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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended: May 31, 2002 -
Commission file number: 0-11411
QMed, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 22-2468665
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Metro Park South, Laurence Harbor, New Jersey 08878
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(732) 566-2666
-----------------------------------------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ].
The number of shares outstanding of the registrant's common stock on
July 11, 2002: 14,457,767
Independent Accountants' Review Report
We have reviewed the accompanying condensed balance sheets of QMed, Inc. and
Subsidiaries as of May 31, 2002, and the related condensed consolidated
statements of operations for the three months and six months ended May 31, 2002
and 2001 and condensed consolidated statements of stockholders' equity and cash
flows for the six months then ended. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of November 30, 2001, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated January 31, 2002, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of November 30, 2001, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
AMPER, POLITZINER & MATTIA P.A.
July 3, 2002
Edison, New Jersey
2
Part I.
Item 1. Financial Statements
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, 2002 November 30,
(Unaudited) 2001
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 1,206,206 $ 531,450
Investments 7,400,848 5,436,290
Accounts receivable, net of
allowances of approximately
$2,000 and $75,000 respectively 644,443 886,028
Inventory 172,239 178,386
Prepaid expenses and other current assets 272,311 159,787
9,696,047 7,191,941
Property and equipment, net 502,944 466,456
Product software development costs 283,759 277,812
Other assets 477,550 231,302
Investment in joint venture -- --
--------------- ---------------
$ 10,960,300 $ 8,167,511
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,114,847 $ 435,479
Leases payable, current portion 50,077 53,034
Accrued salaries and commissions 372,726 498,815
Fees reimbursable to health plans -- 15,524
Contract billings in excess of revenues 368,949 360,524
Deferred warranty revenue 43,339 78,833
--------------- ---------------
1,949,938 1,442,209
Leases payable - long term 39,071 30,781
--------------- ---------------
1,989,009 1,472,990
Stockholders' equity
Common stock $.001 par value;
40,000,000 shares authorized; 14,479,767
and 14,175,713 shares issued and 14,457,767
and 14,153,713 outstanding 14,479 14,175
Paid-in capital 33,021,176 31,541,800
Accumulated deficit (23,968,411) (24,818,342)
Accumulated other comprehensive income
Unrealized (loss) gains on securities available
for sale (20,328) 32,513
--------------- ---------------
9,046,916 6,770,146
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
--------------- ---------------
Total stockholders' equity 8,971,291 6,694,521
--------------- ---------------
$ 10,960,300 $ 8,167,511
=============== ===============
See Accompanying Notes to Condensed Consolidated Financial Statements
3
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
May 31, 2002 May 31, 2001 May 31, 2002 May 31, 2001
------------- ------------- ------------- -------------
Revenue
Disease management services $ 3,397,758 $ 1,516,085 $ 6,458,056 $ 2,590,910
Medical Equipment 94,563 138,613 219,980 271,715
------------- ------------- ------------- -------------
3,492,321 1,654,698 6,678,036 2,862,625
------------- ------------- ------------- -------------
Cost of revenue
Disease management services 1,320,134 637,731 2,542,366 1,089,845
Medical equipment 48,308 79,277 117,932 144,368
------------- ------------- ------------- -------------
1,368,442 717,008 2,660,298 1,234,213
------------- ------------- ------------- -------------
Gross profit 2,123,879 937,690 4,017,738 1,628,412
Selling, general and
administrative expenses 1,516,946 1,300,769 2,902,318 2,365,698
Research and development
expenses 312,637 170,110 569,087 328,000
------------- ------------- ------------- -------------
Income (loss) from operations 294,296 (553,189) 546,333 (1,065,286)
Loss in operations of joint venture (11,250) (26,250) (36,250) (26,250)
Interest expense (1,906) (4,376) (7,508) (9,504)
Interest income 72,460 47,540 128,726 81,187
Other income 94,012 -- 94,012 --
------------- ------------- ------------- -------------
Income (loss) before income tax
benefit 447,612 (516,275) 725,313 (1,019,853)
Income tax benefit - gain on sale
of state net operating loss
carryovers -- -- 124,618 219,603
------------- ------------- ------------- -------------
Net income (loss) $ 447,612 $ (516,275) $ 849,931 $ (800,250)
Basic income (loss) per share
Weighted average shares
outstanding 14,457,022 13,537,626 14,377,939 13,230,019
------------- ------------- ------------- -------------
Basic earnings (loss) per share $ .03 $ (.04) $ .06 $ (.06)
============= ============= ============= =============
Diluted income (loss) per share
Weighted average shares
outstanding 16,729,466 13,537,626 16,721,312 13,230,019
------------- ------------- ------------- -------------
Diluted earnings (loss) per share $ .03 $ (.04) $ .05 $ (.06)
