UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTIOIN 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED: July 31, 2005
COMMISSION FILE NUMBER: 000-31727
THE QUANTUM GROUP, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 20-0774748
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STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3460 Fairlane Farms Road, Suite 4, Wellington, Florida 33414
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(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
(561) 798-9800
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 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 FILINGS FOR THE PAST 90 DAYS.
YES [ X ] NO [ ]
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 5, 2005 the number of the Company's shares of par value
$.001 common stock outstanding was 21,944,151.
INDEX
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements-Unaudited
Consolidated Balance Sheet 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Deficiency in Assets
Accumulated During the Development Stage 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2- Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
Item 3- Controls and Procedures 13
PART II - OTHER INFORMATION 13
SIGNATURES 14
2
PART I
ITEM 1. FINANCIAL INFORMATION.
THE QUANTUM GROUP, INC.
Consolidated Balance Sheet
( A Development Stage Enterprise)
July 31, 2005
(unaudited)
ASSETS
Current assets:
Cash $ 199,992
-----------
Total current assets 199,992
Property and equipment, net of accumulated depreciation of $21,653 160,191
Goodwill 23,300
Other assets 44,000
-----------
Total assets $ 427,483
===========
LIABILITIES AND DEFICIENCY IN ASSETS
Current liabilities:
Accounts payable and accrued liabilities $ 381,162
Accrued payroll 701,854
Notes payable and accrued interest - shareholder 204,170
Other current liabilities 50,000
-----------
Total current liabilities 1,337,186
Capital lease obligation - net of current portion 4,247
-----------
Total Liabilities 1,341,433
Commitments and contingencies
Deficiency in assets accumulated during development stage (913,950)
-----------
Total liabilities and deficiency in assets $ 427,483
===========
See accompanying notes to consolidated financial statements
3
THE QUANTUM GROUP, INC.
Consolidated Statement of Operations
( A Development Stage Enterprise)
For the Periods Ended July 31, 2005 and 2004
(unaudited)
For the period
For the three months ended For the nine months ended July 24, 2001
-------------------------------------------------------------- (inception) to
July 31, July 31, July 31, July 31, July 31,
2005 2004 2005 2004 2005
---------- ---------- ---------- ---------- ---------
Interest expense $ 8,235 $ 9,975 $ 25,785 $ 27,525 $ 96,974
Other expenses 456,434 244,908 1,261,842 592,503 2,771,170
---------- ---------- ---------- ---------- ----------
Expenses representing net loss $ 464,668 $ 254,883 $1,287,626 $ 620,028 $2,868,143
========== ========== ========== ========== ==========
Basic and diluted (loss)
per common share $ (0.02) $ (0.07) $ (0.07) $ (0.18)
========== ========= =========== ==========
Weighted average number of
common shares outstanding 21,441,948 3,613,922 19,570,121 3,439,759
========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
4
THE QUANTUM GROUP, INC.
Consolidated Statement of Changes in Deficiency in Assets
Accumulated During the Development Stage
July 31, 2005
(unaudited)
Preferred Stock Common Stock
par value $.001 par value $.001 Allocated
per share per share Shares
30,000,000 70,000,000 for
authorized authorized Additional Deferred Deferred
------------------- ----------------------- Paid-in Compen- Compen- Accumulated Total
# of Share Amount # of Share Amount Capital sation sation Deficit Equity
-------- -------- ----------- ---------- --------- --------- --------- ----------- -----------
