U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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: 23,093,167 of its $.0001 par
value common stock as of June 30, 2001.
H.QUOTIENT, INC., AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
PART I: FINANCIAL INFORMATION
Page
Item 1: Financial Statements
Consolidated Balance Sheets as of
June 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Operations
for the six-month and three-month periods ended
June 30, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the six month periods ended June 30, 2001
and 2000, (unaudited) 6
Notes to the Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition And Results of Operations 7-9
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 9
Item 2: Changes in Securities and Use of Proceeds 10
Item 5: Other Information 10
Item 6: Exhibits and Reports on Form 8-K 10
Signature 11
2
H.Quotient, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
2001 2000
(Unaudited)
----------- ------------
Assets
Current assets
Cash $ 28,702 $ 151,462
Investment in equity securities 2,439,578 2,598,637
Accounts receivable, less allowance
for doubtful accounts of $18,790,
in 2001 & 2000 72,773 164,912
Due from affiliates 15,250 24,236
Costs and estimated earnings in
excess of billings on uncompleted
contracts 602,355 518,977
Notes receivable 419,865 747,000
Prepaid expenses 2,746,423 1,732,694
------------ ------------
Total current assets 6,324,946 5,937,918
Property and equipment, net 155,206 206,358
Capitalized software, net 256,796 316,105
Deposits 34,294 14,294
------------ ------------
Total assets $ 6,771,242 $ 6,474,675
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 460,813 $ 356,445
Accrued expenses 607,216 898,153
Due to affiliates 162,425 50,077
Short-term debt 127,285 477,285
Deferred revenues 90,995 459,530
------------ ------------
Total current liabilities 1,448,734 2,241,490
Commitments and contingencies
Shareholders' equity
Preferred stock,
10,000,000 shares authorized, 100
shares issued & outstanding -- --
Common stock, $.0001 par value, 90,000,000 shares authorized,
23,093,167 and 19,810,544 shares issued and outstanding at
June 30, 2001 and December 31, 2000 respectively 2,311 1,982
Additional paid-in capital 14,597,027 13,652,448
Accumulated deficit (9,276,830) (9,421,245)
------------ ------------
Total shareholders' equity 5,322,508 4,233,185
------------ ------------
Total liabilities and shareholders' equity $ 6,771,242 $ 6,474,675
============ ============
3
H.Quotient, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Software sales $ 441,010 $ 561,617 $ 416,322 $ 249,630
Maintenance and
service income 468,512 262,684 219,339 131,318
----------- ----------- ----------- -----------
Total revenues 909,522 824,301 635,661 380,948
----------- ----------- ----------- -----------
Operating expenses
Cost of sales and
Services 217,805 421,974 69,034 159,932
Selling and
Marketing 42,387 137,391 29,700 43,428
General and
Administrative 295,696 584,651 189,874 346,309
----------- ----------- ----------- -----------
Total operating expenses 555,888 1,144,016 288,608 549,669
----------- ----------- ----------- -----------
Operating income (loss) 353,634 (319,715) 347,053 (168,721)
----------- ----------- ----------- -----------
Other income (expenses)
Interest expense (7,735) (9,559) (3,867) (4,780)
Unrealized loss on
Securities (246,957) -- (82,922) --
Realized gain on
Sale of securities 45,473 268,976 7,968 --
Interest income -- 27,917 -- --
Other -- -- -- --
----------- ----------- ----------- -----------
Total other income
(expenses) (209,219) 287,334 (78,821) (4,780)
Income (loss) before
provision for income
taxes & extraordinary
item 144,415 (32,381) 268,232 (173,501)
Provision for income
taxes -- -- -- --
----------- ----------- ----------- -----------
Income (loss) before
extraordinary item 144,415 (32,381) 268,232 (173,501)
Extraordinary gains -- 1,177,482 -- 965,410
----------- ----------- ----------- -----------
Net income $ 144,415 $ 1,145,101 $ 268,232 $ 791,909
=========== =========== =========== ===========
4
Earnings per common share
Basic:
Net income loss
before extra-
ordinary item $ 0.007 $ (0.002) $ 0.01 $ (0.01)
Net income $ 0.007 $ 0.09 $ 0.01 $ 0.07
Diluted:
Net income
before extra-
ordinary item $ 0.006 $ (0.002) $ 0.01 $ (0.01)
Net income $ 0.006 $ 0.07 $ 0.01 $ 0.05
Weighted average
common shares
Basic 21,636,488 13,543,989 22,690,067 14,387,841
Diluted 23,238,442 15,826,466 24,292,021 16,157,545
5
H.Quotient, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2001 2000
- ------------------------------------- ----------- -----------
Cash flows from operating activities:
Net cash used in operating activities $ (717,669) $ (998,442)
Cash flows from investing activities:
Net cash provided (used) in investing
activities -- (96,242)
Cash flows from financing activities:
Net cash provided by financing activities 594,909 1,088,973
----------- -----------
Net increase (decrease) in cash $ (122,760) $ (5,711)
Cash at beginning of period 151,462 15,729
----------- -----------
Cash at end of period $ 28,702 $ 10,018
=========== ===========
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H.Quotient, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
1. Organization - H Quotient, Inc. (the "Company"), 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
the $.0001 par value common stock of the Company. The Company develops, markets,
installs and maintains integrated hardware and software systems to private and
public healthcare facilities throughout the United States.