============= ============= ============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
4
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
May 31, 2002 May 31, 2001 May 31, 2002 May 31, 2001
------------- ------------- ------------- -------------
Net income (loss) 447,612 (516,275) 849,931 (800,250)
Other comprehensive income
Unrealized gain (loss) on
securities available for sale (14,345) (680) (52,841) 6,320
Less: reclassification adjustment
for gains included in net income 42,104 30,387 --
------------- ------------- ------------- -------------
Comprehensive income (loss) $ 475,371 $ (516,955) $ 827,477 $ (793,930)
============= ============= ============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
5
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended May 31, 2002
(Unaudited)
Accumulated
Other Common Stock
Common Stock Paid-in Accumulated Comprehensive Held in Treasury
Shares Amount Capital Deficit Income Shares Amount Total
---------- ------- ----------- ------------- ------------- ------ -------- ----------
Balance - November 30, 2001 14,175,713 $14,175 $31,541,800 $(24,818,342) $32,513 22,000 $(75,625) $6,694,521
Exercise of stock options and
warrants 304,054 304 1,464,443 1,464,747
Amortization of non-employee
stock options 14,933 14,933
Net income for the six months
ended May 31, 2002 849,931 849,931
Unrealized holding losses on
securities available for sale (52,841) (52,841)
---------- ------- ----------- ------------ -------- ------ -------- ----------
Balance - May 31, 2002 14,479,767 $14,479 $33,021,176 $(23,968,411) $(20,328) 22,000 $(75,625) $8,971,291
========== ======= =========== ============ ======== ====== ======== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements
6
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six For the Six
Months Ended Months Ended
May 31, May 31,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 849,931 $ (800,250)
============= =============
Adjustments to reconcile net income to cash and cash
equivalents (used in) provided by operating activities:
(Gain) loss on sale of investments (30,387) 2,856
Loss in operations of joint venture 36,250 26,250
Depreciation and amortization 127,188 115,732
Amortization of non-employee stock options 14,934 14,934
(Increase) decrease in
Accounts receivable 241,586 (35,326)
Inventory 6,147 1,720
Prepaid expenses and other current assets (112,524) (4,737)
Increase (decrease) in
Accounts payable and accrued liabilities 537,755 501,236
Deferred revenue (27,069) --
Other, net (1,453) (35,117)
------------- -------------
Total adjustments 792,426 587,548
------------- -------------
$ 1,642,357 $ (212,702)
============= =============
Cash flows from investing activities:
Proceeds from sale of securities available for sale 6,050,389 850,000
Purchases of securities available for sale (8,037,402) (719,599)
Capital expenditures, net (369,056) (166,109)
Investment in joint venture (36,250) (26,250)
------------- -------------
$ (2,392,319) $ (61,958)
============= =============
Cash flows from financing activities:
Payments for capital leases (40,029) -
Proceeds from issuance of common stock 1,464,747 4,052,661
------------- -------------
$ 1,424,718 $ 4,052,661
============= =============
Net (decrease) increase in cash and cash equivalents 674,756 3,778,001
Cash and cash equivalents at beginning of period 531,450 576,537
------------- -------------
Cash and cash equivalents at end of period $ 1,206,206 $ 4,354,538
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,508 $ 9,504
Income taxes 9,000 9,456
See Accompanying Notes to Condensed Consolidated Financial Statements
7
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, these financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended May 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
November 30, 2002. These condensed consolidated financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended November 30,
2001.
Note 1 - Summary of Significant Accounting Policies
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Revenue Recognition
- -------------------
Disease Management Services
The Company enters into contractual arrangements with health plans to provide
disease management services. Revenue from such contracts is calculated on
various performance-based and fixed fee methodologies and is recorded as
services are provided. The Company will adjust or defer a portion of the
contract revenue for contracts where the Company may believe that there could be
an issue of non-performance, possibly resulting in a refund of fees. Adjustments
for non-performance under the terms of the contract or other factors affecting
revenue recognition are accrued on an estimated basis in the period the services
are provided and are adjusted in future periods when final settlement is
determined. These estimates are continually reviewed and adjusted as interim
information is available. Management believes these estimates adequately provide
for any potential adjustments that may be applied to revenues from its
contracts. As of May 31, 2002, the Company has provided an allowance of
approximately $369,000 related to these contracts which has been reflected as
contract billings in excess of revenues in the balance sheet.
