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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: August 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
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number, including area code) (732) 566-2666
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
October 3, 2002: 14,457,767
1
Independent Accountants' Review Report
We have reviewed the accompanying condensed consolidated balance sheets of QMed,
Inc. and Subsidiaries as of August 31, 2002, and the related condensed
consolidated statements of operations and comprehensive income for the three
months and nine months ended August 31, 2002 and 2001 and condensed consolidated
statements of stockholders' equity and cash flows for the nine 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 auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
November 30, 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 14, 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.
/s/ AMPER, POLITZINER & MATTIA P.C.
October 4, 2002
Edison, New Jersey
2
Part I.
Item 1. Financial Statements
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, 2002 November 30,
(Unaudited) 2001
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 2,855,452 $ 531,450
Investments 5,914,021 5,436,290
Accounts receivable, net of
allowances of approximately
$2,000 and $75,000 respectively 304,410 886,028
Inventory 167,871 178,386
Prepaid expenses and other current assets 392,810 159,787
--------------- ---------------
9,634,564 7,191,941
Property and equipment, net 786,349 466,456
Product software development costs 279,568 277,812
Other assets 545,396 231,302
Investment in joint venture -- --
--------------- ---------------
$ 11,245,877 $ 8,167,511
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 776,235 $ 435,479
Leases payable, current portion 52,832 53,034
Accrued salaries and commissions 243,517 498,815
Fees reimbursable to health plans 2,150 15,524
Contract billings in excess of revenues 1,658,430 360,524
Deferred warranty revenue 52,619 78,833
--------------- ---------------
2,785,783 1,442,209
Leases payable - long term 47,260 30,781
--------------- ---------------
2,833,043 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 33,028,643 31,541,800
Accumulated deficit (24,527,777) (24,818,342)
Accumulated other comprehensive income
Unrealized (loss) gains on securities
available for sale (26,886) 32,513
--------------- ---------------
8,488,459 6,770,146
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
--------------- ---------------
Total stockholders' equity 8,412,834 6,694,521
--------------- ---------------
$ 11,245,877 $ 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 Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001
------------- ------------- ------------- -------------
Revenue
Disease management services $ 2,391,590 $ 2,023,109 $ 8,849,646 $ 4,614,019
Medical Equipment 100,017 106,312 319,997 378,027
------------- ------------- ------------- -------------
2,491,607 2,129,421 9,169,643 4,992,046
------------- ------------- ------------- -------------
Cost of revenue
Disease management services 1,367,998 897,647 3,910,364 1,987,492
Medical equipment 49,486 76,006 167,418 220,374
------------- ------------- ------------- -------------
1,417,484 973,653 4,077,782 2,207,866
------------- ------------- ------------- -------------
Gross profit 1,074,123 1,155,768 5,091,861 2,784,180
Selling, general and
administrative expenses 1,369,343 1,381,102 4,271,661 3,746,800
Research and development
expenses 305,440 191,924 874,527 519,924
------------- ------------- ------------- -------------
Income (loss) from operations (600,660) (417,258) (54,327) (1,482,544)
Loss in operations of joint venture (11,250) (16,250) (47,500) (42,500)
Interest expense (3,982) (3,800) (11,490) (13,304)
Interest income 56,526 55,076 185,252 136,263
Other income -- 94,012
------------- ------------- ------------- -------------
Income (loss) before income tax (559,366) (382,232) 165,947 (1,402,085)
benefit
Income tax benefit - gain on sale
of state net operating loss
carryovers -- -- 124,618 219,603
------------- ------------- ------------- -------------
Net income (loss) $ (559,366) $ (382,232) $ 290,565 $ (1,182,482)
Basic income (loss) per share
Weighted average shares
outstanding 14,479,767 13,885,306 14,412,130 13,450,042
------------- ------------- ------------- -------------
Basic earnings (loss) per
share $ (.04) $ (.03) $ .02 $ (.09)
============= ============= ============= =============
Diluted income (loss) per share
Weighted average shares
outstanding 14,479,767 13,885,306 16,645,992 13,450,042
------------- ------------- ------------- -------------
Diluted earnings (loss) per
Share $ (.04) $ (.03) $ .02 $ (.09)
============= ============= ============= =============
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 Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
August 31, 2002 August 31, 2001 August 31, 2002 August 31, 2001
------------- ------------- ------------- -------------
Net income (loss) $ (559,366) $ (382,232) $ 290,565 $ (1,182,482)
Other comprehensive income
Unrealized gain (loss)
on securities available
for sale (6,558) 8,595 (59,399) 14,915
Less: reclassification
adjustment for gains included
in net income 11,439 -- 41,826 --
------------- ------------- ------------- -------------
Comprehensive income (loss) $ (554,485) $ (373,637) $ 272,992 $ (1,167,567)
============= ============= ============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
5
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY For the Nine Months Ended August 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 22,400 22,400
Net income for the nine months
ended August 31, 2002 290,565 290,565
Unrealized holding losses on
securities available for sale (59,399) (59,399)
---------- ------- ----------- ------------ -------- ------ -------- ----------
Balance - August 31, 2002 14,479,767 $14,479 $33,028,643 $(24,527,777) $(26,886) 22,000 $(75,625) $8,412,834
========== ======= =========== ============ ======== ====== ======== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements
