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, 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) 917-8079
(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: 23,516,786 of its $.0001 par
value common stock as of September 30, 2001.
H QUOTIENT, INC., AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements Page
Consolidated Balance Sheets as of
September 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Operations
for the nine-month and three-month periods ended
September 30, 2001 and 2000 (unaudited) 4-5
Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 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 7-10
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 10
Item 2: Changes in Securities and Use of Proceeds 10
Item 5: Other Information 11
Item 6: Exhibits and Reports on Form 8-K 11
Signature 11
2
H Quotient, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
2001 2000
(Unaudited)
------------- -------------
Assets
Current assets
Cash $ 6,678 $ 151,462
Investment in equity securities 3,004,593 2,598,637
Accounts receivable, less allowance
for doubtful accounts of $18,790,
in 2001 & 2000 55,261 164,912
Due from affiliates 53,409 24,236
Costs and estimated earnings in
excess of billings on uncompleted
contracts 797,481 518,977
Notes receivable 419,865 747,000
Prepaid expenses 2,729,192 1,732,694
--------------- ------------
Total current assets 7,066,479 5,937,918
Property and equipment, net 129,630 206,358
Capitalized software, net 227,141 316,105
Deposits 34,294 14,294
--------------- ------------
Total assets $ 7,457,544 $6,474,675
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 498,339 $ 356,445
Accrued expenses 685,553 898,153
Due to affiliates - 50,077
Short-term debt 261,432 477,285
Deferred revenues 44,377 459,530
--------------- ------------
Total current liabilities 1,489,701 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,
23,516,786 and 19,810,544 shares
issued and outstanding at September
30, 2001 and December 31, 2000
respectively 2,423 1,982
Additional paid-in capital 14,599,991 13,652,448
Accumulated deficit (8,634,571) (9,421,245)
-------------
Total shareholders' equity 5,967,843 4,233,185
------------- -----------
Total liabilities and shareholders' equity $ 7,457,544 $ 6,474,675
3
H.Quotient, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------------------
Revenues
Software sales $ 457,964 $ 652,679 $ 16,955 $ 85,062
Maintenance and
service income 678,185 394,025 209,672 131,342
--------------------------------------------------------------------
Total revenues 1,136,149 1,046,704 226,627 216,404
--------------------------------------------------------------------
Operating expenses
Cost of sales and
Services 318,978 520,878 105,738 107,045
Selling and
Marketing 96,788 165,729 55,002 48,744
General and
Administrative 343,465 820,492 52,774 227,513
--------------------------------------------------------------------
Total operating expenses 759,231 1,507,099 213,514 383,302
--------------------------------------------------------------------
Operating income (loss) 376,918 (460,395) 13,113 (166,898)
--------------------------------------------------------------------
Other income (expenses)
Interest expense (21,853) (14,339) (3,867) (4,780)
Gain on securities 440,079 1,568,976 641,564 1,300,000
Interest income - 27,917 - -
--------------------------------------------------------------------
Total other income
(expenses) 418,226 1,582,554 637,697 1,295,220
Income before provision
for income taxes &
extraordinary item 795,144 1,122,159 650,810 1,128,322
Provision for income
taxes - - - -
--------------------------------------------------------------------
Income before
extraordinary item 795,144 1,122,159 650,810 1,128,322
Extraordinary gains - 1,230,119 - 78,855
--------------------------------------------------------------------
Net income $ 795,144 $ 2,352,278 $ 650,810 $1,207,177
====================================================================
4
Earnings per common share
Basic:
Net income loss
before extra-
ordinary item $ 0.04 $ 0.07 $ 0.03 $ 0.07
----------- ----------- ----------- -----------
Net income $ 0.04 $ 0.15 $ 0.03 $ 0.07
=========== =========== =========== ===========
Diluted:
Net income
before extra-
ordinary item $ 0.03 $ 0.06 $ 0.03 $ 0.06
----------- ----------- ----------- -----------
Net income $ 0.03 $ 0.13 $ 0.03 $ 0.06
=========== =========== =========== ===========
Weighted average
common shares
Basic 22,075,871 15,233,393 23,399,447 17,241,108
----------- ----------- ----------- -----------
Diluted 23,677,825 17,732,943 25,001,401 19,361,764
=========== =========== =========== ===========
5