In addition to this allowance, the Company has also recorded a liability of
approximately $465,000 that is required to reimburse one health plan for a
shortfall in the performance guarantee. As of May 31, 2002, this amount is
included in accounts payable and accrued expenses on the balance sheet. It has
been determined by the Company's management as well as the management of the
health plan that while there were modest savings, the contract contained a
number of unforeseeable issues, which made the expected outcome unachievable.
Since the contract is a multi year agreement, both sides have proposed certain
modifications to the contract, which, if accepted, should correct deficiencies
in the agreement and have a positive impact on future performance levels.
Medical Equipment
Revenue is recognized on equipment sales when the equipment is shipped and title
passes. Management establishes estimated accruals for returns from customers,
and for allowances granted to them at the time of shipment.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of QMed, Inc., its
83% owned inactive subsidiary, Heart Map, Inc., and its 100% owned subsidiary,
Interactive Heart Management Corp., which was formed in March, 1995. Interactive
Heart Management Corp. provides disease management services to health care
providers throughout the United States. All inter-company accounts and
transactions have been eliminated.
8
Note 2 - Investments in Securities
- ----------------------------------
Investment in securities available-for-sale as of May 31, 2002 were as follows:
Cost Market Value Unrealized Gain (loss)
---- ------------ ----------------------
Corporate debt securities $5,087,386 $5,058,933 $(28,453)
U.S. Government short term
obligations 2,333,790 2,341,915 8,125
---------- ---------- --------
$7,421,176 $7,400,848 $(20,328)
========== ========== ========
Note 3 - Inventory
- ------------------
Inventories, consisting of finished units and raw materials, are stated at the
lower of cost (determined on a moving weighted average method) or market.
Inventories consist of the following:
May 31, 2002 November 30,
(Unaudited) 2001
------------- -------------
Raw materials (component parts) $ 119,963 $ 127,062
Finished units 52,276 51,324
------------- -------------
$ 172,239 $ 178,386
============= =============
Note 4 - Product Software Development Costs
- -------------------------------------------
During the six months ended May 31, 2002, the Company capitalized approximately
$32,000 in product software development costs. These costs are amortized over a
five-year useful life.
Note 5 - Patent and Deferred Legal Costs
- ----------------------------------------
During the third quarter of fiscal 2001, the Company had instituted patent
litigation. The Company defers legal costs associated with the prosecution of a
patent infringement claim. If the patent claim is successful, the costs remain
capitalized and will be amortized over the estimated remaining useful life of
the patent. If the claim is unsuccessful, the amounts deferred will be charged
to operating expense. As of May 31, 2002, $359,000 has been capitalized as
deferred legal costs and is included in other assets.
Note 6 - Investment in Joint Venture
- ------------------------------------
The Company has a 50% interest in HeartMasters, L.L.C. ("HM"). The management
agreement provides for profits and losses to be allocated based on the Company's
50% interest. As of May 31, 2002, the Company contributed approximately $225,000
to HM, however, losses to date exceeded this amount bringing the investment in
joint venture to zero.
Note 7 - Accounts Payable and Accrued Expenses
- ----------------------------------------------
Accounts payable and accrued expenses include the following:
May 31,
2002 November 30,
(Unaudited) 2001
------------- -------------
Accounts payable trade $ 260,512 $ 252,284
Performance guarantee payable 464,563 --
Other accrued expenses - none in excess of
5% of current liabilities 389,772 183,195
------------- -------------
$ 1,114,847 $ 435,479
============= =============
9
Note 8 - Fees Reimbursable to Health Plans
- ------------------------------------------
Health plans which utilize the disease management program of the Company pay
participating physicians certain fees for their services related to the use of
the program. Such fees are additional costs to the health plans which in most
cases are deducted from fees paid to the Company. As of May 31, 2002, and
November 30, 2001 there was $0 and $15,524, respectively, outstanding under
these provisions.
Note 9 - Business Segment Information
- -------------------------------------
The Company presents segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
established reporting and disclosure standards for an enterprise's operating
segments. Operating segments are defined as components of an enterprise for
which separate financial information is available and regularly reviewed by the
Company's senior management.