Balance at 10-31-01 -- -- 2,700,000 2,700 17,300 -- -- (127,576) (107,576)
Net (loss) (86,400) (86,400)
-------- -------- ----------- ---------- --------- --------- --------- ----------- -----------
Balance at 10/31/02 -- -- 2,700,000 2,700 17,300 -- -- (213,976) (193,976)
Merger with TPII 510,885 511 (121,363) -- -- -- (120,852)
Sale of common stock
for cash -- -- 86,000 86 64,914 -- -- -- 65,000
Deferred compensation-
stock
options -- -- -- -- 207,500 (207,500) -- -- --
Deferred compensation-
stock grants -- -- -- -- -- (327,150) $ 327,150 -- --
Amortization of
deferred comp -- -- -- -- -- 3,458 -- -- 3,458
Net (loss) -- -- -- -- -- -- -- (246,555) (246,555)
-------- -------- ----------- ---------- --------- --------- --------- ----------- -----------
Balance at 10/31/03 -- -- 3,296,885 3,297 168,351 (531,192) 327,150 (460,531) (492,925)
Sale of common stock -- -- 1,188,122 1,188 276,690 -- -- -- 277,878
Conversion of note
payable -- -- 300,000 300 164,700 -- -- -- 165,000
Issuance of stock -
stk grants -- -- 197,269 197 172,551 172,748 (172,748) -- 172,748
Amortization of
deferred compensation -- -- -- -- -- 83,975 -- -- 83,975
Stock based compensation -- -- 25,000 25 23,475 -- -- -- 23,500
Merger - Renaissance
Health Systems, Inc 100,000 100 9,300,000 9,300 -- -- -- -- 9,400
Merger - Quantum
Medical
Technologies, Inc. 100,000 100 4,000,000 4,000 -- -- -- -- 4,100
Deferred compensation-
stock grants -- -- -- -- -- (45,950) 45,950 -- --
Grant of stock options -- -- -- -- 79,800 (79,800) -- -- --
Net (loss) -- -- -- -- -- -- $(1,119,986) (1,119,986)
-------- -------- ----------- ---------- --------- --------- --------- ----------- -----------
Balance at 10/31/04 200,000 $ 200 18,307,276 $ 18,307 $ 885,567 $(400,219) $200,352 $(1,580,517) $ (876,310)
Sale of common stock -- -- 917,778 917 226,934 -- -- -- 227,851
Issuance of stock -
stk grants 36,775 37 31,197 31,234 (31,234) -- 31,234
Stock based
compensation 6,500 6 3,049 -- -- -- 3,055
Stock issued in lieu
of cash -- -- 57,500 58 29,268 -- -- -- 29,326
Amortization of
deferred compensation -- -- -- -- -- 20,840 -- -- 20,840
Deferred compensation-
stock grants -- -- -- -- -- (26,512) 26,512 -- --
Deferred compensation-
stock options -- -- -- -- 68,250 (68,250) -- -- --
Net (loss) -- -- -- -- -- -- -- (421,904) (421,904)
-------- -------- ----------- ---------- --------- --------- --------- ----------- -----------
Balance at 1/31/05 200,000 $ 200 19,325,829 $ 19,325 $1,244,26 $(442,907) $ 195,630 $(2,002,42) $ (985,908)
Sale of common stock -- -- 687,500 688 234,663 -- -- -- 235,351
Issuance of stock -
stk grants -- -- 67,526 68 45,845 45,913 (45,913) -- 45,913
Stock issued in
lieu of cash 30,450 31 17,865 -- -- -- 17,896
Amortization of
deferred compensation -- -- -- -- -- 22,820 -- -- 22,820
Deferred compensation-
stock grants (16,850) 16,850 -- -- --
Deferred compensation-
stock options (64,950) 64,950 -- -- --
Net (loss) -- -- -- -- -- -- -- (401,254) (401,254)
-------- -------- ----------- ---------- --------- --------- --------- ----------- -----------
Balance at 4/30/05 200,000 $ 200 20,111,305 $20,111,305 $1,477,688 (326,074 $ 166,567 $(2,403,675) (1,065,182)
Sale of common stock -- -- 1,249,759 $ 1,250 $ 520,750 -- -- -- 522,000
Cancellation of
preferred stock (200,000) $ (200) -- -- -- -- -- -- (200)
Stock based
compensation 70,250 $ 70 $ 45,005 -- -- -- 45,075
Issuance of stock -
stk grants 32,137 $ 32 $ 26,633 $ 27,640 $ (27,640) -- 26,665
Amortization of
deferred
compensation -- -- -- -- -- $ 22,160 -- -- 22,160
Net (loss) -- -- -- -- -- -- -- $ (464,468) (464,468)
-------- -------- ----------- ---------- --------- --------- --------- ----------- -----------
-- $ -- 21,463,451 $ 21,463 $2,070,07 $(276,274) $ 138,927 $(2,868,143) $ (913,950)
======== ======== =========== ========== ========= ========= ========= =========== ===========
See accompanying notes to consolidated financial statements.
