SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(MarkOne)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
8150 Leesburg Pike, Suite 503 Vienna, VA 22182
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(Address of principal executive offices) (Zip Code)
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
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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: 34,830,413 of its $.0001 par value
common stock as of October 10, 2003.
Transitional small business disclosure format (check one) Yes: [ ] No: [X]
1
H-QUOTIENT, INC., AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of
September 30, 2003, and December 31, 2002 3
Consolidated Statements of Operations
For the nine month and three month periods ended
September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 2003 and 2002 5
Notes to the Consolidated Financial Statements 5
Item 2: Management's Discussion and Analysis or Plan of Operation 6
Item 3: Controls and Procedures 6-7
PART II: OTHER INFORMATION 7-8
Item 1: Legal Proceedings 7
Item 2: Changes in Securities 7-8
2
HoQuotient, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, December 31,
2003 2002
(Unaudited) (Audited)
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Assets
Current assets
Cash $ 260,420 $ 11,503
Investment in marketable securities 2,465,276 486,540
Accounts receivable, less allowance for doubtful accounts of $481,881 and
$509,037, respectively 2,684,596 2,157,688
Inventory 371,340 --
Note receivable 139,869 139,869
Prepaid expenses 2,682,340 2,629,000
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Total current assets 8,603,841 5,424,600
Property and equipment, net 15,991 51,024
Capitalized software, net 281,805 82,171
Investment 3,143,638 2,213,138
Other Assets 153,981 14,878
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Total assets $ 12,199,256 $ 7,785,811
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Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued expenses 216,251 $ 361,872
Notes payable 62,475 62,475
Unearned revenue 16,189 990
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Total current liabilities 294,915 425,337
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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, 33,618,366 and
28,588,454 shares issued and outstanding at September 30, 2003 and
December 31, 2002, respectively 3,361 2,859
Additional paid-in capital 15,893,640 14,841,065
Subscriptions receivable (269,845) (52,385)
Accumulated deficit (3,722,815) (7,431,065)
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Total shareholders' equity 11,904,341 7,360,474
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Total liabilities and shareholders' equity $ 12,199,256 $ 7,785,811
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See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
3
HoQuotient, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
Nine Months Ended Three Months Ended
September 30 September 30
2003 2002 2003 2002
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Revenues $ 3,069,645 $ 1,869,477 $ 1,410,873 $ 1,121,670
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Operating expenses 449,599 211,709 131,372 62,993
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Income from operations 2,620,046 1,657,768 1,279,501 1,058,677
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Other income (expenses)
Interest expense (6,408) (11,856) (2,136) (4,068)
Unrealized gain on securities 1,095,248 -- 571,759 --
Realized gain (loss) on sale of securities (636) 86,040 --
Interest income -- 25,802 -- 7,651
Total other income (expense) 1,088,204 99,986 569,623 3,583
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Income before provision for income taxes 3,708,250 1,757,754 1,849,124 1,062,260
Provision for income taxes -- -- -- --
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Net income $ 3,708,250 $ 1,757,754 $ 1,849,124 $ 1,062,260
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Net income per common share
Basic: $ .13 $ .07 $ .06 $ 0.04
Diluted: $ .13 $ .07 $ .06 $ 0.04
Weighted average common shares Basic 29,269,542 26,370,380 30,558,209 26,540,305
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Diluted 29,607,551 26,982,025 30,932,102 27,123,400
4
HoQuotient, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2003
2003 2002
Nine Months Ended September 30 (Unaudited) (Unaudited)
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Net cash provided (used) in operating activities $104,417 $(82,720)
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Net cash provided in investing activities -- 51,159
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Net cash provided by financing activities 144,500 53,900
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Net (decrease) in cash 248,917 22,339
Cash at beginning of period 11,503 5,616
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Cash at end of period $260,420 $ 27,955
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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 September 30, 2003 and 2002, the
Consolidated Statement of Operations for the three-month periods ended September
30, 2003 and 2002, and the Consolidated Statement of Cash Flows for the
three-month periods ended September 30, 2003 and 2002, have been prepared
without audit. In the opinion of management, all adjustments necessary to
present fairly the financial position as of September 30, 2003 and 2002, and
results of operations and cash flows for the three month period ended September
30, 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 September 30, 2003,
are not necessarily indicative of results anticipated for the full year.