The Company segments are organized into two business units, disease-management
services and medical equipment sales, which are considered reportable segments.
The segments are managed separately and the Company evaluates performance on
operating profits of the respective segments. The Company supports both segments
with shared human resources, clinical, marketing and information technology
resources. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies in Note 1.
Income (loss) before income taxes by operating segment excludes interest income,
interest expense and general corporate expenses.
Summarized financial information by operating segment for three and six months
ending May 31, is as follows:
Three Months Ended Six Months Ended
May 31, May 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenue:
Disease management services $ 3,397,758 $ 1,516,085 $ 6,458,056 $ (335,076)
Medical equipment sales 94,563 138,613 219,980 271,715
------------ ------------ ------------ ------------
$ 3,492,321 $ 1,654,698 $ 6,678,036 $ 2,862,625
============ ============ ============ ============
Income (loss) before income taxes:
Disease management services $ 890,551 $ (251,429) $ 1,512,397 $ (335,076)
Medical equipment sales 71,796 69,644 83,184 (62,943)
------------ ------------ ------------ ------------
Total segments $ 962,347 $ (181,785) $ 1,595,581 $ (398,019)
General corporate expenses - net $ (514,735) $ (334,490) $ (870,268) $ (621,834)
------------ ------------ ------------ ------------
$ 447,612 $ (516,275) $ 725,313 $ (1,019,853)
============ ============ ============ ============
Note 10 - Earnings per Share
- ----------------------------
For the three and six month period ended May 31, 2001, the basic and diluted
loss per share were the same because the assumed conversion of warrants and
stock options, which totaled $2,798,571 and $2,825,878, respectively, were
antidilutive and not included in the calculation of loss per share.
Note 11 - Line of Credit
- ------------------------
On September 11, 2001, the Company entered into a loan agreement with First
Union National Bank for a $1 million line of credit. The annual interest rate is
the lower of the bank's reference rate minus 1% or the LIBOR Market Index Rate
plus 1.5%. The line is collateralized by securities owned by the Company.
Borrowings under this line of credit were $0 at May 31, 2002.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
QMed, Inc. is a Delaware corporation and is the successor by merger to the
business of a New Jersey corporation organized on February 1, 1983. Interactive
Heart Management Corp. ("IHMC(R)"), a subsidiary founded during the year ended
November 30, 1995 ("fiscal 1995"), developed and is marketing an integrated
cardiovascular disease management system under the name "ohms|cvdsm" (Online
Health Management System for Cardiovascular Disease). It includes related
systems to assist health plans, government organizations and employer groups in
managing the incidence, treatment, and cost of cardiovascular conditions,
including coronary artery disease ("CAD"), stroke, congestive heart failure
("CHF"), hypertension, hyperlipidemia and the cardiovascular complications of
diabetes. These systems are designed to aid primary health care physicians in
the use of optimal medical management for patients with these conditions, as
well as those at high risk of developing these conditions. The net impact of
this approach is the improvement in cardiovascular health and the associated
reduction in its cost. As of May 31, 2002, the Company had contracts to provide
its services to 15 health plans nationwide.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, which are based upon current
expectations and involve a number of risks and uncertainties. In order for the
Company to utilize the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, investors are hereby cautioned that these
statements may be affected by the important factors, among others, set forth
below, and consequently, actual operations and results may differ materially
from those expressed in these forward-looking statements. The important factors
include: the Company's ability to renew and/or maintain contracts with its
customers under existing terms or restructure these contracts on terms that
would not have a material negative impact on the Company's results of
operations; the Company's ability to execute new contracts for health plan
disease management services; the risks associated with a significant
concentration of the Company's revenues with a limited number of health plan
customers; the Company's ability to effect estimated cost savings and clinical
outcome improvements under health plan disease management contracts and reach
mutual agreement with customers with respect to cost savings, or to effect such
savings and improvements within the timeframes contemplated by the Company; the
ability of the Company's health plan customers to provide timely and accurate
data that is essential to the operation and measurement of the Company's
performance under the terms of its health plan contracts; the Company's ability
to resolve favorably contract billing and interpretation issues with its health
plan customers; the ability of the Company to effectively integrate new
technologies into the Company's care management information technology platform;
the ability of the Company to obtain adequate financing to provide the capital
that may be needed to support the growth of the Company's health plan operations
and financing or reinsurance to support the Company's performance under new
health plan contracts; unusual and unforeseen patterns of healthcare utilization
by individuals within the health plans with cardiovascular conditions, including
coronary artery disease ("CAD"), stroke, congestive heart failure ("CHF"),
hypertension, hyperlipidemia and the cardiovascular complications of diabetes
which the Company has executed a disease management contract; the ability of the
health plans to maintain the number of covered lives enrolled in the plans
during the terms of the agreements between the health plans and the Company; the
Company's ability to attract and/or retain and effectively manage the employees
required to implement its agreements with health plan organizations; and the
impact of future state and federal healthcare legislation and regulations on the
ability of the Company to deliver its services and on the financial health of
the Company's customers and their willingness to purchase the Company's
services. The Company undertakes no obligation to update or revise any such
forward-looking statements.
