10-QSB
Form 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the period ended June 30, 1998
( ) Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______ to _______
Commission file number 0 - 29044
Heuristic Development Group, Inc.
(Name of Small Business Issuer in Its Charter)
Delaware 95-4491750
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(State or Other Jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification No. )
1219 Morningside Drive, Suite 102, Manhattan Beach, California 90266
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(Address of Principal Executive Offices) (Zip Code)
(310) 546-1065
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
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State the number of shares outstanding of each of the issuer's common equity
as of August 15, 1998: 2,101,326 shares of Common Stock, $ . 01 par value.
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
June 30, 1998......................................................... 3
Condensed Statements of Operations - Three Months and Six Months ended
June 30, 1997 and 1998 and period from inception (July 20, 1994)
to June 30, 1998...................................................... 4
Condensed Statements of Cash Flows - Six Months ended June 30, 1997 and
1998 and period from inception (July 20, 1994) to
June 30, 1998......................................................... 5
Notes to Financial Statements - June 30, 1998.......................... 6
Item 2. Management's Discussion and Analysis
or Plan of Operations................................................. 8
Part II. OTHER INFORMATION
Item 3. Other Information....................................................... 10
Item 4. Exhibits and Reports on Form 8-K........................................ 10
SIGNATURES....................................................................... 11
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ASSETS
Current assets:
Cash and cash equivalents $ 3,568,000
Prepaid expenses and other current assets 73,000
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Total current assets 3,641,000
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Captialized software costs 506,000
Furniture and equipment (net of accumulated depreciation) 13,000
Organizational costs (net of accumulated amortization) 8,000
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TOTAL $ 4,168,000
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LIABILITIES
Current liabilities:
Accounts payable $ 1,000
Accrued expenses 6,000
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Total current liabilities 7,000
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STOCKHOLDERS' EQUITY
Preferred stock - $ .01 par value, authorized
5,000,000 shares; issued and outstanding none
Common stock - $ .01 par value, authorized 20,000,000
shares; issued and outstanding 2,101,326 shares
(includes 349,370 shares held in escrow) 21,000
Additional paid-in capital 8,441,000
(Deficit) accumulated during the development stage (4,301,000)
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Total stockholders' equity 4,161,000
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TOTAL $ 4,168,000
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July 20,
1994
Three Months Ended Six Months Ended (Inception)
June 30 June 30, to
---------------------------- -------------------------------- June 30,
1997 1998 1997 1998 1998
------------ ------------ --------------- --------------- --------------
Costs and expenses:
Research and development:
Direct expenditures $ 338,000
Payments under research
services agreement 137,000
------------
Total research and development 475,000
General and administrative $ 424,000 $ 130,000 $ 688,000 $ 314,000 3,075,000
Loss on sale and write down of equipment - - 7,000 185,000
------------ ------------ --------------- --------------- ------------
Total costs and expenses 424,000 130,000 688,000 321,000 3,735,000
------------ ------------ --------------- --------------- ------------
(Loss) from operations (424,000) (130,000) (688,000) (321,000) (3,735,000)
Interest (expense) - - (406,000) - (746,000)
Interest income 44,000 50,000 68,000 96,000 302,000
------------ ------------ --------------- --------------- ------------
Net (loss) $ (380,000) $ (80,000) $(1,026,000) (225,000) $(4,179,000)
------------ ------------ --------------- --------------- ------------
------------ ------------ --------------- --------------- ------------
Net (loss) per share - Basic and Diluted $ (0.22) $ (0.05) $ (0.73) (0.13)
------------ ------------ --------------- --------------- ------------
------------ ------------ --------------- --------------- ------------
Weighted average shares outstanding 1,751,956 1,751,956 1,399,026 1,751,956
------------ ------------ --------------- --------------- ------------
------------ ------------ --------------- --------------- ------------
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July 20,
1994
Six Months Ended (Inception)
June 30, to
------------------------------ June 30,
1997 1998 1998
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Cash flows from operating activities:
Net (loss) $(1,026,000) (225,000) (4,179,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization 30,000 5,000 146,000
Loss on sale and write down of equipment 7,000 185,000
Value of preferred stock charged to research and development 50,000
Amortization of loan acquisition costs 95,000 160,000
Amortization of debt discount 297,000 500,000
Fair value of options granted 236,000
Accrued interest on notes payable - stockholders 64,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other current assets (55,000) 9,000 (112,000)
Net (decrease) increase in accounts payable and accrued expenses (11,000) (19,000) 1,000
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Net cash (used in) operating activities (670,000) (223,000) (2,949,000)
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Cash flows from investing activities:
Acquisition of fixed assets (57,000) (5,000) (335,000)
Capitalized software costs (149,000) (506,000)
Proceeds from sale of equipment 11,000 24,000
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Net cash (used in) investing activities (206,000) 6,000 (817,000)
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Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 6,900,000 419,000
Proceeds from the sale of preferred stock 550,000
Proceeds from borrowings - notes payable - stockholders 1,194,000
Proceeds from Bridge notes 1,000,000
Repayment of Bridge notes (1,000,000) (1,000,000)
Initial public offering expenses (1,201,000) 5,501,000
Repayment of notes payable - stockholders (170,000) (170,000)
Loan acquisition costs (160,000)
-------------- -------------- -------------
Net cash provided by financing activities 4,529,000 - 7,334,000
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NET INCREASE (DECREASE) IN CASH 3,653,000 (217,000) 3,568,000
Cash - beginning of period 533,000 3,785,000
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Cash - end of period $ 4,186,000 $3,568,000 3,568,000
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Supplemental and noncash disclosures:
Preferred stock issued in connection with assignment agreement 50,000
Warrants issued in connection with Bridge notes 500,000
Common stock issued for conversion of debt, accrued interest,
preferred stock and preferred dividends 1,084,000 1,084,000
Initial public offering expenses charged to additional paid-in capital 198,000
Interest paid 14,000 14,000
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HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions for Form 10 - QSB and
Item 310 (b) of Regulation S - B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and such other
adjustments as described in NOTE C) considered necessary for a fair
presentation have been included. Operating results for the six-month period
ended June 30, 1998, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. For further information,
refer to the financial statements and footnotes thereto included in the
Registrant Company annual report on Form 10 - KSB for the year ended December
31, 1997.
