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: April 30, 2005 COMMISSION FILE NUMBER: 000-31727 THE QUANTUM GROUP, INC. -------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEVADA 20-0774748 ------------------------------ ------------------- STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3460 Fairlane Farms Road, Suite 4, Wellington, Florida 33414 ------------------------------------------------------------------------------- (ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES) (561) 798-9800 ---------------------------------------------------------------------------- (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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: As of June 2, 2005 the number of the Company's shares of par value $.001 common stock outstanding was 20,113,805. 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 15 Item 3- Controls and Procedures 17 PART II - OTHER INFORMATION 18 SIGNATURES 20 2 PART I ITEM 1. FINANCIAL INFORMATION. THE QUANTUM GROUP, INC. CONSOLIDATED BALANCE SHEET (A DEVELOPMENT STAGE ENTERPRISE) APRIL 30, 2005 (unaudited) ASSETS Current assets: Cash $ 7,719 ----------- Total current assets 7,719 Property and equipment, net of accumulated depreciation of $15,320 152,506 Goodwill 23,500 Other assets 12,569 ----------- Total assets $ 196,294 =========== LIABILITIES AND DEFICIENCY IN ASSETS Current liabilities: Accounts payable and accrued liabilities $ 398,222 Accrued payroll 635,622 Notes payable and accrued interest - shareholder 222,481 ----------- Total current liabilities 1,256,325 Capital lease obligation - net of current portion 5,151 ----------- Total Liabilities 1,261,476 Commitments and contingencies Deficiency in assets accumulated during development stage (1,065,182) ----------- Total liabilities and deficiency in assets $ 196,294 =========== See accompanying notes to consolidated financial statements 3 THE QUANTUM GROUP, INC. CONSOLIDATED STATEMENT OF OPERATIONS (A DEVELOPMENT STAGE ENTERPRISE) FOR THE PERIODS ENDED APRIL 30, 2005 AND 2004 (unaudited) For the period For the three months ended For the six months ended July 24, 2001 -------------------------------- -------------------------------- (inception) to April 30, 2005 April 30, 2004 April 30, 2005 April 30, 2004 April 30, 2005 -------------- -------------- -------------- -------------- -------------- Interest expense $ 8,065 $ 8,194 $ 17,750 $ 17,550 $ 88,739 Other expenses 393,189 201,417 805,408 347,595 2,314,936 -------- -------- -------- -------- ---------- Expenses representing net loss $401,254 $209,611 $823,158 $365,145 $2,403,675 ======== ======== ======== ======== ========== Basic and diluted (loss) per common share $ (0.02) $ (0.06) $ (0.04) $ (0.11) ========== ========= ========== ========= Weighted average number of common shares outstanding 19,737,823 3,383,239 19,162,529 3,351,721 ========== ========= ========== ========= 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 APRIL 30, 2005 (unaudited) Preferred Stock Common Stock par value $.001 par value $.001 per share per share Allocated 30,000,000 authorized 170,000,000 authorized Additional Shares --------------------- ---------------------- Paid-in Deferred for Deferred Accumulated Total # of Shares Amount # of Shares Amount Capital Compensation Compensation 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 $1,244,265 $(442,907) $ 195,630 $(2,002,421) $ (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 based compensation -- 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 $1,477,688 $(326,074) $ 166,567 $(2,403,675) $(1,065,182) ======= ==== ========== ======= ========== ========= ========= =========== ============ 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 APRIL 30, 2005 AND 2004 (unaudited) Six Months Six Months July 24, 2001 ended ended (Inception) to April 30, 2005 April 30, 2004 April 30, 2005 -------------- -------------- -------------- OPERATING ACTIVITIES Net (loss) $ (823,158) $ (365,145) (2,403,675) ----------- ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 8,361 666 15,320 Amortization of deferred compensation 43,660 116,559 131,093 Issuance of stock for compensation 127,422 323,670 Loss on conversion of debt to common stock -- 135,000 Changes in operating assets and liabilities: Increase (decrease) in other assets 682 (96) (12,568) Increase in accounts payable and accrued liabilities 282,173 222,146 931,633 ----------- ----------- ----------- Total adjustments 462,298 339,275 1,524,148 ----------- ----------- ----------- Net cash used in operating activities (360,860) (25,870) (879,527) INVESTING ACTIVITIES Purchase of property and equipment (108,411) (214) (157,289) Investment in related companies -- (10,000) ----------- ----------- ----------- Net cash used in investing activities (108,411) (214) (167,289) ----------- ----------- ----------- FINANCING ACTIVITIES Proceeds (repayments) on notes payable (20,647) 28,050 230,480 Proceeds from issuance of common stock 463,204 826,082 Repayments on capital lease obligation (1,535) (2,027) ----------- ----------- ----------- Net cash provided by financing activities 441,022 28,050 1,054,535 ----------- ----------- ----------- Net increase (decrease) in cash (28,249) 1,966 7,719 Cash at beginning of period 35,968 242 -- ----------- ----------- ----------- Cash at end of period $ 7,719 $ 2,208 $ 7,719 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 29,094 $ -- $ 31,302 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) APRIL 30, 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 six months ended April 30, 2005, were of a normal, recurring nature. The amounts presented for the six months ended April 30, 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 April 30, 2005 there were no cash equivalents. 7 THE QUANTUM GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED) APRIL 30, 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 April 30, 2005, there was no impairment of goodwill. