SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20049
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FORM 10-QSB
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(Mark One)
(X)
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the QUARTERLY PERIOD ENDED MARCH 31, 2003
Commission File No. 001-15179
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H-QUOTIENT, INC.
(Exact name of registrant as specified in its charter)
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Virginia 54-1947753
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
8150 Leesburg Pike, Suite 503 22182
Vienna, VA (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: 703-752-0690
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each Exchange on
---------------------- which registered
None -------------------
OTC Bulletin Board
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the last practicable date: 29,691,613 of its $.0001 par value
common stock as of April 30, 2003.
Transitional small business disclosure format (check one) Yes: No: X
H-QUOTIENT, INC., AND SUBSIDIARY
FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations
For the three-month periods ended
March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
three month periods ended March 31, 2003 and 2002 5
Notes to the Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis or Plan of Operation 7
Item 3: Controls and Procedures 7
PART II: OTHER INFORMATION 8
Item 1: Legal Proceedings 8
Item 2: Changes in Securities 8
F-2
H-Quotient, Inc. and Subsidiary
Consolidated Balance Sheets
December 31,
March 31, 2003 2002
(Unaudited) (Audited)
- ------------------------------------------------------------------------------------- ---------------- -----------------
Assets
Current assets
Cash $ 1,441 $ 11,503
Investment in marketable securities 648,720 486,540
Accounts receivable, less allowance for doubtful accounts of $509,037 2,810,342 2,157,688
Note receivable 139,869 139,869
Prepaid expenses 2,669,000 2,629,000
- ------------------------------------------------------------------------------------- ---------------- -----------------
Total current assets 6,269,372 5,424,600
Property and equipment, net 39,040 51,024
Capitalized software, net 335,244 82,171
Investment 2,213,138 2,213,138
Other Assets 14,878 14,878
- ------------------------------------------------------------------------------------- ---------------- -----------------
2,602,300 2,361,211
Total Other assets
Total assets $ 8,871,672 $ 7,785,811
- ------------------------------------------------------------------------------------- ---------------- -----------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued expenses 256,836 $ 361,872
Notes payable 62,475 62,475
Unearned revenue 35,347 990
- ------------------------------------------------------------------------------------- ---------------- -----------------
Total current liabilities 354,658 425,337
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Shareholders' equity
Preferred stock, 10,000,000 shares authorized,
100 shares issued and outstanding - -
Common stock, $.0001 par value, 90,000,000 shares authorized, 29,691,613 and
28,588,454 shares issued and outstanding at March 31, 2003 and December 31, 2002,
respectively 2,969 2,859
Additional paid-in capital 15,123,793 14,841,065
Subscription receivable (52,385) (52,385)
Accumulated deficit (6,651,284) (7,431,065)
- ------------------------------------------------------------------------------------- ---------------- -----------------
Total shareholders' equity 8,423,093 7,360,474
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Total liabilities and shareholders' equity $ 8,871,672 $ 7,785,811
- ------------------------------------------------------------------------------------- ---------------- -----------------
See accompanying Notes to Consolidated Financial Statements.
F-3
H-Quotient, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31 2003 2002
Revenues $ 754,667 $ 228,516
- ------------------------------------------------------------------------------------- ---------------- -----------------
Operating expenses 134,930 35,523
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Income from operations 619,737 192,993
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Other income (expenses)
Interest expense (2,136) (3,836)
Unrealized gain on securities 162,180 -
Realized gain on sale of securities 72,997
Interest income - 10,500
Total other income (expense) 160,044 79,661
- ------------------------------------------------------------------------------------- ---------------- -----------------
Income before provision for income taxes 779,781 272,654
Provision for income taxes - -
- ------------------------------------------------------------------------------------- ---------------- -----------------
Net income $ 779,781 $ 272,654
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Net income per common share
Basic: $ 0.03 $ 0.01
Diluted: $ 0.03 $ 0.01
Weighted average common shares
Basic 28,891,138 25,670,455
- ------------------------------------------------------------------------------------- ---------------- -----------------
Diluted 30,297,038 25,982,650
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
F-4
H-Quotient, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2003
2003 2002
Three Months Ended March 31 (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------- ---------------- -----------------
Net cash provided (used) in operating activities $ (10,062) $ (70,139)
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Net cash provided in investing activities - 69,264
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Net cash (used) by financing activities -
- ------------------------------------------------------------------------------------- ---------------- -----------------
Net (decrease) in cash (10,062) (875)
Cash at beginning of period 11,503 6,491
- ------------------------------------------------------------------------------------- ---------------- -----------------
Cash at end of period $ 1,441 $ 5,616
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
F-5
H-Quotient, Inc., and Subsidiary
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 subsidiary, Quotient Capital
Corporation. All significant inter-company balances and transactions have been
eliminated in consolidation.
The Consolidated Balance Sheets as of March 31, 2003 and 2002, the Consolidated
Statement of Operations for the three-month periods ended March 31, 2003 and
2002, and the Consolidated Statement of Cash Flows for the three-month periods
ended March 31, 2003 and 2002, have been prepared without audit. In the opinion
of management, all adjustments necessary to present fairly the financial
position as of March 31, 2003 and 2002, and results of operations and cash flows
for the three month period ended March 31, 2003 and 2002, 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, 2002, included in the Company's
Annual Report on Form 10KSB for the year ended December 31, 2002.
The results of operations for the three-month period ended March 31, 2003, are
not necessarily indicative of results anticipated for the full year.