5
THE QUANTUM GROUP, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flow
For the Periods Ended July 31, 2005 and 2004
(unaudited)
Nine Months Nine Months July 24, 2001
ended ended (Inception) to
July 31, July 31, July 31,
2005 2004 2005
----------- ----------- -----------
OPERATING ACTIVITIES
Net (loss) $(1,287,626) $ (620,028) (2,868,143)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 14,694 986 21,653
Amortization of deferred compensation 97,067 158,616 184,500
Issuance of stock for compensation 146,197 15,000 342,445
Loss on conversion of debt to common stock -- -- 135,000
Changes in operating assets and liabilities:
Increase (decrease) in other assets (4,449) (13,317) (17,699)
Increase in accounts payable and accrued liabilities 308,350 342,565 957,810
----------- ----------- -----------
Total adjustments 561,859 503,850 1,623,709
----------- ----------- -----------
Net cash used in operating activities (725,767) (116,178) (1,244,434)
INVESTING ACTIVITIES
Purchase of property and equipment (122,429) (21,458) (171,307)
Investment in related companies -- -- (10,000)
----------- ----------- -----------
Net cash used in investing activities (122,429) (21,458) (181,307)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds (repayments) on notes payable 29,353 54,130 280,480
Proceeds from issuance of common stock 985,204 190,269 1,348,082
Repayments on capital lease obligation (2,337) -- (2,829)
----------- ----------- -----------
Net cash provided by financing activities 1,012,220 244,399 1,625,733
----------- ----------- -----------
Net increase (decrease) in cash 164,024 106,763 199,992
Cash at beginning of period 35,968 242 --
----------- ----------- -----------
Cash at end of period $ 199,992 $ 107,005 $ 199,992
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 55,175 $ -- $ 57,383
Supplemental disclosures of non-cash investing and financing activities:
Assumption of Liabilities of Transform Pack International, Inc. $ -- $ -- $ 120,852
Common stock and preferred stock issued in connection with acquisitions $ -- $ -- $ 23,500
Capital lease obligations incurred on purchases of equipment $ -- $ -- $ 10,358
Conversion of convertible note into common stock $ -- $ -- $ 30,000
See accompanying notes to consolidated financial statements.
6
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
JULY 31, 2005
NOTE 1: DESCRIPTION OF COMPANY
On May 28, 2003, Transform Pack International, Inc. (the "Company")
merged with Quantum HIPAA Consulting, Inc ("Quantum"). On January 30, 2004, the
shareholders of the Company approved the reincorporation of the Company under
the name of The Quantum Group, Inc. ("QTUM"). The shareholders approved a 1 for
10 reverse stock split. The Company is a development stage company with no
current revenues. The Company's business model is to become a provider of
services to the healthcare industry in three complementary areas: outsourcing
administrative responsibilities for physicians, Managed Care Organizations,
healthcare facilities and physician associations; developing new technologies
for the healthcare delivery system; and providing healthcare services to
consumers.
BASIS OF PRESENTATION
The condensed financial statements of The Quantum Group, Inc. (the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and Regulation SB. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
The accompanying condensed financial statements of the Company are unaudited.
However, in the opinion of management, they include all adjustments necessary
for a fair presentation of financial position, results of operations and cash
flows. All adjustments made during the nine months ended July 31, 2005, were of
a normal, recurring nature. The amounts presented for the nine months ended July
31, 2005, are not necessarily indicative of the results to be expected for any
other interim period or for the entire fiscal year. Additional information is
contained in the Annual Report on Form 10-KSB of the Company for the year ended
October 31, 2004, which should be read in conjunction with this quarterly
report.
GOING CONCERN
The Company has no revenues to date. Since its inception, the Company has been
dependent upon the receipt of capital investment to fund its continuing
activities. In addition to the normal risks associated with a new business
venture, there can be no assurance that the Company's business plan will be
successfully executed. The Company's ability to execute its business model will
depend on its ability to obtain additional financing and achieve a profitable
level of operations. There can be no assurance that sufficient financing will be
obtained. Nor can any assurance be made that the Company will generate
substantial revenues or that the business operations will prove to be
profitable. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. At July 31, 2005
there were no cash equivalents.
7
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
JULY 31, 2005
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which range
from three to five years.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense when incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates and the differences could be material.
INCOME TAXES
The Company has not recognized any benefit of such net operating loss carry
forwards in the accompanying financial statements in accordance with the
provisions of SFAS No. 109, as the realization of this deferred tax benefit is
not likely. A 100% valuation allowance has been recognized to offset the entire
effect of the Company's net deferred tax asset.
GOODWILL
On an annual basis, management assesses the composition of the Company's assets
and liabilities, as well as the events that have occurred and the circumstances
that have changed since the most recent fair value determination. If events
occur or circumstances change that would more likely than not reduce the fair
value of goodwill below its carrying amount, goodwill will be tested for
impairment. The Company will recognize an impairment loss if the carrying value
of the asset exceeds the fair value determination. As of July 31, 2005, there
was a reduction of the acquisition price of $200 resulting from the cancellation
of the preferred stock associated with acquisition. There was no impairment of
goodwill as of July 31, 2005.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements for the period ended July 31,
2005 include the accounts of The Quantum Group, Inc. and its subsidiaries,
Renaissance Health Systems, Inc. and Quantum Medical Technologies, Inc.
