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 MARCH 31, 2001
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)
8150 Leesburg Pike, Suite 503, Vienna, VA 22182
(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: 20,909,567 of its $.0001 par
value common stock as of March 31, 2001.
H-QUOTIENT INC.
FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 2001
INDEX
PART I: FINANCIAL INFORMATION (unaudited)
Item 1: PAGE
Condensed Consolidated Balance Sheet as of March 31, 2001
and December 31, 2000 2
Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 2001 and
March 31, 2000 3
Condensed Consolidated Statements of Cash Flows for the
Three months ended March 31, 2001 and the three months
ended March 31, 2000 4
Notes to Unaudited Condensed Consolidated Financial
Statements for the three months ended March 31, 2001 5
Item 2:
Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 2: Changes in Securities and Use of Proceeds 14
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
H QUOTIENT, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Assets
31-Mar-01 31-Dec-00
------------ ------------
(unaudited) (audited)
Current assets:
Cash $ 38,326 $ 151,462
Investment in equity securities 2,433,222 2,598,637
Accounts receivable, less allowance for doubtful accounts of
$18,790 at March 31, 2001 and December 31, 2000, respectively 123,560 164,912
Due from affiliates 15,250 24,236
Costs and estimated earnings in excess of billings
on uncompleted contracts 761,612 518,977
Notes receivable 1,151,865 747,000
Prepaid expenses 1,778,527 1,732,694
------------------ --------------------
Total current assets 6,302,362 5,937,918
Property and equipment, net 180,782 206,358
Capitalized software, net 286,450 316,105
Deposits 34,294 14,294
------------------ --------------------
Total assets $ 6,803,888 $ 6,474,675
================== ====================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 410,881 $ 356,445
Accrued expenses 965,783 898,153
Due to affiliates 2,764 50,077
Short-term debt 650,630 477,285
Deferred revenues 476,332 459,530
------------------ --------------------
Total current liabilities 2,506,390 2,241,490
------------------ --------------------
Commitments and contingencies
Shareholders' accumulated deficit:
Preferred stock, 10,000,000 shares - -
authorized; 100 shares issued and outstanding - -
Common stock, $.0001 par value, 90,000,000 shares
authorized; 20,909,567 and 19,810,544 shares issued and
outstanding at March 31, 2000 ((unaudited), and
December 31, 2000, respectively) 2,092 1,982
Additional paid-in capital 13,840,467 13,652,448
Accumulated deficit (9,545,062) (9,421,245)
------------------ --------------------
Total shareholders' equity 4,297,497 4,233,185
------------------ --------------------
Total liabilities and shareholders' equity $ 6,803,888 $ 6,474,675
================== ====================
See accompanying notes to consolidated financial statements.
2
H QUOTIENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended March 31, 2001 and 2000
31-Mar-01 31-Mar-00
------------------ ------------------
(unaudited) (unaudited)
Revenues:
Software sales $ 24,688 $ 311,987
Maintenance and service income 273,861 131,366
------------------ ------------------
Total revenues 273,861 443,353
Operating expenses:
Cost of sales and services 148,771 262,042
Selling and marketing 12,687 93,964
General and administrative 105,822 238,341
------------------ ------------------
Total operating expenses 267,280 594,348
------------------ ------------------
Operating income (loss) 6,581 (150,994)
Other income (expense):
Interest expense (3,868) (4,780)
Unrealized loss on securities (164,035)
Realized gain on sale of securities 37,505 268,976
Interest income - 27,917
------------------ ------------------
Total other expense (130,398) 292,113
------------------ ------------------
Income (loss) before provision for income taxes and
extraordinary item (123,817) 141,119
Provision for income taxes - -
------------------ ------------------
Income (loss) before extraordinary item (123,817) 141,119
Extraordinary item - 212,073
------------------ ------------------
Net income (loss) $ (123,817) $ 353,190
================== ==================
Earnings (loss) Per Common Share:
Before extraordinary item
Basic $ (0.01) $ 0.01
================== ==================
Diluted $ (0.01) $ 0.01
================== ==================
Extraordinary item
Basic $ - $ 0.02
================== ==================
Diluted $ - $ 0.01
================== ==================
After extraordinary item
Basic $ (0.01) $ 0.03
================== ==================
Diluted $ (0.01) $ 0.02
================== ==================
Weighted average common shares
Basic 20,491,843 12,700,137
------------------ ------------------
Diluted 22,093,797 15,613,157
================== ==================
See accompanying notes to consolidated financial statements.
