs associated with new
marketing personnel.
General and administrative expenses for the three months ended September 30,
1999 increased to $255,096 from $103,190 for the three months ended September
30, 1998. The increase of $151,906 primarily resulted from an increase in legal
and accounting fees associated with the filing of a registration statement and
increased depreciation expense for computer equipment used in contract
fulfillment and amortization of capitalized software costs.
Interest expense, net, for the three months ended September 30, 1999 was
$20,166, as compared to $24,299 for the three months ended September 30, 1998.
The decrease in interest expense of $4,133, resulted primarily from an
conversion of debt instruments and repayment of notes payable.
Extraordinary items, net for the three months ended September 30, 1999 increased
to $447,476 as compared to $-0- for the three months ended September 30, 1998.
The increase resulted primarily from the net gain derived from the settlement of
debt totaling $792,000 with various creditors in which 154,092 shares of our
common stock was exchanged. See "Legal Proceedings" and "Changes in Securities
and Use of Proceeds".
Net profit for the three months ended September 30, 1999 and the three months
ended September 30, 1998 were $376,035 and $(162,393), respectively.
Nine Months Ended September 30, 1999 Compared With Nine Months Ended
September 31, 1998
Revenues for the nine months ended September 30, 1999 increased to $944,640 from
$211,953 for the nine months ended September 30, 1998. The increase of $732,687
resulted primarily from revenue generated under new contracts signed in the
first quarter for I-Link Enterprise software systems and related services and
completion of the testing phase of the new version of the Dataqual software
product that was partially offset by a decrease in DOS based Dataqual products
under support contracts.
The cost of sales and services for the nine months ended September 30, 1999
increased to $216,750 from $198,655 for the nine months ended September 30,
1998. The increase of $18,095 resulted primarily from an increase in the
technical and support staff associated with implementing new contracts, which
was partially offset by capitalized research and development costs.
Selling and marketing expenses for the nine months ended September 30, 1999
increased to $183,785 from $154,134 for the nine months ended September 30,
1998. This increase of $29,651 resulted primarily from increased costs
associated with an expanded marketing outreach program and new marketing
personnel.
General and administrative expenses for the nine months ended September 30, 1999
decreased to $700,606 from $869,829 for the nine months ended September 30,
1998. The decrease of $169,224 was a resulted primarily from a decrease in
expense from contingent liabilities and investment banking fees which were
offset by increased legal and accounting fees associated with filing of a
registration statement.
Interest expense, net, for the nine months ended September 30, 1999 was $63,929,
as compared to $69,584 for the nine months ended September 30, 1998. The
decrease of $5,655 in interest expense resulted primarily from an interest
income offset of $4,631, conversion of debt instruments and repayment of notes
payable.
Extraordinary items, net for the three months ended September 30, 1999 increased
to $447,476 as compared to $-0- for the three months ended September 30, 1998.
The increase resulted primarily from the net gain derived from the settlement of
debts totaling $792,000 with various creditors in which cash and 154,092 shares
of our common stock was exchanged. See "Legal Proceedings" and "Changes in
Securities and Use of Proceeds".
Net Profit for the nine months ended September 30, 1999 and the nine months
ended September 30, 1998 were $362,492 and $(1,080,249), respectively.
Liquidity and Capital Resources
Working capital (deficit) at September 30, 1999 was $(2,127,339) as compared to
$(3,090,910) at September 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 September 30, 1999 were $ 23,368, an increase of
$23,925 from September 30, 1998. During the nine months ended September 30,
1999, we used $13,347 net cash in our operating activities as compared to using
$243,792, for the nine months ended September 30, 1998. This net change in the
use of cash in operations of $257,139 was the result of an increase in operating
revenue and a decrease in operating expenses, accounts payable and accrued
expenses.
During the nine months ended September 30, 1999, we used $428,393 for investing
activities as compared to $-0-, for the nine months ended September 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 nine months ended September 30, 1999, we generated net cash of
$463,332 from financing activities as compared to $245,074 for the nine months
ended September 30, 1998. The increase of $218,258 resulted from funds raised in
a Regulation D, Rule 504 private placement of common stock and the exercise of
investor warrants, which was partially offset by debt repayment.
Our sales of Dataqual and related service contracts are billed net due upon
receipt. Payment terms on I-Link Enterprise contracts are defined in the
contract and will vary. It is our practice to require a substantial payment upon
signing of any long term contract.
We lease office space on a two-year sublease basis and could be required to move
and/or add more space after this two-year period. The major capital expenditures
we may incur are for computers and related local area network hardware and
software and travel for sales representatives and key support and installation
personnel. Our recent upgrade of the DataQual software is being initially
marketed to our existing hospital customers. We also intend to invest
approximately $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 September 30, 1999, we had past due obligations for which there
were claims and judgments of approximately $900,000. 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.