(NOTE B) - The Company:
Heuristic Development Group (the "Company") is a development stage
company incorporated in Delaware in July 1994. The Company is engaged in the
development and marketing of the IntelliFit software, a product which
generates personalized exercise prescriptions based on, among other things,
an individual's weight, ability, medical history, goals, fitness level and
exercise preferences and tracks and records fitness progress. The IntelliFit
software interacts with a user by applying algorithms to an individual's
personal profile and adjusting a user's exercise prescription based on
progress, frequency of workouts and other variables. The Company believes
that this interactive feature helps motivate users to continue exercising,
and allows users to reach their goals more quickly.
To date, the Company has been engaged primarily in research and
development activities relating to the IntelliFit software and has conducted
only limited marketing activities. The Company believes that product
development has been substantially completed and that the IntelliFit software
is a viable for a company which has complementary products and an existing
field sales department. The Company has therefore initiated discussions with
OEM customers regarding the sale or licensing of the IntelliFit software for
incorporation into the OEM customers existing product lines. The Company has
not yet generated any significant revenue.
Additionally, the Company believes that the year 2000 issue has been
adequately addressed during development of the product and will not effect
its usefulness.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As reflected in the accompanying
financial statements, the Company has incurred substantial losses since
inception and such losses are expected to continue during the development
stage.
(continued)
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HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENT
(NOTE C) - Loss on Sale and Write Down of Equipment:
During the first quarter of 1998, management continues to sell excess
office equipment and selected components of the IntelliFit System. As a
result of such sales, the Company wrote down some remaining equipment.
Losses recorded as a result of the sales and write downs are reported
separately in the Statement of Operations as "Loss on Sale and Write Down of
Equipment."
(NOTE D) - Subsequent Events:
On August 11, 1998, the Company announced that it has entered into a
letter of intent to acquire Autoskill, Inc.,("the Seller"), a national
satellite auto parts locating network. Under the proposed transaction, the
Company would acquire the Seller for $2.2 million in cash, 500,000 shares of
the Company's common stock, and three new series of the Company's preferred
stock (totalling $4,250,000), which could under certain circumstances be
convertible into an aggregate of 4,250,000 shares of the Company's common
stock. The Company will also assume all the seller's liabilities. The
transaction is expected to close in the fourth quarter of 1998, subject to
the negotiation of definitive agreements and the satisfaction of certain
conditions, including obtaining the approval of the Company's stockholders
and an opinion from an investment banking firm that the transaction is fair
to the Company's stockholders. Failure to close the transaction for any
reason other than fault of the Seller's, will result in a $100,000 payment to
the Seller.
Additionally, the Company's Board of Directors authorized a program to
repurchase up to 200,000 shares of its common stock.
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Item 2.
MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
In the second half of 1997, the Company commenced a reassessment of its
Intellifit system program in light of initially disappointing product
acceptance. While the Company believes that the marketing of the Intellifit
System remains a potentially viable business, it appears that the timing of
the product launch is premature relative to the needs of the market.
Consequently, the company terminated all former beta sites and liquidated the
relevant inventory. During late 1997, the Company sold all excess computer
hardware, office furniture and equipment. Concurrent with the sales, the
Company revalued the remaining inventory of Intellifit System components and
shortened their estimated useful lives to one year, and suffered a loss on
the sale and write down of the remaining assets. The Company recognized a
loss from the sale and writedown of $178,000 during 1997 and $7,000 during
the first quarter of 1998. Additionally, the Company has relocated the
corporate office to much smaller, less expensive space, eliminated all
personnel with the exception of the President/CEO, Chief Financial Officer
and Controller, and liquidated all unnecessary fixed assets. The Company
continues to explore possible licensing opportunities for the Intellifit
system.