REVENUE RECOGNITION
It is anticipated that the Company will recognize a majority of its revenue from
Health Maintenance Organizations (HMO) as a percentage of premium collected by
the HMO from governmental sources. These payments are paid at the beginning of
each month, with quarterly adjustments as required on a look back basis to
account for any disenrollments. Revenue will be recorded in the month earned
with an allowance for the quarterly adjustments.
8
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
JULY 31, 2005
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION
The company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 encourages the
use of a fair-value-based method of accounting for stock-based awards, under
which the fair value of stock options is determined on the date of grant and
expensed over the vesting period. Under SFAS 123, companies may, however,
measure compensation costs for those plans using the method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Companies that apply APB No. 25 are required to include
pro forma disclosures of net earnings and earnings per share as If the
fair-value-based method of accounting had been applied. The Company elected to
account for such plans under the provisions of APB No. 25. The Company accounts
for stock options granted to consultants under SFAS 123.
Had the compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for Stock
Based Compensation," at July 31, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
2005 2004
------------ ----------
Net income (loss)
As reporte $ (1,287,626) $ (620,028)
------------ ----------
Pro forma $ (1,307,161) $ (644,928)
------------ ----------
Earnings per share
As reported $ (0.07) $ (0.18)
------------ ----------
Pro forma $ (0.08) $ (0.19)
------------ ----------
The fair value of each option is estimated on the date of grant using the fair
market value option-pricing model with the assumptions:
Risk-free interest rate 3%
Expected life (years) 5
Expected volatility 1.46
Expected dividends None
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 154, Accounting Changes and Error Corrections, was issued in May 2005
and replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting principle in most
instances and is required to be applied to all accounting changes made in fiscal
years beginning after December 15, 2005. The Company's expected April 1, 2006
adoption of SFAS No. 154 is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.
9
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
JULY 31, 2005
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts payable, notes
payable and accrued liabilities approximate their fair value because of the
short maturity of these financial instruments.
NOTE 4: MERGER WITH QUANTUM HIPAA CONSULTING, INC.
Effective May 28, 2003, the Company consummated a merger pursuant to a merger
agreement with Quantum HIPAA Consulting Group, Inc. Quantum HIPAA Consulting
Group, Inc. developed a training compact disc and manuals to instruct the
healthcare industry on the implementation of the regulations created to comply
with the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
The Company completed the merger by issuing 2,700,000 shares of Common Stock to
the sole shareholder of Quantum, in exchange for all the issued and outstanding
shares of Quantum. For accounting purposes, the acquisition was treated as a
recapitalization of the Company. The value of the net assets of the Company
after the acquisition was completed is the same as their historic book value.
On May 30, 2003, in accordance with the agreement, the Company, Transform Pack
International, Inc., sold its wholly owned subsidiary, Transform Pack, Inc.
(TPI) to certain previous shareholders and investors of the Company. Transform
Pack, Inc. and its shareholders have agreed to assume and indemnify the Company
for all operating debts of the Company.
NOTE 5: ACQUISITION OF QUANTUM MEDICAL TECHNOLOGIES, INC. AND RENAISSANCE HEALTH
SYSTEMS, INC.
Following a motion approved by the Company's shareholders during a meeting
January 30, 2004, the Board of Directors agreed to issue 13,300,000 post reverse
shares and 200,000 shares of Series A preferred stock, approved separately by
the Board of Directors on July 19, 2004, to the shareholder of both Quantum
Medical Technologies, Inc. (QMT) and Renaissance Health Systems, Inc. (RHS) for
the 80% of the those companies which the Company does already not own from the
majority shareholder of the Company. The Series A preferred stock was
convertible into 30 common shares after 4 years at the option of the holder.
Control in the Company will not materially change, since all the shareholders in
numbers and relative beneficial ownership of both QMT and RHS are also material
and beneficial owners of the common shares of the Company today. The final
merger was consummated in August 2004. On May 23, 2005, the majority shareholder
returned the 200,000 Series A preferred stock received from the acquisition in
order to facilitate future capital raising efforts.
Quantum Medical Technologies, Inc. (QMT) was incorporated in January of 2000,
and is a developmental stage company, with no significant material assets or
liabilities and no revenues, and consists primarily of intellectual and patent
pending business process to provide medical technologies, computer programs,
electronic services, predictive modeling and other services to the medical
profession. The Company has begun to develop a Cybernaptic (SM) process to
connect in an applications service provider (ASP) format most of the touch
points in the healthcare delivery system. The Company has also in development a
QuantumQuotient (SM) index that the Company believes could be used as a tool to
provide a measurable way to tack improvement in the healthcare lifestyle of its
subject. If this process can be confirmed, it could have significant value to
the Company as a tool to reduce cost, and as a intellectual property it can sell
or license to others. In addition, the Company has purchased an online medical
office billing and collection program, which is currently in beta testing.