Critical Accounting Policies
The Company's accounting policies are described in Note 1 of the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended November 30, 2001 and in Note 1 to the condensed
consolidated financial statements included in Item 1 of this report. The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which 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 amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The following policy is considered by management to be the most critical in
understanding the judgments involved in preparing the financial statements and
the uncertainties that could impact the Company's results of operations,
financial condition and cash flows.
11
Revenue Recognition - The Company enters into contractual arrangements with
health plans to provide disease management services. Revenue from such contracts
is calculated on various performance-based and fixed fee methodologies and
recorded as services are provided. Performance-based contracts have varying
degrees of risk associated with the Company's ability to deliver the guaranteed
financial cost savings. In most cases the Company guarantees a percentage
reduction of disease costs compared to a prior baseline year. The measurement of
the Company's performance against the base year information is a data intensive
and time consuming process that is typically not completed until well after the
end of the contract year. The Company adjusts or defers a portion of the
contract revenue for contracts where we believe that there could be an issue of
non-performance, possibly resulting in a refund of fees. Adjustments for
non-performance under the terms of the contract or other factors affecting
revenue recognition are accrued on an estimated basis in the period the services
are provided and are adjusted in future periods when final settlement is
determined. These estimates are continually reviewed and adjusted as interim
information is available. Management believes these estimates adequately provide
for any potential adjustments that may be applied to revenues from its
contracts. As of May 31, 2002, the Company has provided an allowance of
approximately $369,000 related to these contracts which have been reflected as
deferred revenue in the balance sheet.
In addition to this allowance, the Company has also recorded a liability of
approximately $465,000 that is required to reimburse one health plan for a
shortfall in the performance guarantee. This reimbursement did not have a
material impact on reported operations since deferred contract revenue was
sufficient to cover any potential reimbursement. The Company's management and
the management of the health plan found that while modest savings were achieved,
the contract did not cover a number of unforeseeable issues, which made the
performance guarantee unachievable. Since the contract is a multi-year
agreement, both sides have proposed certain modifications to the contract,
which, if accepted, should correct for deficiencies in the agreement and have a
positive impact on future performance.
Results of Operations
The following table presents the percentage of total revenues for the periods
indicated and changes from period to period of certain items included in the
Company's Statements of Operations.
Period to Period Percentage Changes
For the Three Months For the Six Months For the Three Months For the Six Months
Ended May 31, Ended May 31, Ended May 31, Ended May 31,
2002 2001 2002 2001 2002 Vs. 2001 2002 Vs. 2001
---- ---- ---- ---- ------------- --------------
Revenue 100.0% 100.0% 100.0% 100.0% 111.0% 133.3%
Cost of revenue 39.2 43.3 39.8 43.1 90.8 115.5
----- ----- ----- -----
Gross profit 60.8 56.7 60.2 56.9 126.5 146.7
Selling, general and administrative1
expenses 43.4 78.6 43.5 82.6 16.6 22.7
Research and development expenses 9.0 10.3 8.5 11.5 83.8 73.5
----- ----- ----- -----
Income (loss) from operations 8.4 (32.2) 8.2 (37.2) * *
Loss in operations of joint venture (.3) (1.6) (.5) (.9) 57.1 38.0
Interest expense (.1) (.3) (.1) (.3) (56.4) (21.0)
Interest income 2.0 2.9 1.9 2.8 52.4 58.6
Other income 2.8 - 1.4 - * *
----- ----- ----- -----
Loss before income tax benefit 12.8 (31.2) 10.9 (35.6) * *
Income tax benefit - gain on sale of
state net operating loss carryovers - - 1.8 7.7 - (43.3)
----- ----- ----- -----
Net income (loss) 12.8 (31.2) 12.7 (27.9) * *
===== ===== ===== =====
* Not meaningful
Revenues for the three and six month periods ended May 31, 2002 increased 111%
and 133%, respectively, over the same periods in 2001. This increase in revenues
resulted primarily from an increase in the membership covered by the Company's
disease management program. As of May 31, 2002, our program covered
approximately 1.4 million members compared to approximately 850,000 members as
of May 31, 2001. At May 31, 2002, of the approximately 1.4 million health plan
members under contract, the Company had approximately 1.2 million commercial
members and 200,000 Medicare+Choice members compared to approximately 715,000
commercial members and 135,000 Medicare+Choice members at May 31, 2001. Revenue
for Medicare+Choice members is significantly higher than commercial members.