3
H QUOTIENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and the three months ended March 31, 2000
31-Mar-01 31-Mar-00
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ (123,817) $ 353,191
--------------- ---------------
Net cash provided (used) in operating activities 21,331 (495,701)
--------------- ---------------
Cash flows from investing activities:
Net cash provided (used) in investing activities 79,134 (69,688)
--------------- ---------------
Cash flows from financing activities:
Net cash provided by financing activities (213,601) 567,844
--------------- ---------------
Net increase in cash (113,136) 2,455
Cash at beginning of period 151,462 15,729
--------------- ---------------
Cash at end of period $ 38,326 $ 18,184
=============== ===============
See accompanying notes to consolidated financial statements.
4
H-QUOTIENT, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 2001
Organization - H-Quotient, Inc., was incorporated in the
Commonwealth of Virginia on May 12, 1999 as a wholly-owned
subsidiary of Integrated Healthcare Systems, Inc. ("IHS").
On June 14, 1999, IHS executed a downstream merger with
H-Quotient, Inc. in which all the issued and outstanding
shares of common stock of IHS were exchanged for an equal
number of shares of our $.0001 par value common stock.. We
develop, market, install and maintain integrated hardware
and software systems to private and public healthcare
facilities throughout the United States.
Basis of Interim Presentation - The consolidated financial
statements of the Company include the accounts of its wholly
owned subsidiaries, IHS of Virginia, Inc. (sold December 28,
2000). Dataqual Group, Inc and Quotient Capital Corporation.
All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates - The preparation of consolidated financial
statements in conformity with general accepted accounting
principles 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 - We sell software systems under
noncancelable sales agreements. Revenue from a software
system sale is recognized when a sales agreement is in
force, the product has been delivered, the sales price is
fixed and 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.
Revenues from software system sales requiring significant
modification or customization are recognized using the
percentage of completion method based on 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.
5
We offer non-specific upgrades to customers with annual
support agreements for a specific product when they are
completed and available for release. If an upgrade leads to
a new product, the upgrade is considered a new sale.
Revenues from consulting services are recognized as
performed. Revenues derived from maintenance contracts are
initially deferred and recognized as revenue ratably over
the terms of the contracts, which are typically from one to
two years.
Deferred Revenue - Deferred revenue represents 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, We consider all highly liquid debt
instruments purchased with a maturity of three months or
less at the time of purchase to be cash equivalents.
Throughout the year cash and cash equivalents exceeded
federally insured limits. We do not believe that this
results in any significant credit risk.
Fair Value of Financial Instruments - We consider the
recorded value of its financial assets and liabilities,
consisting principally of contracts receivable, investments
in equity securities, accounts payable, accrued expenses,
and debt to approximate the fair value of the respective
assets and liabilities at March 31, 2001 and December 31,
2000.
Property and Equipment - Property and equipment are stated
at cost. Depreciation of property and equipment is
determined using the straight-line method over an estimated
useful life of three years.
Capitalized Software Costs - We capitalize software
development costs incurred subsequent to the internal
release of the product for acceptance testing. Upon the
general release of the product to customers, development
costs for that product are amortized over periods not
exceeding four years, based on the economic life of the
product. Capitalized software costs consist of the
following:
3/31/01 12/31/00
--------------------------
Capitalized software $ 474,474 $ 474,474
Accumulated amortization (188,024) (158,369)
-------------------------------------------------------
Net $ 286,450 $ 316,105
=======================================================
Amortization expense for the three months ended March 31,
2001 and the year ended December 31, 2000 totaled $29,655
and $108,709, respectively.