10
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
JULY 31, 2005
NOTE 5: ACQUISITION OF QUANTUM MEDICAL TECHNOLOGIES, INC. AND RENAISSANCE HEALTH
SYSTEMS, INC. (CONTINUED)
Renaissance Health Systems, Inc. was incorporated in December of 2002, and is a
developmental stage company, with no significant material assets or liabilities
and no revenues, which was formed to create a community health system (CHS) that
will coordinate care to managed care patients by affiliating with providers,
physicians and hospitals. The Company has signed an agreement with two Florida
licensed health maintenance organization to build a CHS in three counties in
central Florida. The Company's management has extensive experience in developing
CHS, and with recent additions to the staff, have completed the CHS by end of
3rd quarter of 2005.
NOTE 6: LOSS PER SHARE
Basic loss per share is computed by dividing loss available to common
shareholders by the weighted average number of common shares for the period. The
computation of diluted loss per share is similar to basic loss per share, except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potentially dilutive common
shares, such as options, had been issued. Diluted loss per share is not
presented as the effects would be anti-dilutive.
NOTE 7: INCENTIVE EQUITY AND STOCK OPTION PLAN
In October 2003 the Company adopted a stock option plan. The purpose of the
stock option plan was to increase the employees and non-employee director's
proprietary interest in Quantum and to align more closely their interests with
the interests of the shareholders of Quantum, as well as to enable Quantum to
attract and retain the services of experienced and highly qualified employees
and non-employees directors.
Options granted under this plan may either be options qualifying as incentive
stock options under Section 422 of the Internal Revenue Code of 1986, as
amended, or options that do not so qualify. Any incentive option must provide
for an exercise price of not less than 100% of the fair market value of the
underlying shares on the date of such grant, but the exercise price of any
incentive option granted to an eligible employee owning more than 10% of the our
common stock must be at least 110% of such fair market value as determined on
the date of the grant.
The term of each option and the manner in which it may be exercised is
determined by the board of directors, provided that no option may be exercisable
more that 10 years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more that 10% of the our common
stock, no more than five years after the date of the grant. The board of
directors shall determine the exercise price of non-qualified options.
The Company has reserved 5,000,000 shares of common stock under the plan. The
board of directors or a committee of the board of directors will administer the
plan including, without limitation, the selection of the persons who will be
granted plan options under the plan, the type of plan options to be granted, the
number of shares subject to each plan options and the plan option price.
The per share exercise price of shares granted under the plan may be adjusted in
the event of certain changes in the total purchase price payable upon the
exercise in full of options granted under the plan. Officers, directors and key
employees of and consultants to Quantum will be eligible to receive
non-qualified options under the plan. Only officers, directors and employees of
Quantum who are employed by Quantum or by any subsidiary thereof are eligible to
receive incentive options.
11
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
JULY 31, 2005
NOTE 7: INCENTIVE EQUITY AND STOCK OPTION PLAN (CONTINUED)
The Company has elected to account for the stock options under the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company accounts for stock options granted to
consultants under Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation."
Under the plan, the Company granted 1,751,500 and 240,000 options for the nine
month periods ended July 31, 2005 and 2004, at a weighted average exercise price
of $0.52 and $0.62 per share, respectively.
A summary of options during the six months ended July 31, 2005 and 2004 is shown
below:
2005 2004
----------------------------------- ------------------------------------
Options Options
---------------------- ----------------------
Weighted Weighted
Incentive Average Common Average
Stock Number of Exercise Stock Number of Exercise
Grants Shares Price Grants Shares Price
-------- -------- ---------- ---------- -------- ---------
Outstanding at beginning
of the period 82,000 361,000 -- - $ --
Granted 99,750 1,751,500 $ 0.52 -- 90,000 $ 0.62
Exercised -- -- $ -- -- -- $ --
Forfeited -- 129,165 $ 0.50 -- -- $ --
-------- -------- ---------- ---------- -------- ---------
Outstanding at July 31 181,750 1,983,335 $ 0.54 -- 90,000 $ 0.62
-------- ---------- ---------- ---------- -------- ---------
Exercisable at July 31 534,393 --
Available for issuance at
July 31 under the plan 2,744,915 4,910,000
---------- -----------
NOTE 8: OTHER COMMON STOCK TRANSACTIONS
DEFERRED COMPENSATION
The Company, from time to time, grants shares of common stock to employees,
directors and advisors in lieu of or as partial compensation for services
performed for the Company. These shares vest over two and three year periods.