6
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine For the Nine
Months Ended Months Ended
August 31, August 31,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 290,565 $ (1,182,482)
============= =============
Adjustments to reconcile net income to cash and cash
equivalents (used in) provided by operating activities:
(Gain) loss on sale of investments (41,826) 5,323
Loss in operations of joint venture 47,500 42,500
Depreciation and amortization 404,749 203,884
Amortization of non-employee stock options 22,400 22,401
(Increase) decrease in
Accounts receivable 581,619 (506,148)
Inventory 10,515 22,079
Prepaid expenses and other current assets (233,023) (9,225)
Increase (decrease) in
Accounts payable and accrued liabilities 72,084 386,954
Contract billings in excess of revenues 1,271,692 359,389
Other, net (74,296) (40,396)
------------- -------------
Total adjustments 2,061,414 486,761
------------- -------------
$ 2,351,979 $ (695,721)
============= =============
Cash flows from investing activities:
Proceeds from sale of securities available for sale 11,273,005 5,191,683
Purchases of securities available for sale (11,768,309) (7,983,451)
Capital expenditures (909,890) (345,619)
Investment in joint venture (47,500) (42,500)
------------- -------------
$ (1,452,694) $ (3,179,887)
============= =============
Cash flows from financing activities:
Payments for capital leases (40,030) --
Proceeds from issuance of common stock 1,464,747 4,450,834
------------- -------------
$ 1,424,717 $ 4,450,834
============= =============
Net increase in cash and cash equivalents 2,324,002 575,226
Cash and cash equivalents at beginning of period 531,450 576,537
------------- -------------
Cash and cash equivalents at end of period $ 2,855,452 $ 1,151,763
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 11,490 $ 13,304
Income taxes 10,200 9,700
See Accompanying Notes to Condensed Consolidated Financial Statements
7
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Reporting
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 nine month period ended August 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 2 - Investments in Securities
Investment in securities available-for-sale as of August 31, 2002 were as
follows:
Cost Market Value Unrealized Gain (loss)
---- ------------ ----------------------
Corporate debt securities $3,364,829 $3,328,540 $(36,289)
U.S. Government short term
obligations 2,576,078 2,585,481 9,403
---------- ---------- --------
$5,940,907 $5,914,021 $(26,886)
========== ========== ========
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:
August 31, 2002 November 30,
(Unaudited) 2001
--------------- ------------
Raw materials (component parts) $ 122,720 $ 127,062
Finished units 45,151 51,324
------------- -------------
$ 167,871 $ 178,386
============= =============
Note 4 - Product Software Development Costs
During the nine months ended August 31, 2002, the Company capitalized
approximately $41,000 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 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 August 31, 2002, $358,425 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 August 31, 2002, the Company contributed approximately
$236,000 to HM, however, losses to date exceeded this amount bringing the
investment in joint venture to zero.
8
Note 7 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
August 31, 2002 November 30,
(Unaudited) 2001
--------------- ------------
Accounts payable trade $ 218,480 $ 252,284
Insurance Premiums Payable 203,280 19,516
Other accrued expenses - none in excess of
5% of current liabilities 354,475 163,679
------------- -------------
$ 776,235 $ 435,479
============= =============
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 August 31, 2002, and
November 30, 2001 there was $2,150 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 nine months
ending August 31, is as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenue:
Disease management services $ 2,391,590 $ 2,023,109 $ 8,849,646 $ 4,614,019
Medical equipment sales 100,017 106,312 319,997 378,027
------------ ------------ ------------ ------------
$ 2,491,607 $ 2,129,421 $ 9,169,643 $ 4,992,046
============ ============ ============ ============
Income (loss) before income taxes:
Disease management services $ (363,817) $ 71,028 $ 1,148,580 $ (264,048)
Medical equipment sales 44,437 (122,269) 133,981 (185,212)
------------ ------------ ------------ ------------
Total segments $ (319,380) $ (51,241) $ 1,282,561 $ (449,260)
General corporate expenses - net $ (239,986) $ (330,991) $ (1,116,614) $ (952,825)
------------ ------------ ------------ ------------
$ (559,366) $ (382,232) $ 165,947 $ (1,402,085)
============ ============ ============ ============
9
Note 10 - Earnings per Share
For the three month period ended August 31, 2002, the basic and diluted loss per
share were the same because the assumed conversion of warrants and stock options
outstanding, which totaled 1,957,539 were antidilutive and not included in the
calculation of loss per share. For the three and nine month period ended August
31, 2001, the basic and diluted loss per share were the same because the assumed
conversion of warrants and stock options outstanding, which totaled 2,513,006
and 2,275,268, 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 August 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|cvd(R)" (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 August 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. 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 fee based 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 determined by actuarial analysis and
other estimates used as a basis to measure performance objectives. 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
six to eight months after the end of the contract year. The Company bills its
customers each month for the entire amount of the fees contractually due based
on previous months membership, which always includes the amount, if any that may
be subject to refund for member retroactivity and a shortfall in performance.