From its inception in 1994 through the second quarter of 1997, the
Company's efforts had been principally devoted to research, development and
design of products, marketing activities and raising capital. The Company has
generated only nominal revenues to date from the placement of test products
and has incurred substantial operating losses. From inception through June
30, 1998, the Company sustained cumulative net losses of approximately
$4,179,000 primarily as a result of general and administrative expenses,
including salaries, marketing, and professional fees which have aggregated
$3,075,000 since inception.
During the three and six months ended June 30, 1998 , the Company
incurred operating losses of $80,000 and $225,000, while during the same
three and six month periods during 1997, the Company incurred operating
losses of $380,000 and, $1,026,000, respectively. The decrease in operating
losses during 1998 reflects the reduction in the Company's general and
administrative expenses. The loss from operations also includes an unusual
loss on the sale and write down of fixed assets of $7,000 during the first
quarter of 1998. The Company has reduced current cash use to approximately
$40,000 per month. The Company has interest income of approximately $15,000
per month. The ongoing expenses are expected to remain at current levels into
the second half of 1998.
During the three and six months ended June 30, 1998, the Company
recognized interest income of $50,000 and $96,000 respectively. During the
same periods in 1997, the Company recognized interest income of $44,000 and
$68,000. The increase in 1998 interest income is as a result of re-investment
of the Company's working capital. During the three and six months ended June
30, 1998 the Company did not incur any interest expense. During the same
three and six months periods in 1997, the Company incurred interest expense
of $0 and $406,000, respectively. The reduction of interest expense during
1998 shows that the company undertook no additional financing activities.
PLAN OF OPERATION
Based on feedback from test sites and beta customers, and the
disappointing acceptance of the Intellifit product, the Company has revamped
its going forward business
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model. The Company no longer believes that it can be successful in selling
the Intellifit System to consumers and supporting the systems in the field.
It still believes that the Intellifit software is a viable product for a
company which has complementary products and which has an existing field
sales and support organization. Accordingly, the Company has engaged in
discussions with respect to possible licensing arrangements, with regard to
selling or licensing the Intellifit software to OEM customers for
incorporation into existing or new product lines. No assurances can be given
that any such discussions will result in any agreements being reached.
Additionally, the Company believes that the Intellifit product has no
exposure to the year 2000 problem that may result from the date change at the
end of 1999.
Additionally, the Company has decided to pursue a strategy of an
investment in, or acquisition of, an existing company. Management and the
board of directors have been investigating various investment and acquisition
possibilities. There can be no assurances that the Company will identify and
complete such an investment or acquisition.
Until the licensing of the Intellifit software or, an acquisition or
investment, the Company does not expect to generate any significant revenues
and there can be no assurance that efforts to market the Intellifit System
will be successful. Accordingly, the Company expects to continue to incur
losses for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $ 3,634,000. Based
on the Company's anticipated working capital needs, the Company believes that
the working capital will be sufficient to sustain planned operations for at
least the next 12 months. During such period, the Company intends to focus
its efforts on maintaining the reduced cash usage, making an acquisition or
investment in another company, and licensing the Intellifit software. There
can be no assurances that the Company's efforts will be successful.
SUBSEQUENT EVENTS
On August 11, 1998, the Company announced that it has entered into a
letter of intent to acquire Autoskill, Inc., ("the Seller"), a national
satellite auto parts locating network. The Seller's network offers customers
the ability to locate auto parts by sending point to multi-point messages to
other network subscribers using the Seller's proprietary software and
satellite uplink facilities. Based on audited financial statements for the
year 1997, the Seller generated EBITDA in excess of $660,000 on revenues of
approximately $1,450,000.
Under the proposed transaction, the Company would acquire the Seller
(represented by principals Jeffrey Rubin and Robert Cohen) for $2.2 million
in cash, 500,000 shares of the Company's common stock, and three series of
the Company's preferred stock, (totalling $4,250,000) which could under
certain circumstances be convertible into an aggregate of 4,250,000 shares of
the Company's common stock. The transaction is expected to close in the
fourth quarter of 1998, subject to the negotiation of definitive agreements
and the satisfaction of certain conditions, including obtaining the approval
of the Company's stockholders and an opinion from an investment banking firm
satisfactory to the Company that the transaction is fair to the Company's
stockholders. Failure to close the transaction for any reason other than
fault of the Sellers's, will result in a $100,000 payment to the Seller.
Upon consummation of the transaction, Jeffrey Rubin and one other person
selected by him would join existing the Company directors, Jonathan Seybold,
Greg Zink and Brian Wasserman, who would constitute the the Company Board.
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Additionally, the Company's Board of Directors authorized a program to
repurchase up to 200,000 shares of its common stock. the Company anticipates
that depending on market conditions, the shares may be acquired in the open
market or in privately negotiated transactions.
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PART II
Item 3. Other Information
Item 4. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K were filed during the three months ended June 30,
1998.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HEURISTIC DEVELOPMENT GROUP, INC.
Date: August , 1998 by: /s/ Gregory L. Zink
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Gregory L. Zink, President
by: /s/ Theodore Lanes
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Theodore Lanes, Chief Financial Officer
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