The value of the stock was determined by the closing market price at the date of
grant. The Company recognized $104,787 and $107,212 in compensation expense
related to these stock grants for the nine month periods ended July 31, 2005 and
2004.
The Company recorded $43,362 and $0 of deferred compensation during the nine
month periods ended July 31, 2005 and 2004, respectively, on the grants of stock
and recorded the unvested shares as Deferred Compensation - Allocated Shares in
the equity section of the balance sheet.
12
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
JULY 31, 2005
NOTE 8: OTHER COMMON STOCK TRANSACTIONS (CONTINUED)
EQUITY FINANCING
In June 2004, the Company entered into an agreement with two companies to raise
a minimum of $500,000 to a maximum of $1,000,000. The terms include the share
price to be a 75% discount on the closing sale price. The placement companies
will receive a combined placement fee of 13% of the gross proceeds received from
issuance of shares and common stock warrants at an exercise price of $0.275 per
share. As of December 31, 2004, the Company received $381,300 and issued
1,385,289 shares. The Company paid $49,569 in cash and issued 199,170 warrants
as commissions.
In December 2004, the Company entered into an agreement with a placement company
to raise capital. The placement company will receive 13% cash commission on the
gross proceeds received from the issuance of the shares and 10% stock warrants
exercisable at the price of stock sold. As of July 31, 2005, the Company
received $775,000 for 2,057,870 shares of common stock. The Company paid
$100,750 in cash as commissions and issued 205,787 warrants.
In July 2005, the Company issued a private placement memorandum to sell
3,000,000 for $1,500,000. The Company will pay 13% commission on the gross
proceeds received from the issuance of the shares and one stock warrant
exercisable at the price of stock sold for every $10 raised. As of July 31,
2005, the Company received $300,000 for 600,000 shares of common stock. The
Company paid $39,000 in cash as commissions and will issue 30,000 warrants.
REVERSE STOCK SPLIT
In January 2004, the shareholders of the Company approved the merger of the
Company into The Quantum Group, Inc. for the purpose of reincorporation in the
State of Nevada. In conjunction with the reincorporation, the shareholders
approved a 1 for 10 reverse stock split of its common stock. An amended and
restated Articles of Incorporation have been filed to change the name of the
Company to The Quantum Group, Inc. ("QTUM") and to set the authorized shares of
common stock to 170,000,000 at a par value of $.001 per share and authorized
preferred stock to 30,000,000 at a par value of $.001 per share. All share and
per share amounts have been retroactively restated in the accompanying financial
statements and notes for all periods presented.
NOTE 9: RELATED PARTY TRANSACTIONS
On November 1, 2002, the Company entered into an agreement with a shareholder to
purchase certain intellectual property integral to the Company's business. In
exchange, the company issued a three (3) year installment note for $179,080 with
an interest rate of eighteen percent (18%) per annum. The price of the sale was
equal to the cost the shareholder incurred to develop the property purchased.
The note is payable monthly starting January 2003. The Company is in technical
default as no payments have been made on the note. The Company is accruing
interest, at 18% per annum, monthly on the unpaid principal balance and has
classified the note as current as per the agreement. The Company paid $55,175 in
interest during the nine month period ended July 31, 2005. No interest was paid
during the nine month period ended July 31, 2004. The interest accrued at July
31, 2005 is $39,107.
13
THE QUANTUM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
JULY 31, 2005
NOTE 9: RELATED PARTY TRANSACTIONS (CONTINUED)
On November 2, 2002 the Company signed a demand note, with an interest rate of
eighteen percent (18%) per annum, for the expenses a shareholder paid on behalf
of the Company subsequent to the sale of the intellectual property. The Company
repaid the note during the nine month period ended July 31, 2005. The note
payable balance and accrued interest as of July 31, 2005 and 2004 were $-0- and
$38,582 respectively.
NOTE 10: ACQUISITION OF SOFTWARE
On December 16, 2004, Quantum Medical Technologies, Inc. entered into an
agreement to purchase application systems provider software from a Florida
Limited Liability Corporation for $80,000. The software was in developmental
stage and has received HIPPA certification. The purchase price is to be paid
over a period of 120 days from the date of closing. Upon review and testing by
an independent software development company, management has determined that
certain representations by the seller were not met and therefore the Company has
not made the second scheduled payment due 60 days from closing. The Company is
seeking to renegotiate or rescind the purchase with the seller.