We had, at September 30, 1999, a working capital (deficit) of $(2,127,339). 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 September 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
We currently have judgements entered against us by various creditors. Of these
judgements, five are uncontested and are immediately payable in the aggregate
amount of $200,000 plus accrued interest of approximately $40,000.
On September 23, 1999, we settled a judgement and a pending lawsuit with a
judgement holder. The outstanding matters included a judgement for a note
payable plus accrued interest totaling $198,000 and in the matter of Integrated
Healthcare Systems, Inc.v. Gaskell, et al, (Docket No. 98-1480) before the
United States District Court Eastern District of Virginia which the defendant
claimed $162,147 in legal fees. In settlement of these matters, we transferred
marketable securities owned by us which we received in exchange for 75,295
shares of our common stock to the judgement holder. See "Sale of Securities and
Use of Proceeds."
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.
On September 16, 1999, we settled a lawsuit in exchange for 16,667 shares of our
common stock. The case SSMI Corp. v. Integrated Healthcare Systems, Inc. (Index
No. 21622/97) was filed for non-payment of a note payable of $50,000 plus
accrued interest by SSMI Corp. in an action in the Supreme Court for the State
of New York, County of Nassau.
In addition, our former accountant sued us in April 1997 for collection of
$365,833 in fees. The case, M.R. Weiser & Co., LLP v. Integrated Healthcare
Systems, Inc., (Index No. 601937/97). is presently pending in the United States
District Court for the Southern District of New York. We have answered the
complaint and asserted various affirmative defenses, among them claims that the
plaintiff has not given us full credit for payments made and that plaintiff's
charges were excessive and unreasonable. This action is pending and is in the
discovery phase.
On January 10, 1997 the Internal Revenue Service ("IRS") filed in the Circuit
Court for the County of Fairfax, Virginia a Notice of Federal Tax Lien in the
amount of $386,234.73 against us for employment withholding tax liabilities of
Integrated Systems Technology, Inc. ("IST") formerly a wholly owned subsidiary
of ours acquired in 1995. It is the opinion of our special counsel, Carr Goodson
Lee & Warner P.C., Washington D.C.; that there is no "alter ego" liability on
the part of us and that the lien filed against us is wrongful and should be
released. We have made efforts to get the lien released but the IRS has refused.
In the meantime, the IRS since the filing of the Notice, has not made any effort
to enforce it against us. In the event the lien is not released, we may have to
bring a suit against the IRS in the Federal courts for wrongful levy.
Other suits arising in the ordinary course of business are pending against us.
We believe the ultimate outcome of these actions will not result in a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
Item 2. Changes in Securities and Use of Proceeds
From January 1999 to May 1999, we issued 1,727,078 shares of common stock under
Regulation D, Rule 504 at an adjusted price of $.50 per share in exchange for
$428,833 in cash and $457,704 in 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.
In August 1999 we issued 500,000 shares of our common stock which are subject to
the restrictions of Rule 144 of the Securities Exchange Act of 1934 at $2.00 per
share in exchange for 153,245 shares of Internet Guide, Inc. ("IGI") common
stock which was issued under a Regulation A offering at $6.50 per share. In
September 1999 we used 28,893 of the IGI shares we received in the exchange to
retire $392,878 in notes payable, accrued expenses and accounts payable. As part
of the exchange agreement with IGI, we issued 250,000 warrants to purchase
250,000 shares of our common stock at an exercise price of $2.00 per share and
250,000 warrants to purchase 250,000 shares of our common stock at an exercise
price of $1.00 per share.
In September 1999 we issued the following shares of our common stock which are
subject to the restrictions of Rule 144 of the Securities Exchange Act of 1934
in exchange for an aggregate of $249,259 in notes payable and accrued interest:
16,667 shares at $.84 per share; 41,500 shares at $.94 per share; and 2,872
shares at $.78 per share.
In September 1999 we issued 120,000 shares of our common stock under a
Regulation D, Rule 504 offering at $.50 per share in exchange for $60,000 in
cash; and 60,000 shares of our common stock which are subject to the
restrictions of Rule 144 of the Securities Exchange act of 1934 in exchange for
$30,000 in cash.
In September 1999 we issued 25,000 warrants to purchase 25,000 shares of our
common stock at an exercise price of $.75 per share to a Director in lieu of
compensation for serving a director for calendar year 1998. We issued 1,000,000
warrants to purchase 1,000,000 shares of our common stock at an exercise price
of $.75 per share to officers for a period of five years. These warrants were
issued in lieu of the implementation of an executive management stock option
program.
At September 30, 1999 warrants to purchase 13,591,755 shares of common stock
exercisable at varying dates through September 2004 at prices from $.75 to $7.00
per share were outstanding. Of the 1,3592,755, 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.
HoQuotient, Inc.
November 15, 1999 By: /s/ Michael J. Black
-------------------------------------
Michael J. Black
Chairman and Chief Executive Officer