During the second quarter of fiscal 2002 the Company began implementation of its
contract with Providence Health Plan in Oregon, which represents our third
12
health plan in that state. Revenues from this business segment continue to
increase as PacifiCare implements our disease management program in additional
states. The initial enrollment of members began in Arizona during June 2002 and
the contract with Colorado was recently completed with enrollment expected to
begin in early September. The Company has also begun the patient selection
process for the Medicare Coordinated Care Demonstration. Under the award, the
Company is implementing its ohms|cad disease management technology in a
controlled randomized study of Medicare beneficiaries who have been diagnosed
previously with CAD. Patient enrollment in California will begin in July 2002
and the Company will receive fees from the Centers for Medicare and Medicaid
Services for up to four years. The Company expects to begin receiving revenue
under this project within the next 60 days. The Company anticipates that
revenues for the remainder of fiscal 2002 will increase over fiscal 2001
primarily as a result of additional lives enrolled under both existing and
anticipated new contracts with health care providers as well as those enrolled
under the Medicare program.
Gross profit margins for the three and six month periods ending May 31, 2002
increased to 60% from 57% compared to the same periods of the prior fiscal years
primarily due to increased revenues and the ability to leverage our staffing
resources in states where it has multiple health plan contracts. The investment
the Company has made over the past year in product software development has also
helped maintain staffing levels and enhanced cost efficiencies and the speed at
which information flows from our database to the physician.
Selling, general and administrative expenses for the three and six months ended
May 31, 2002 increased by 17% and 23%, respectively, compared with the prior
fiscal year periods. The increase was primarily due to an increase in
administrative staff, legal costs associated with contracting issues, and
consulting expenses. Selling, general and administrative expenses as a
percentage of revenue decreased significantly to 43% from 79% for the three
months ending May 31, 2002 compared to 2001 and to 44% compared to 83% for the
six months ending May 31, 2002 compared to 2001. The Company anticipates
selling, general and administrative expenses to increase as a result of
increases in its management team to support its growth and to move the corporate
headquarters into a larger facility which is expected to be completed in October
2002.
Research and development expenses for the three and six months ended May 31,
2002 increased by 84% and 74%, respectively, when compared to the prior fiscal
year periods. During the past year the Company has focused its efforts primarily
on the development of new, advanced software programs to help us better
identify, locate and evaluate patients who are at risk for developing various
disease conditions. These programs incorporate state of the art
telecommunications, data management, security and information technology. The
Company intends to continue to improve and expand the capabilities of the
ohms|cvd system ongoing.
Liquidity and Capital Resources
To date, the Company's principal sources of working capital has been provided by
proceeds from public and private placements of securities and the sale of
certain assets. Since the Company's inception, sales of securities and assets
have generated approximately $31,000,000 less applicable expenses.
The Company had working capital of $7,746,109 at May 31, 2002 compared to
$5,749,732 at November 30, 2001 and ratios of current assets to current
liabilities of 5.0:1 as of May 31, 2002 and 5.0:1 as of November 30, 2001. The
working capital increase of approximately $2,000,000 was primarily due to the
net income of approximately $850,000 and proceeds from the sale of common stock
through the exercise of outstanding options and warrants of approximately
$1,450,000. In September 2001 the Company entered into a $1,000,000 line of
credit agreement with First Union National Bank. Outstanding balances under the
loan bear interest at an annual rate equal to the lower of the bank's reference
rate minus 1% or LIBOR plus 1.5%. As of May 31, 2002 the entire $1,000,0000 was
available under this credit line.