NOTE 11: SUBSEQUENT EVENTS
The Company has received an additional $237,500 proceeds from the sale of common
stock and have issued 480,700 shares of stock.
Beginning in September 2005, the Company's first Community Health System (CHS)
in Volusia County Florida began accepting patients from a managed care
organization. Additionally, as of September 1, 2005, the Company completed two
additional CHS located in Miami-Dade and Broward Counties in southern Florida.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The discussion and analysis set forth below should be read in conjunction with
our Financial Statements and the related notes thereto appearing elsewhere in
this quarterly report. The information presented for the nine months ended July
31, 2005 and 2004, was derived from unaudited financial statements, which, in
our opinion, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation.
FORWARD LOOKING STATEMENTS
This Report on Form 10-QSB contains certain forward-looking statements. When
used in this report, press releases and elsewhere by the management of the
Company from time to time, the words "believes", "anticipates", and "expects"
and similar expressions are intended to identify forward-looking statements that
involve certain risks and uncertainties. Additionally, certain statements
contained in this discussion may be deemed forward-looking statements that
involve a number of risks and uncertainties. Among the factors that could cause
actual results to differ materially are the following: the ability of the
Company to meet its working capital and liquidity needs, economic trends for
consumer advertisers, the availability of long-term credit, unanticipated
changes in the U.S. and international economies, business conditions and growth
in e-commerce and the timely development and acceptance of new products, the
impact of competitive products and pricing, and other risks detailed from time
to time in the Company's SEC reports. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results of
any events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
GOING CONCERN
The Company is a development stage company that over the last three years has
expensed material sums in creating procedures, manuals and systems to assist the
medical community in the implementation of medical regulations. Though the
Company has materially finished developing its training programs, additional
updates and deployment will be required.
As shown in the accompanying condensed financial statements, the Company has
incurred recurring losses and negative cash flows from its development and
organization activities and has negative working capital and shareholders'
deficit. Under normal conditions, these conditions raise substantial doubt about
the Company's ability to continue as a going concern.
There can be no assurance that the Company will be able to successfully
implement its plans to generate additional investor interest and raise
additional capital, or if such plans are successfully implemented, that the
Company will achieve its goals.
Furthermore, if the Company is unable to raise additional funds, it may be
required to modify its growth and developmental plans, and even be forced to
severely limit development operations completely.
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern and do not include any adjustments
to reflect the possible future effects of the recoverability and classification
of assets or the amounts and classification of liabilities that might result
from the outcome of this uncertainty. See "Liquidity and Capital Resources,"
below.
15
RESULTS OF OPERATIONS
Nine months ended July 31, 2005 and 2004
The expenses for the nine months ended July 31, 2005 were $1,287,625 compared to
$620,828 for the nine period ended July 31, 2004. The increase of $666,798 was
primarily due to an increase of $508,050 in personnel related costs which
include salaries, consulting fees, and the amortization of deferred
compensation.
Three months ended July 31, 2005 and 2004
The expenses for the quarter ended July 31, 2005 were $464,469 compared to
$255,587 for the quarter July 31, 2004. The increase of $208,882 was primarily
due to an increase of $149,036 in personnel related costs which include
salaries, consulting fees, and the amortization of deferred compensation.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2005, the Company had working capital deficit of $1,137,194 as
compared to a working capital deficit of $797,323 at July 31, 2004.
Cash inflow from financing activities was $1,012,220 for the nine months ended
July 31, 2005, compared to $244,399 for the nine months ended July 31, 2004. The
increase was primarily due to the sale of common stock to outside investors as
detailed below. The Company will need to secure additional financing during the
next 12 months.
The Company executed an agreement with an investment group to raise up to
$1,000,000 from foreign investors. These shares will be restricted from sale in
the United States for a minimum of one year. The Company paid commissions and
expenses of 13%, plus legal and support cost relating to this private overseas
offering. Additionally, the Company issued 199,170 warrants to purchase common
stock at a price of $0.275 per share which expires January 4, 2010. The Company
realized net proceeds from the sale of common stock of $331,731 through December
31, 2004.
During the quarter ended January 31, 2005, the Company entered into an agreement
with a placement firm to raise additional working capital. The terms include a
13% cash commission. The Company has realized net proceeds from the sale of
common stock of $674,250 plus issued 205,787 warrants to purchase common stock
at a price ranging from $0.27 to $0.40 per share during the nine months ended
July 31, 2005.