6
The carrying amount of acquired technology and software
development is periodically reviewed 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.
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. 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. We evaluate
the likelihood of realization of deferred tax assets and
provides an allowance where, in management's opinion, it is
more likely than not that the asset will not be realized.
Net Income (Loss) - 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.
Investment in Equity Securities - Our investments in equity
securities consists of marketable securities that the
Company has classified as trading securities and common
stock in a closely held Company that is a shareholder of H
Quotient, Inc., and is reported at cost.
The trading securities consist of 14,237,750 shares of
Veridien Corporation as of December 31, 2000, and 14,960,100
as of March 31, 2001, that had a fair value of $909,219 and
$629,934, respectively. The unrealized loss on this
investment as of December 31, 2000 and March 31, 2001 was
$356,781 and $164,035, respectively.
The investment in the stock of the shareholder of H
Quotient, Inc., consists of 310,516 and 430,626 shares of
common stock of Internet Guide, Inc., ("Internet Guide") as
of March 31, 2001 and December 31, 2000, respectively. These
shares are carried at cost of $1,804,288, as of March 31,
2001 and December 31, 2000. In December 2000, we acquired
79,890 shares of Internet Guide stock in an exchange of a
marketable security that was valued at $305,216, the fair
value of the stock exchanged on the date of the exchange. We
sold 138,500 shares of Internet Guide in September 2000 for
$1,800,000, consisting of $732,000 of notes receivable from
unrelated parties and $1,068,000 of commercial trade
credits. A gain of $899,750 was recognized on the sale. In
addition, in September 2000, we exchanged 61,500 shares of
Internet Guide stock at $6.50 per share, an aggregate of
$800,000, for 8,000,000 shares of the common stock of
Veridien Corporation. No gain or loss was recognized on the
exchange.
7
Notes Receivable - Notes receivable at March 31, 2001,
consist of notes from employees for a cash advances of
$15,250 and a group of notes from Canadian individuals that
totaled $732,000 that were due at various dates in 2000 and
2001 and a balance on a note of $419,135 that was issued for
the exercise of 834,434 warrants at $.63 per share. On May
4, 2001, the $732,000 of notes were exchanged for $382,000
of commercial trade credits and a $350,000 note payable to
the other party to the exchange transaction.
Prepaid Expenses - Prepaid expenses at March 31, 2001 and
December 31, 2000 include $1,068,000 of Asset Recovery
Credits from SGD International Corp. and $622,500 of Cash
Collateral Credits issued by SGD International Corp.
acquired from Veridan Corporation. The credits represent
amounts that we expect to use in the fulfillment of future
sales contracts.
Property and Equipment -
Property and equipment consists of the following:
3/31/01 12/31/00
--------------------------
Office and computer equipment $ 339,225 $ 339,225
Furniture and fixtures 57,804 57,804
------------------------------------------------------------
397,029 397,029
Less: accumulated depreciation (216,247) (190,671)
------------------------------------------------------------
$ 180,780 $ 206,358
============================================================
Depreciation expense of property and equipment was $25,576
and $70,912 for the three months ended March 31, 2001 and
the year ended December 31, 2000, respectively.
Short-term Debt -
Short-term debt consists of the following:
3/31/01 12/31/00
----------------------------------
Unsecured note payable to 967474 Ontario, Inc. with
interest at 12%, due March 28, 2001 $ 350,000 $ 350,000
Unsecured note payable to a bank with interest at
prime plus 1%. - -
Legal settlement with a law firm with interest at 9%.