The Company anticipates that funds generated from operations, together with cash
and investments, and availability under our credit line will be sufficient to
fund our current level of growth. However, to the extent the expansion of the
Company's operations requires significant additional resources or certain forms
of financial guarantees to assure its performance under the terms of new health
plan contracts, the Company may be required to seek additional financing. No
assurance can be given that such financing would be available on terms that
would be acceptable to the Company.
13
Part II - Other Information
Item 1. Legal Proceedings
The Company previously disclosed that it brought a patent infringement
and unfair competition action against LifeMasters Supported Selfcare
("LifeMasters"). In the action, which is pending in the U.S. District
Court for the District of New Jersey under the caption QMed, Inc v.
LifeMasters Supported Selfcare, Inc. (CV-01-3469), we are seeking
damages and other relief for patent infringement, violation of the
Lanham Act and common law unfair competition. In November 2001,
LifeMasters then brought arbitration proceedings against both the
Company and IHMC, seeking, in arbitration, compensatory and punitive
damages in an unspecified amount, together with costs and fees. In the
arbitration proceedings, LifeMasters asserts claim of fraud,
constructive fraud, declaratory relief, breach of contract, and claims
for determination as to the validity, enforceability and infringement
of our patent, as well as for other relief. LifeMasters' motion in the
U.S. District Court action, for an order, transferring, staying or
dismissing parts of our case, in favor of their arbitrations was denied
and our cross motion to stay the arbitration was granted. Lifemasters
is appealing this order. The Company has opposed LifeMasters' motion
and arbitrations, and will vigorously defend against LifeMasters'
claims, and in pursuit of our own.
The Company is subject to claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business.
Although management of the Company cannot predict the ultimate outcome
of these legal proceedings with certainty, it believes that their
ultimate resolution, including any amounts we may be required to pay
will not have a material effect on the financial statements.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company's Annual Meeting of Stockholders was held on May 22, 2002,
pursuant to written notice and the Company's bylaws. The total number
of the Company's shares outstanding on April 8, 2002, the record date
of the meeting, was 14,446,386 of which 13,729,755 were present, in
person or by proxy. The following persons were nominated by management
and each was elected to serve as director until the next annual meeting
of stockholders:
Michael W. Cox
Bruce F. Wesson
Jane A. Murray
David Feldman
Richard I. Levin
Robert A. Burns
A. Bruce Campbell
Herbert H. Sommer
14
The following matter was submitted to stockholders and adopted by the
requisite vote of two-thirds of the outstanding shares:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
To amend the Company's
certificate of incorporation
to remove the hyphen
from the Company's formal
name 13,710,495 7,785 11,010 -0-
The following matters were submitted to stockholders and adopted by the
requisite vote of a majority of the shares present and voting on the
matter:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
To amend the Company's
1999 Equity Incentive Plan
to increase the number of
shares reserved for issuance
from 1,000,000 to 2,000,000 7,157,031 325,071 56,644 6,191,009
To ratify the selection of the
Company's independent
certified public accountants
for the current fiscal year. 13,699,020 8,985 21,750 -0-
Item 5. Other Information
- --------------------------
The Company amended its certificate of incorporation on May 28, 2002 to
remove the hyphen from its corporate name. This action was taken with
the approval of stockholders. In addition to changing the corporate
name to QMed, Inc., its trading symbol on the Nasdaq stock market
changed from QEKG to QMED on May 28, 2002.
The Company entered into a lease of approximately 18,000 square feet
for its corporate headquarters in June 2002. The five year lease
provides for fixed rent of $36,421 per month, which will be adjusted
annually for changes in real estate taxes and the landlord's operating
expenses. The Company expects to occupy the new facility, which is
approximately twice the size of its current headquarters, in October
2002. The facilities will be used for administrative offices, sales
training, marketing and will house the Company's ohms Center.
Management believes that this space will be adequate for its present
level of operations and growth for the next few years.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following exhibits are filed as part of this report:
3.1 Amendment to the Company's Restated Certificate of
Incorporation, effective May 28, 2002
10.1 Amendment No. 1 to the QMed, Inc. 1999 Equity
Incentive Plan
10.2 Real Property Lease between Donato Hi-Tech Holdings
IV, Inc. and the Company dated June 19, 2002
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QMed, Inc.
By: /s/ Michael W. Cox
------------------------
Michael W. Cox
President
Principal Executive and
Financial Officer
Dated: July 15, 2002
16