2. Basis of Presentation - The consolidated financial statements of the Company
include the accounts of its wholly owned subsidiary, Quotient Capital
Corporation, and its sold subsidiaries, IHS of Virginia, Inc., and The DataQual
Group, Inc. All significant inter-company balances and
transactions have been eliminated in consolidation.
The Consolidated Balance Sheet as of June 30, 2001, the Consolidated Statement
of Operations for three-month and six-month periods ended June 30, 2001 and
2000, and the Consolidated Statement of Cash Flows for the six-month periods
ended June 30, 2001 and 2000, have been prepared without audit. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at June 30, 2001, and for all
periods then ended, have been recorded. All adjustments recorded were of a
normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 2000 included in the Company's
Annual Report on Form 10KSB for the year ended December 31, 2000.
The results of operations for the three-month and six-month periods ended June
30, 2001 are not necessarily indicative of results anticipated for the full
year.
Item 2: Management's Discussion and Analysis of the Financial Conditions and the
Results of Operations
Results of Operations
Three Months ended June 30, 2001 Compared With Three Months ended June 30, 2000:
Revenues for the three months ended June 30, 2001 increased to $635,661 from
$380,948 for the three months ended June 30, 2000. The increase of $254,713 is
primarily a result of the sale of a software license that is partially offset by
an increase in service revenue and a decrease in software revenue that resulted
from completion of the primary software development component from our long-term
contract.
The cost of sales and services for the three months ended June 30, 2001
decreased to $69,034 from $159,932 for the three months ended June 30, 2000. The
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decrease of $90,898 resulted primarily from an increase in productivity and a
corresponding decrease in redundant technical staff.
Selling and marketing expenses for the three months ended June 30, 2001
decreased to $29,700 from $43,428 for the three months ended June 30, 2000. This
decrease of $13,728 is a result of a decrease in salaried marketing personnel,
partially offset by increases in public relation efforts.
General and administrative expenses for the three months ended June 30, 2001
decreased to $189,874 from $346,309 for the three months ended June 30, 2000.
The decrease of $156,435 primarily resulted from reduced executive management
costs, other personnel costs and legal and accounting fees.
Interest expense, net, for the three months ended June 30, 2001 was $3,867, as
compared to $4,780 for the three months ended June 30, 2000. The decrease in
interest expense of $913 resulted from a reduction in notes payable.
Extraordinary items for the three months ended June 30, 2001 decreased to $-0-as
compared to $965,410 for the three months ended June 30, 2000. There were no
transactions related to extraordinary items during the three months ended June
30, 2001.
Net profit for the three months ended June 30, 2001 and the three months ended
June 30, 2000 were $268,232 and $791,909, respectively.
Six Months ended June 30, 2001 Compared With Six Months ended June 30, 2000:
Revenues for the six months ended June 30, 2001 increased to $909,522 from
$824,301 for the six months ended June 30, 2000. The increase of $85,221 is
primarily a result of the sale of a software license that is partially offset by
an increase in service revenue and a decrease in software revenue that resulted
from completion of the primary software development component from our long term
contract.
The cost of sales and services for the six months ended June 30, 2001 decreased
to $217,805 from $421,974 for the six months ended June 30, 2000. The decrease
of $204,169 resulted primarily from an increase in productivity and a
corresponding decrease in redundant technical staff.
Selling and marketing expenses for the six months ended June 30, 2001 decreased
to $42,387 from $137,391 for the six months ended June 30, 2000. This decrease
of $95,004 is a result of a decrease in salaried marketing personnel, partially
offset by increases in public relation efforts.