The Company is in default of the terms of
settlement of this obligation. 62,475 62,475
Unsecured non-interest bearing demand note payable to
an individual. - -
Unsecured promissory notes payable with interest at
15%. These notes are in default 64,810 64,810
-------------------------------------------------------------------------------------------
$ 477,285 $ 477,285
===========================================================================================
8
Uncompleted Contracts -
Costs incurred on uncompleted contracts $ 831,482 $ 725,164
Gross profit recognized to date on uncompleted
contracts 856,968 720,657
Less: Billings to date (926,838) (926,838)
------------------------------------------------------------------------------------------
Net $ 761,612 $ 518,977
===========================================================================================
Included in the accompanying consolidated balance sheets
under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 761,612 $ 518,977
Billings in excess of cost and estimated earnings on
uncompleted contracts -
------------------------------------------------------------------------------------------
$ 761,612 $ 518,977
==========================================================================================
Lease Commitments - We entered into a nineteen month lease
agreement for office space beginning December 1, 2000. The
lease requires monthly payments of $4,294 plus a pro rata
share of taxes and operating costs. Future minimum lease
payments as of March 31, 2001 under this lease are as
follows:
Year ending
December 31
-----------------------------------------------------
2001 $ 38,649
2002 25,766
-----------------------------------------------------
Total $ 64,415
=====================================================
Rent expense under all operating leases was $12,882 and
$105,386 for the three months ended March 31, 2001 and the
year ended December 31, 2000, respectively.
Net Operating Loss Carryforward - At December 31, 2000, we
had approximately $6,700,000 in net operating loss
carryfowards which expire at varying dates between the years
2009 and 2020. The annual utilization of these carryfowards
are significantly limited under Section 382 of the Internal
Revenue Code as a result of ownership changes. A valuation
allowance equal to the total deferred tax asset has been
established in each period due to the uncertainty regarding
the realization of the net deferred tax assets.
9
Net Income (Loss) per Share - The following data shows the
amounts used in computing basic and diluted net income
(loss) per share for the three months ended March 31, 2001
and the year ended December 31, 2000:
3/31/01 3/31/00
----------------- ----------------
Net income to common shareholders $ (123,817) $ 353,191
-------------------------------------------------------------------------------------------
Weighted average number of outstanding common
shares-basic 20,491,843 12,700,137
Diluted effect of warrants to purchase common shares 1,601,954 2,913,020
-------------------------------------------------------------------------------------------
Diluted common shares outstanding 22,093,797 15,613,157
-------------------------------------------------------------------------------------------
Basic
-------------------------------------------------------------------------------------------
Net income (loss) $ (.01) $ .03
-------------------------------------------------------------------------------------------
Diluted
-------------------------------------------------------------------------------------------
Net income (loss) $ (.01) $ .02
-------------------------------------------------------------------------------------------
Supplemental Information to Condensed Consolidated Statement
of Cash Flows.
Supplemental disclosure of cash flows and noncash investing
and financing activities are as follows:
Three months ended March 31, 2001:
. We received 1,500,000 shares of Veridien Corporation
common stock on a zero cost basis as a supplement to a
transaction in which we sold 183,800 shares of our
common stock in exchange for $39,000 in cash. Of these
shares, 777,400 shares were sold in market transactions
that are recorded as a realized gain on the sale of
securities and the 722,600 shares held at March 31,
2001 are valued at the closing price of Veridien
Corporation common stock at March 30, 2001 at $.0469
per share.
. On February 8, 2001, warrant certificates for the
purchase of 834,434 shares of our common stock were
exercised at a price of $.63 per share in the
aggregated of $525,000. Payment was made by the
delivery to us of a promissory note in the amount of
$525,000 with an interest rate of 6% per annum. The
note, which matures on December 31, 2001, has been
partially paid in the amount of $105,135 by waiver of
payment for balances due the note issuer by us.
10
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 three months ended
March 31, 2001 and with the Company's audited financial statements and
accompanying notes for the year ended December 31, 2000. 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 1934, 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
H-Quotient, Inc., is a Virginia corporation, incorporated on May 12, 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 7,526,284
shares of outstanding common stock (par value $.0001) of Integrated Healthcare
Systems, Inc., were exchanged for 7,526,284 shares of H Quotient, Inc., common
stock, (par value $.0001).