6
Item 2: Management's Discussion or Plan of Operation
Results of Operations
Three Months Ended September 30, 2003, Compared with Three Months Ended
September 30, 2002:
Revenues for the three months ended September 30, 2003, increased to $1,410,873
compared to $1,121,670 for the three months ended September 30, 2002. The
increase of $289,203 was a result of increased sales. Including other income,
revenues for the three months ended September 30, 2003, increased to $1,980,496
compared to $1,128,836 for the three months ended September 30, 2002. The
increase in other income was primarily derived from appreciation in the
company's securities portfolio. Quarterly dividends of $.01 per share were
authorized for shareholders of record on July 31, 2003 and on October 31, 2003.
Expenses
Interest expense for the three months ended September 30, 2003, was $2,136
compared to $4,068 for the three months ended September 30, 2002. The negligible
difference is attributed to the continuity of notes payable.
The unrealized gain on securities for the three months ended September 30, 2003,
was $571,759 as compared to $-0- for the three months ended September 30, 2002.
The difference resulted from an increase in the market value of the securities
portfolio.
Net profit for the three months ended September 30, 2003, was $1,849,124 or $.06
per share compared to $1,062,260 or $.04 per share for the three months ended
September 30, 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 September 30, 2003, was $8,308,926 as compared to $6,916,277
at September 30, 2002. The improvement by $1,293,649 resulted primarily from
operations and investments.
Cash and cash equivalents at September 30, 2003, were $260,420 as compared to
$15,218 on September 30, 2002.
During the quarter ended September 30, 2003, we generated -0- from investing
activities as compared to $55,930 for the quarter ended September 30, 2002.
During the quarter ended September 30, 2003, we used net cash of $144,500 from
financing activities as compared to $51,900 for the quarter ended September 30,
2002. This was the result of the exercise of warrants.
During the quarter ended September 30, 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
September 30, 2002.
During the quarter ended September 30, 2003, we issued stock with a value of
$144,500 warrant redemptions. There were no such activities in the quarter ended
September 30, 2002.
7
Item 3: Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-14(c) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of
the filing date of this report. Based on their evaluation, our principal
executive officer and principal accounting officer concluded that the
Company's disclosure controls and procedures are effective.
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in the above paragraph.
See certification pursuant to Sarbanes-Oxley Act of 2002 attached.
(b) Changes in internal controls. None.
(c) Asset-Backed Issuers. None.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
A suit with a previous customer is ongoing, and a $340,000 reserve has been
allocated. No liability has been recognized because of the contingent nature of
a default judgment rendered due to legal counsel error. The Company expects to
prevail and recover the reserve 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.
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.
In the three month period ended June 30, 2003, the Company issued 10,000 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.
8
In the three month period ended June 30, 2003, the Company issued 1,237,800
shares of its common stock in warrant exercises subject to restrictions under
Rule 144 of the Securities Act of 1933 in exchange for $371,340.
In the three month period ended June 30, 2003, the Company issued 361,000 shares
of its common stock subject to restrictions under Rule 144 of the Securities Act
of 1933 in exchange for investments.
In the three month period ended June 30, 2003, the Company issued 120,000 shares
of its common stock subject to restrictions under Rule 144 of the Securities Act
of 1933 in exchange for contract services of $36,000.
In the three month period ended September 30, 2003, the Company issued 2,063,409
shares of its common stock in exchange for warrant exercises and 45,000 shares
in exchange for contractor compensation. An additional 885,677 shares subject to
restrictions under Rule 144 of the Securities Act of 1933 were issued for the
exercise of a warrant.
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: November 19, 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