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements for the period ended April 30, 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) APRIL 30, 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 April 30, 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 $ (823,158) $ (365,145) ----------- ----------- Pro forma $ (944,514) $ (381,745) ----------- ----------- Earnings per share As reported $ (0.04) $ (0.11) ----------- ----------- Pro forma $ (0.05) $ (0.11) ----------- ----------- 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) APRIL 30, 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 million 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 is 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) APRIL 30, 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 seeks to complete 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) APRIL 30, 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 1,751,000 and 240,000 options for the six month periods ended April 30 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 April 30, 2005 and 2004 is shown below: 2005 2004 ------------------------------------------ ------------------------------------- Options Options ----------------------------- ---------------------------- Incentive Number Weighted Common Number Weighted Stock of Average Stock of Average Grants Shares Exercise Price Grants Shares Exercise Price --------- --------- -------------- ------- --------- -------------- Outstanding at beginning of the period 82,000 361,000 -- -- $ -- Granted 99,750 1,751,500 $ 0.52 -- 240,000 $ 0.62 Exercised -- $ -- -- $ -- Forfeited -- 83,328 $ 0.50 -- -- $ -- ------- ---------- ------- Outstanding at April 30 181,750 2,029,172 $ 0.54 -- 240,000 $ 0.62 ------- ---------- ------- Exercisable at April 30 187,836 -- Available for issuance at April 30 under the plan 2,789,078 5,000,000 --------- --------- 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 $147,697 and $71,475 in compensation expense related to these stock grants for the six month periods ended April 30, 2005 and 2004. The Company recorded $16,850 and $327,150 of unearned compensation during the six month periods ended April 30, 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) APRIL 30, 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 5% stock warrants exercisable at the price of stock sold. As of April 30, 2005, the Company received $475,000 for 1,307,870 shares of common stock. The Company paid $61,750 in cash as commissions and issued 130,787 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 $28,529 in interest during the six month period ended April 30, 2005. No interest was paid during the six month period ended April 30, 2004. The interest accrued at April 30, 2005 is $57,401. 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 six month period ended April 30, 2005. The note payable balance and accrued interest as of April 30, 2005 and 2004 were $-0- and $42,582 respectively. 13 THE QUANTUM GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - (UNAUDITED) APRIL 30, 2005 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 In May, 2005, the Company received $200,000 for the purchase of 500,000 shares of common stock at a price of $0.40 per share. On May 23, 2005, the majority shareholder of the Company returned to the Company the 200,000 Series A preferred stock he received in the Company's acquisition of Renaissance Health Systems, Inc. and Quantum Medical Technologies, Inc. Subsequent to April 30, 2005, the Company has executed agreements with three managed care organizations, covering 11 counties in Florida. The Company will generate revenue from these contracts upon regulatory approval of the managed care organizations' plans in the specific counties in 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 six months ended April 30 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 Six months ended April 30, 2005 and 2004 The expenses for the quarter ended April 30, 2005 were $823,158 compared to $365,145 for the quarter April 30, 2004. The increase of $458,013 was primarily due to an increase of $343,182 in personnel related costs which include salaries, consulting fees, and the amortization of deferred compensation. Three months ended April 30, 2005 and 2004 The expenses for the quarter ended April 30, 2005 were $401,254 compared to $209,611 for the quarter April 30, 2004. The increase of $191,643 was primarily due to an increase of $124,906 in personnel related costs which include salaries, consulting fees, and the amortization of deferred compensation. LIQUIDITY AND CAPITAL RESOURCES At April 30, 2005, the Company had working capital deficit of $1,248,607 as compared to a working capital deficit of $254,857 at April 30, 2004. Cash inflow from financing activities was $441,022 for the six months ended April 30, 2005, compared to $28,050 for the six months ended April 30, 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 $413,250 plus issued 130,787 warrants to purchase common stock at a price ranging from $0.27 to $0.40 per share during the six months ended April 30, 2005. In May, 2005, the Company received $200,000 for the purchase of 475,000 shares of common stock at a price of $0.40 per share. Subsequent to April 30, 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, which is anticipated during the fourth fiscal quarter. The Company has nearly completed the physician networks in those areas. The Company is continuing to pursue additional to contract with health care providers in these counties and anticipates that the provider networks will be completed during the third fiscal quarter. 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 16 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 April 30, 2005 we had only five 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. The Company has realized net proceeds from the sale of common stock of $413,250 plus issued 130,787 warrants to purchase common stock at a price ranging from $0.27 to $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. The Company received net proceeds from the sale of stock of an additional $174,000 plus issued 50,000 warrants to purchase common stock at a price of $0.40 per share through June 5, 2005. 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. ITEM 3. DEFAULTS UPON SENIOR SECURITIES As of April 30, 2005, the Company is in default of a $ 179,080 installment note, plus accrued interest of $57,401 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 18 Exhibits: Copies of the following documents are included or furnished as exhibits to this report pursuant to Item 601 of Regulation S-B. Exhibit No. Title of Document ------- ----------------- 31.1 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certifications of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certifications of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 19 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. Date: June 20, 2005 BY: /s/ Noel J. Guillama --------------------------- Noel J. Guillama, President 20