On December 28, 2000, the Company sold IHS of Virginia, Inc., a wholly-owned
subsidiary to an affiliate of a former officer and director in exchange for the
assumption of $791,319 in liabilities for which the subsidiary was obligated and
the granting of a license to resell certain of the Company's software products.
The Company has recognized this transaction as revenue from sale of marketing
rights in 2000.
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.
DataQuotient(R) is being developed for the extended-care market. DataQual's
companion product, I-Link, an interface engine, is designed to interconnect and
extract data from any and all hospital information systems in the hospitals.
I-Link Enterprise is a system of servers installed on a hospital's 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 significant 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 and the
11
extended-care market, which constitute over 60% of the existing market for
patient care information delivery software. Our strategy includes the following
key elements:
. Continue sales and installation of I-Link Enterprise and the Central Data
Repository and enhancements of this product through additional research and
development. This product is marketed to hospital associations and insurance
companies. Priority is being given to the completion of the Ohio Hospital
Association (189 hospitals) contract as a stepping stone to securing similar
contracts with other hospital associations. The following testimonial is a
validation of this strategy:
"The concept around H-Quotient's data collection software systems is
groundbreaking, and we at the Ohio Hospital Association are excited about the
prospect of accessing and using data through H-Quotient's I-Link Enterprise and
virtual private network. H-Quotient's solutions facilitate HIPAA compliance, and
they are innovative enough to bridge the technology gaps that occur in some
hospitals. This customization is what will create connectivity between our
member hospitals and the VPN. I highly recommend discussing the possibilities
with H-Quotient." Ohio Hospital Association Vice President of Data Services,
David Engler, PhD.
. Continue sales/leases and installation of DataQual with the I-Link interface
engine and provide enhancements of those products through additional research
and development. It is anticipated that DataQual sales/leases efforts will be
concentrated on hospitals belonging to hospital associations that are I-Link
Enterprise customers.
. Complete development of DataQuotient, continue sales and commence
installations in extended-care facilities.
. Maintenance of our existing client base by providing support, software
upgrades and consulting services.
. Expansion of our operations through strategic merger and acquisitions.
. Continue portfolio investment activity through our subsidiary Quotient Capital
Corporation.
Results of Operations
Three Months ended March 31, 2001 Compared With Three Months ended March 31,
2000
Revenues for the three months ended March 31, 2001, decreased to $273,861 from
$443,353 for the three months ended March 31, 2000. The decrease of $169,492 is
primarily a result of completing software products under our contract with the
Ohio Hospital Association during 2000. The decrease was partially offset by an
increase in service revenue of $117,807.
The cost of sales and services for the three months ended March 31, 2001,
decreased to $148,771 from $262,042 for the three months ended March 31, 2000.
The decrease of $113,271 resulted primarily from an increase in productivity and
a corresponding decrease redundant technical staff.
Selling and marketing expenses for the three months ended March 31, 2001,
decreased to $12,687 from $93,964 for the three months ended March 31, 2000.
This decrease of $81,276 resulted from a decrease in salaried marketing
personnel, implementing an in-house marketing outreach program and the addition
of commission-only outside sales representatives.
12
General and administrative expenses for the three months ended March 31, 2001,
decreased to $105,822 from $238,342 for the three months ended March 31, 2000.
The decrease of $132,520 resulted from a reduction in executive management
costs, other personnel costs and legal and accounting fees.
Interest expense, net, for the three months ended March 31, 2001, was $3,868, as
compared to $4,780 for the three months ended March 31, 2000. The decrease in
interest expense of $912 resulted from reductions in notes payable in our
on-going debt settlement efforts.
Extraordinary gains, net for the three months ended March 31, 2001 decreased to
$-0- as compared to $212,073 for the three months ended March 31, 2000. The
decrease resulted because gains derived from our debt reduction efforts were
settled in previous periods.
Net income (loss) for the three months ended March 31, 2001, and the three
months ended March 31, 2000, were $(123,817) and $353,190 respectively.