H.Quotient, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2001 2000
- -------------------------------------------------------------------------
Cash flows from operating activities:
Net cash used in operating activities $(1,092,768) $(1,297,225)
Cash flows from investing activities:
Net cash provided (used) in investing
activities - (190,679)
Cash flows from financing activities:
Net cash provided by financing activities 947,984 1,486,242
----------- -----------
Net increase (decrease) in cash $ (144,784) $ (1,662)
Cash at beginning of period 151,462 10,018
----------- -----------
Cash at end of period $ 6,678 $ 8,356
6
H Quotient, Inc. and Subsidiaries
Notes to the Unaudited Condensed 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 subsidiaries, 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 September 30, 2001, the Consolidated
Statement of Operations for three-month and nine-month periods ended September
30, 2001 and 2000, and the Consolidated Statement of Cash Flows for the nine-
month periods ended September 30, 2001 and 2000, have been prepared without
audit. In the opinion of management, all adjustments necessary to present fairly
the financial position, as of September 30, 2001 and results of operations and
cash flows at September 30, 2001 and 2000, 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 nine-month periods ended
September 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 September 30, 2001, Compared With Three Months ended
September 30, 2000:
Revenues for the three months ended September 30, 2001, increased to $226,627
from $216,404 for the three months ended September 30, 2000. The increase of
$10,223 is primarily a result of a substantial increase in service revenue under
a long-term contract that was partially offset by a decrease in software revenue
that resulted from completion of the primary software development component from
the long-term contract.
7
The cost of sales and services for the three months ended September 30, 2001,
decreased to $105,738 from $107,045 for the three months ended September 30,
2000. The decrease of $1,307 resulted primarily from a decrease in redundant
staff that was partially offset by an increase in the use of contract
personnel.
Selling and marketing expenses for the three months ended September 30, 2001,
increased to $55,002 from $48,744 for the three months ended September 30, 2000.
This increase of $6,258 is a result of an increase in the ongoing public
relations efforts that was partially offset by a decrease in salaried marketing
personnel.
General and administrative expenses for the three months ended September 30,
2001, decreased to $52,774 from $227,513 for the three months ended September
30, 2000. The decrease of $174,739 primarily resulted from reduced executive
management costs, other personnel costs and legal and accounting fees and
recoupment of $44,031 in rent and staff expenses incurred that were reimbursed
by an affiliate.
Interest expense, net, for the three months ended September 30, 2001, was
$3,867, as compared to $4,780 for the three months ended September 30, 2000. The
decrease in interest expense of $913 resulted from a reduction in notes payable.
Extraordinary items for the three months ended September 30, 2001, decreased to
$-0- as compared to $78,555 for the three months ended September 30, 2000. There
were no transactions related to extraordinary items during the three months
ended September 30, 2001.
The unrealized gain on securities for the three months ended September 30, 2001,
was $641,564 as compared to $-0- for the three months ended September 30, 2000.
Realized gains on sale of securities were $-0- for the three months ended
September 30, 2001 as compared to $1,300,000 for the three months ended
September 30, 2000. We did not sell any of the securities we hold during the
three months ended September 30, 2001. For the three months ended September 30,
2000 we sold 200,000 shares of Internet Guide, Inc., common stock at $13.00 per
share in exchange for $1,300,000 in a Note Receivable portfolio valued at
$732,000, 8,000,000 shares of Veridien Corporation common stock valued at
$800,000 and $1,068,000 in SDG commercial trade credits.
Net profit for the three months ended September 30, 2001, and the three months
ended September 30, 2000, were $650,810 and $1,207,177, respectively.
Nine Months ended September 30, 2001, Compared With Nine Months ended September
30, 2000:
Revenues for the nine months ended September 30, 2001, increased to $1,136,149
from $1,046,704 for the nine months ended September 30, 2000. The increase of
$89,445 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 a long-term contract.