General and administrative expenses for the six months ended June 30, 2001
decreased to $295,696 from $584,651 for the six months ended June 30, 2000. The
decrease of $288,955 primarily resulted from reduced executive management costs,
other personnel costs and legal and accounting fees.
Interest expense for the six months ended June 30, 2001 was $7,735, as compared
to $9,559 for the six months ended June 30, 2000. The decrease in interest
expense of $1,824 resulted from a reduction in notes payable.
Extraordinary items, net for the six months ended June 30, 2001 decreased to
$-0- as compared to $1,117,482 for the six months ended June 30, 2000. There
were no transactions related to extraordinary items during the six months ended
June 30, 2001.
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Net profit for the six months ended June 30, 2001 and the six months ended
June 30, 2000 was $144,415 and $1,145,101, respectively.
Liquidity and Capital Resources
Working capital at June 30, 2001 was $4,876,212 as compared to $3,696,428 at
December 31, 2000.
We have funded our operations and working capital needs through profits, a
series of private equity placements and the exercise of investor warrants. We
believe that cash generated from operations and portfolio security sales will
meet our current operational and business plans for the next 12 months.
Cash and cash equivalents at June 30, 2001 were $28,702, an increase of $18,684
from June 30, 2000. During the six months ended June 30, 2001, we used $717,669
net cash in our operating activities as compared to using $ 998,442, for the six
months ended June 30, 2000. This net change in the use of cash in operations of
$280,773 was the result of more efficient use of personnel, a general reduction
of operating expenses and an increase in unbilled receivables related to our
long term contract.
During the six months ended June 30, 2001, we used $-0- for investing activities
as compared to $96,242, for the six months ended June 30, 2000. The decrease of
$96,242 in the use of cash for investing activities resulted primarily from a
decrease in capitalized research and development costs associated with bringing
new software products to market and a reduction in capital expenditures.
During the six months ended June 30, 2001, we generated net proceeds from
financing activities of $594,909 as compared to $1,088,973 for the six months
ended June 30, 2000. The decrease of $494,064 resulted from a reduction in
capital raised though the private placement of common stock, the exercise of
investor warrants in the period and payment of a note payable.
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 $386,235 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
9
of common stock from the July 31, 2000 and August 31, 2000 one for seven
distributions have been settled through the delivery of the shares for the July
31, 2000 distribution and the August 31, 2001 distribution. Counsel is assessing
other matters regarding the claim.
A hearing on a contract dispute of $350,000 with Marketing Enterprises, Inc.,
was held before an arbitrator on August 2, 2001. We are waiting a ruling by the
arbitrator. In the event we lose the arbitration, we will book any liability
that may result in the period the ruling is made, if made against us.
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
In February 2001, warrant certificates for the purchase of 1,089,873 shares of
our common stock were exercised at a price of $.48 per share in the aggregate of
$525,000. Payment was made by delivery to 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 restricted
under Rule 144 of the Securities Act of 1933, at $0.22122 per share in exchange
for $39,000 and 1,500,000 shares of Veridien Corporation common stock.
On March 29, 2001, we filed a Form S-8 in which 395,000 shares owned by a former
officer and director were registered under the Securities Act of 1933.
From April through June 2001, we issued 2,183,700 shares of our common stock,
all of which is restricted under Rule 144 of the Securities Act of 1933 as
follows: 350,000 shares at $.205 per share to various individuals for services
valued at $71,750; 500,000 shares at $.327 per share in exchange for 90,000
shares of ROSS Corporation common stock and $150,000 of SGD Commercial trade
credits; 1,110,000 shares to the holder of options for 1,110,000 shares of our
common stock at $.35 in exchange for $388,500 of SGD Commercial trade credits;
63,600 shares of our common stock; at $.20 per share in exchange for 509,188
shares of Veridien Corp. common stock, 50,000 shares of our common stock at
$.205 per share as payment of $10,250 in loan discount expense in exchange for a
loan of $100,0000 from July 1, 2000 to May 4, 2001; 30,000 shares of our common
stock at $.50 per share as repayment of a $15,000 short term advance; 80,000
shares of our common stock at $.40 per share in exchange for cash of $32,000.
Item 5: Other Information
None.
Item 6: Exhibits and Reports on Form 8-K
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H Quotient, Inc.
August 23, 2001 By: /s/ Douglas A. Cohn
------------------------------
Douglas A. Cohn
Chairman, President, Chief
Executive Officer and
Chief Financial Officer
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