Liquidity and Capital Resources
Working capital at March 31, 2001, was $3,795,970 as compared to $3,696,428 at
December 31, 2000.
We have funded our operations and working capital needs through profits, private
equity placements, and the exercise of investor warrants. We believe, that with
cash generated from operations and portfolio security sales that we will meet
our current operational and business plans for the next 12 months.
Cash at March 31, 2001, was $38,326, an increase of $20,142 from March 31, 2000.
During the three months ended March 31, 2001, our operations provided $21,331
net cash as compared to using $495,701 for the three months ended March 31,
2000. This net change in the use of cash in operations of $517,032 was the
result of realizing gains from notes receivable payments, billing increases in
our long-term contact.
During the three months ended March 31, 2001, we generated $79,134 from
investing activities as compared to using $69,688 for the three months ended
March 31, 2000. The increase of $148,822 in cash provided from investing
activities resulted from a decrease in capital expenditures and net cash
generated from the sale of equity securities.
During the three months ended March 31, 2001, we used net cash of $213,601 in
financing activities as compared to generating $567,844 for the three months
ended March 31, 2000. The decrease of $781,445 resulted from redemptions of
stock of $375,871, and a reduction of $594,164 in capital raised though the
issuance of our common stock and proceeds from notes payable.
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 nineteen-month sublease basis and could be required
to move and/or add more space after this period. Capital expenditures we may
incur are for computers and related local area network hardware and software.
13
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 continue to book
profits.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
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"), a wholly owned subsidiary of ours
from September 1994 through December 1996. 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.
On May 17, 2001, a lawsuit was filed by the Steven W. Bingaman 1996 Trust (the
"Trust") alleging that restrictions be removed from certain stock certificates
owned by the Trust, and that certain shares be issued to the Trust. The
restrictions have been removed, and the claim for approximately 500,000 shares
of common stock from the July 31, 2000 and August 31, 2000 one-for-seven
distributions is being assessed by counsel. We do not believe there to be any
financial liability in the lawsuit.
A contract dispute of $350,000 with Marketing Enterprises, Inc., is set for
arbitration. We are vigorously defending the action.
Actions by Sallie E. Buck for $500,000 and the Department of Labor for $80,000
were dismissed by the courts.
Other suits arising in the ordinary course of business are pending against us,
including one ex-employee suit which our legal counsel regards as frivolous and
without merit. 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
In February 2001, warrant certificates for the purchase of 834,434 shares of our
common stock were exercised at a price of $.63 per share in the aggregate of
$525,000. Payment was made by delivery us of a promissory note in the amount of
$525,000 with an interest rate of 6% per annum. The note matures on December 31,
2001. We issued 183,800 shares of our common stock, which are restriction under
Rule 144 of the Securities Act of 1933, at $0.2122 per share in exchange for
$39,000 and 1,500,000 shares of Veridien Corporation common stock.
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On March 29, 2001, we filed Form S-8 in which 395,000 shares owned by a former
officer and director were registered under the Securities Act of 1933, and is
subject to a selling restriction for shares sold in the open market through
registered broker-dealers whereby no more than five percent of the previous
day's trading volume or 5,000 shares of the registered common stock may be sold
in open market transactions.
Item 5: Other Information
On April 20, 2000, we announced an agreement in principle to purchase all of the
outstanding stock of Information Resource Products, Inc., and IRP Systems, Inc.,
for $3,900,000 plus $1,000,000, which is designated to purchase shares of our
common stock in the open market, 25,000 shares of our common stock which is to
be allocated to the seller's employees and 250,000 common stock purchase
warrants that are exercisable for a period of two years at $10.00 per share. The
closing of this acquisition is pending as of the date of this report.
Item 6: Exhibits and Reports on Form 8-K
None.
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.
June 4, 2001 By: /s/ Douglas A. Cohn
Douglas A. Cohn
Chairman, President and Chief Executive
Officer
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