The cost of sales and services for the nine months ended September 30, 2001,
decreased to $318,978 from $520,878 for the nine months ended September 30,
2000. The decrease of $201,900 resulted primarily from an increase in
productivity and a corresponding decrease in redundant technical staff.
8
Selling and marketing expenses for the nine months ended September 30, 2001,
decreased to $96,788 from $165,729 for the nine months ended September 30, 2000.
This decrease of $68,941 is a result of a decrease in salaried marketing
personnel, partially offset by increases in public relation efforts.
General and administrative expenses for the nine months ended September 30,
2001, decreased to $343,465 from $820,492 for the nine months ended September
30, 2000. The decrease of $477,027 primarily resulted from reduced executive
management costs, other personnel costs and legal and accounting fees which were
partially offset by rent and staff expenses that were reimbursed by an
affiliate.
Interest expense for the nine months ended September 30, 2001, was $21,853, as
compared to $14,339 for the nine months ended September 30, 2000. The increase
in interest expense of $7,514 resulted from interest due on a short-term advance
that is partially offset by a reduction in notes payable and the corresponding
interest expense.
Unrealized gain on securities for the nine months ended September 30, 2001 was
$394,606 as compared to $-0- for the nine months ended September 30, 2000.
Realized gains on sales of securities were $45,473 for the nine months ended
September 30, 2001, as compared to $1,568,976 for the nine months ended
September 30, 2000.
Extraordinary items, net for the nine months ended September 30, 2001, decreased
to $-0- as compared to $1,230,119 for the nine months ended September 30, 2000.
There were no transactions related to extraordinary items during the nine months
ended September 30, 2001.
Net profit for the nine months ended September 30, 2001, was $795,144 as
compared to a net profit of $2,352,278 for the nine months ended September 30,
2000.
Liquidity and Capital Resources
Working capital at September 30, 2001, was $5,576,778 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 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 September 30, 2001, were $6,678, a decrease of
$8,356 from September 30, 2000. During the nine months ended September 30, 2001,
we used $1,092,768 net cash in our operating activities as compared to using
$1,297,225, for the nine months ended September 30, 2000. This net change in the
use of cash in operations of $204,457 was the result of more efficient use of
personnel, a general reduction of operating expenses and an increase in unbilled
receivables related to a long term contract.
During the nine months ended September 30, 2001, we used $-0- for investing
activities as compared to $190,679, for the nine months ended September 30,
2000. The decrease of $190,679 in the use of cash for investing activities
9
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 nine months ended September 30, 2001, we generated net proceeds from
financing activities of $947,984 as compared to $1,486,242 for the nine months
ended September 30, 2000. The decrease of $538,258 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 filing 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 have been rendered moot 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.
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.
10
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 $150,000 of SGD Commercial trade credits and 90,000 shares
of ROSS Corporation common stock; 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 in exchange for
509,188 shares of Veridien Corp. common stock at $.20 per share; 50,000 shares
of our common stock at $.205 per share as payment of $10,250 in a loan discount
expense 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.
From July through September 2001, we issued 423,619 shares of our common stock,
all of which is restricted under Rule 144 of the Securities Act of 1933 as
follows: 47,619 shares of our common stock at $0.105 per share to an individual
investor in exchange for cash of $5,000; 41,000 shares of our common stock in
exchange for 71,400 shares of ROSS Corporation common stock, which was
subsequently sold; and 335,000 of our common stock at $0.15 per share in
exchange for public relations services. These 335,000 shares were issued in 23
certificates with additional restrictions which call for the share certificates
to be held in an attorney escrow account and released to the shareholder at a
rate of one certificate per month.
On August 20, 2001, we sold 161,500 shares that we held in ROSS Corporation
securities in exchange for $23,475 in cash. These shares, which were sold at
cost constituted our entire holding in ROSS. As a result of the transaction we
no longer own any shares of ROSS Corporation.
Item 5: Other Information
None.
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.
November 20, 2001 By: /s/ Douglas A. Cohn
----------------------------
Douglas A. Cohn
Chairman, President, Chief
Executive Officer and
Chief Financial Officer
11