On July 6, 2005, the Company issued a private placement memorandum to sell
3,000,000 shares of common stock at a price of $0.50 per share. The Company has
agreed to pay a placement agent 13% of the funds raised and one grant warrant,
exercisable at $0.50 per share, for every $10 raised. During the third quarter
ended July 31, 2005, the Company has realized net proceeds from the sale of
common stock of $261,000 and issued 30,000 warrants. In August 2005, the Company
has realized an additional $206,625 in net proceeds from the sale of common
stock.
During the third quarter ended July 31, 2005, the Company executed agreements
with three managed care organizations, covering 11 counties in Florida. The
Company will start generating revenue from these contracts upon regulatory
approval of the managed care organizations' plans in the counties that the
Company will provide health care. One of the managed care organizations has
received approval, and the Company will start recognizing revenue in the month
of September 2005. Additionally, the Company has secured Errors and Omission
insurance policy to protect it from any potential suits related to its
responsibility for the managed care organization.
16
The Company's development plan is to identify, negotiate with and acquire
business and services that will allow the Company to provide comprehensive
consulting services, technological, strategic intelligence and systems that will
allow the small to medium size medical organization to provide better care,
better medical outcomes and earn more profit. The Company expect to acquire the
candidate businesses after extensive due diligence, and then to acquire the
business enterprise including cash flow by issuing stock, notes and cash. The
Company expects to secure financing for the acquisition by selling common and/or
preferred shares, issuing debt or notes and by leveraging the potential
acquisition. There is no assurance that the Company will be able to execute on
its plans and clearly, additional financing will be needed to develop and
implement its business plan within the next twelve months.
New Accounting Pronouncements
SFAS No. 154, Accounting Changes and Error Corrections, was issued in May 2005
and replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting principle in most
instances and is required to be applied to all accounting changes made in fiscal
years beginning after December 15, 2005. The Company's expected April 1, 2006
adoption of SFAS No. 154 is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.
ITEM 3. CONTROLS AND PROCEDURES
Our Management and resources are limited, as of July 31, 2005 we had only
sixteen full time employees, of which, three were also officers and directors of
the Company. These positions are President/CEO, CFO and Vice President of
Administration, collectively these officers have conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of
1934, as amended) as of the end of the fiscal quarter covered by this report.
Based upon that evaluation and both our limited developmental history as well as
the size of our organization, our management has concluded that we have adequate
disclosure controls. However we must improve procedures for effective and timely
gathering, analyzing and disclosing the information we are required to disclose
in our reports filed under the Securities Exchange Act of 1934, as amended.
Management expects to add additional controls and personnel in the near future
as capital becomes available. There have been no significant changes made in our
internal controls or in other factors that could significantly affect our
internal controls during the fiscal quarter covered by this report.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended January 31, 2005, the Company entered into an agreement
with a placement firm to raise additional working capital. The terms include a
13% cash commission. During the quarter ended July 31, 2005, the Company has
realized net proceeds from the sale of 750,000 shares of common stock of
$261,000 plus issued 75,000 warrants to purchase common stock at a price of
$0.40 per share. Each investor represented to us that the investor was an
"accredited investor", as defined under Rule 501 Regulation D of the 1933 Act.
The shares were issued as restricted shares under the 1933 Act and were endorsed
with a restrictive legend.
On July 6, 2005, the Company issued a private placement memorandum to raise
$1,500,000 at a price of $0.50 per share. The terms include a 13% cash
commission plus one common stock warrant at a price of $0.50 for every $10.00
raised. During the quarter ended July 31, 2005 the Company received net proceeds
from the sale of 600,000 shares of common stock of $261,000 plus issued 30,000
warrants to purchase common stock at a price of $0.50 per share. Each investor
represented to us that the investor was an "accredited investor", as defined
under Rule 501 Regulation D of the 1933 Act. The shares were issued as
restricted shares under the 1933 Act and were endorsed with a restrictive
legend.
During the quarter ended July 31, 2005, the majority shareholder returned to the
Company the 200,000 shares of convertible preferred stock he received in the
Company's acquisition of Renaissance Health Systems, Inc. and Quantum Medical
Technologies, Inc. as a reduction of the purchase price of the two companies.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of July 31, 2005, the Company is in default of a $ 179,080 installment note,
plus accrued interest of $39,107 obligation to the Company's President and
majority shareholder. He has not declared the note in default as of this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None
Exhibits: Copies of the following documents are included or furnished as
exhibits to this report pursuant to Item 601 of Regulation S-B.
Exhibit Nol. SEC Ref. No. Title of Document
------------ ------------ ------------------
31.1 31 Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 32 Certifications of the Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
18
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
duly authorized.
THE QUANTUM GROUP, INC.
BY: /s/ Noel J. Guillama
-------------------------------
Noel J. Guillama, President
Date: September 16, 2005
19