F-6
Item 2: Management's Discussion or Plan of Operation
Results of Operations
Three Months Ended March 31, 2003, Compared with Three Months Ended March 31,
2002:
Revenues for the three months ended March 31, 2003, increased to $754,667
compared to $228,516 for the three months ended March 31, 2002. The increase of
$526,151 is a result of increased sales. Including other income, revenues for
the three months ended March 31, 2003, increased to $914,711 compared to
$308,177 for the three months ended March 31, 2002.
Expenses
Interest expense for the three months ended March 31, 2003, was $2,136 compared
to $3,836 for the three months ended March 31, 2002. The negligible difference
is attributed to the continuity of the notes payable.
The unrealized gain on securities for the three months ended March 31, 2003, was
$162,180 as compared to $-0- for the three months ended March 31, 2002. The
difference resulted from an increase in the market value of our holdings in
Veridien Corp. stock.
Realized gains on the sale of securities were $0 for the three months ended
March 31, 2003, compared to $72,997 for the three months ended March 31, 2002.
No securities were sold in the 2003 period.
Net profit for the three months ended March 31, 2003, was $779,781 or $.03 per
share compared to $272,654 or $.01 per share for the three months ended March
31, 2002.
Liquidity and Capital Resources
We funded our operations and working capital needs through profits, payments
received from customers, and the exercise of warrants.
Working capital at March 31, 2003, was $5,914,714 as compared to $5,483,504 at
March 31, 2002. The improvement of $431,210 resulted from operations.
Cash and cash equivalents at March 31, 2003, were $1,441 as compared to $5,616
on March 31, 2002. The company maintains its liquid assets in securities.
During the quarter ended March 31, 2003, we generated $-0- from investing
activities as compared to $69,264 for the quarter ended March 31, 2002. No
securities were sold during the period.
During the quarter ended March 31, 2003, we used net cash of $-0- from financing
activities as compared to $-0- for the quarter ended March 31, 2002.
During the quarter ended March 31, 2003, we issued stock with a value of
$282,728 for software development activities that represent non-cash investing
and financing activities. There were no such activities in the quarter ended
March 31, 2002.
Item 3: Controls and Procedures
(a) Evaluation of disclosure controls and procedures. See certification
pursuant to Sarbanes-Oxley Act of 2002 attached.
(b) Changes in internal controls.
None.
(c) Asset-Backed Issuers.
Not Applicable.
F-7
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
A suit with a previous customer is ongoing, and a $340,000 reserve has been
allocated. However, the Company expects to recover this sum and all other
amounts due from the customer.
Other suits arising in the ordinary course of business are pending against the
Company. Management believes the ultimate outcome of these actions will not
result in a material adverse effect on its consolidated financial position,
results of operations or cash flows.
Item 2: Changes in Securities
In January, 2003, warrants were exercised for 342,796 shares of common stock
that are subject to restrictions under Rule 144 of the Securities Act of 1933 in
exchange for $78,559 in cash.
In the three month period ended March 31, 2003, the Company issued 211,011
shares of its common stock to shareholders of record as of July 31, 2000 and
August 31, 2000, respectively, who submitted proof of ownership of the Company's
common stock as of those dates in accordance with the terms and conditions
announced on July 12, 2000 and July 31, 2000 in a stock distribution program.
In the three month period ended March 31, 2003, the Company issued 1,047,142
shares of its common stock subject to restrictions under Rule 144 of the
Securities Act of 1933 in exchange for $282,728 of LabQuotient development. The
price was based upon the market price of the stock at the date of the
transaction.
In January 2003, the Company issued 600,000 options pursuant to the acquisition
of IntelliServices, Inc., exercisable at 50,000 per month until December 31,
2003, for $738,000. In February 2003, the Company issued 2,613,461 options
subject to restrictions under Rule 144 of the Securities Act of 1933 pursuant to
the acquisition of IntelliServices, Inc., exercisable until December 31, 2005,
for $3,214,557. The option price of the stock is $1.23 per share, which is
significantly above the market value of the stock. The Company expects to close
the acquisition in the second quarter.
In March 2003, the Company issued 1,200,000 warrants exercisable until December
31, 2003, as follows: $360,000 in cash for common stock in exchange for
1,200,000 shares of H-Quotient, Inc., common stock at $.30 per share which are
subject to restrictions under Rule 144 of the Securities Act of 1933. No
compensation expense was associated with the issuance of the warrants because of
their insignificant value.
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. Date: June 9, 2003.
H-QUOTIENT, INC.
By: /s/ Douglas A. Cohn
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Chairman of the Board, Chief Executive Officer,
President and Chief Financial Officer
F-8
CERTIFICATION
I, Douglas Cohn, Chief Executive Officer of H-Quotient, Inc. certify that:
1. I have reviewed this quarterly report on Form 10-QSB of H-Quotient,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 of the Exchange Act) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 9, 2003
/s/ Douglas A. Cohn
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(Douglas Cohn, Chairman of the Board,
Chief Executive Officer and Chief Financial Officer)
F-9
CERTIFICATION PUSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of H-Quotient, Inc., on Form 10-QSB for
the quarter ending March 31, 2003, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, the Executive Vice President of
Finance and the Chief Executive Officer of the Company, certify, pursuant to and
solely for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: June 9, 2003
/s/ Douglas A. Cohn
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(Douglas Cohn, Chairman of the Board,
Chief Executive Officer and Chief Financial Officer)
F-10