The Company adjusts or defers revenue for contracts where we believe that there
could be an issue of non-performance, possibly resulting in a refund of fees or
where fees generated may be subject to further retroactive adjustment associated
with a contract or plan's decision to completely terminate its coverage in a
geographic market and general membership terminations. For example, general
terminations can be due to death, member change of health plan, etc. 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 periodically reviewed and adjusted, as interim
information is available.
The Company determines its level of performance at interim periods based on
medical claims data, achievement of enrollment targets and other data required
to be supplied by the health plan. In the event these interim performance
measures indicate that performance targets are not being met or sufficient data
is unavailable, fees subject to refund are not recorded as revenues but rather
are recorded as a current liability entitled "contract billings in excess of
revenues." Under performance based arrangements, the ability to make estimates
at interim periods can be challenging due to the inherent nature of the medical
claims process and the lag time associated with it. In most cases, paid claims
data is not available until up to six months after claims are incurred. Although
interim data measurement is indicative of performance objectives, actual results
could differ from those estimates. As of August 31, 2002, based on information
and data available at this time, the Company has provided an allowance of
approximately $1,650,000, of which approximately $1,400,000 was recorded during
the three months ended August 31, 2002, related to contracts with two Regence
health plans and has been reflected as contract billings in excess of revenues
on the balance sheet. Management believes these estimates adequately provide for
any potential adjustments that may be applied to revenues from this contract.
Since the contract is a multi year agreement, both sides have proposed certain
modifications to the agreement, which, as of this date have not been
satisfactorily resolved. While all sides to the negotiations appear to believe
that a final and positive resolution is possible, it may also be possible that
the contract may terminate, therefore, the necessary steps have been taken this
quarter to increase reserves in that eventuality.
Contract billings in excess of revenues on the balance sheet in the amount of
approximately $1,650,000 consists of revenue from two health plan customers,
Regence Oregon and Washington, which may be subject to refund. HeartMasters, a
limited liability company consisting of the Company and a partner LifeMasters,
has three separate lines of business, two health maintenance organizations
("HMO") lines and one preferred provider organization ("PPO"), under contract
with Regence Oregon and Washington under which the Company provides coronary
artery disease management services and Life Masters provides services for
congestive heart failure. The Company also has contracts with Regence of Idaho
and Utah. Regence Idaho and Utah contracts are not subject to the same terms and
conditions as those in Oregon and Washington. In addition, the Idaho and Utah
contract outcomes are designed to measure the company's disease management of
coronary disease and stroke against a control population not managed by a formal
disease management process. It has been determined by the Company's management
as well as the management of the health plans that while there were modest
savings in Oregon and Washington, the contract contained a number of
unforeseeable issues, which made the expected outcome unachievable. Certain
provisions in the contract covering "all claims" versus "disease specific"
claims had a negative impact on contract performance to date. These provisions
are not included in any of the Company's other disease management contracts.
Furthermore, QMed alone operates all of the Company's other contractual
agreements without any outside partner's involvement. Approximately $1,400,000
of the $1,650,000 amount in contract billings in excess of revenues on the
balance sheet is subject to reconciliation at future periods, however, since the
first contract year reconciliation did not provide positive results, enrollment
targets have not improved, and since the company has not yet been successful in
renegotiating agreement terms with Regence, all of the revenue from this
agreement which is estimated to be subject to refund is deferred in accordance
with the Company's revenue recognition policy. If reconciliation or renegotiated
contract terms provides positive results, revenue from this contract will be
recorded at that time.
12
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 Nine Months For the Three Months For the Nine Months
Ended August 31, Ended August 31, Ended August 31, Ended August 31,
2002 2001 2002 2001 2002 Vs. 2001 2002 Vs. 2001
--------- --------- -------- -------- -------------------- -------------------
Revenue 100.0% 100.0% 100.0% 100.0% 17.0 83.6
Cost of revenue 56.9 45.7 44.5 44.2 45.6 84.7
----- ----- ----- -----
Gross profit 43.1 54.3 55.5 55.8 (7.1) 82.9
Selling, general and administrative
expenses 54.9 64.9 46.6 75.1 (.9) 14.0
Research and development expenses 12.3 9.0 9.5 10.4 59.2 68.2
----- ----- ----- -----
Income (loss) from operations (24.1) (19.6) (.6) (29.7) 43.9 (96.3)
Loss in operations of joint venture (.4) (.8) (.5) (.9) (30.7) 11.7
Interest expense (.1) (.2) (.1) (.3) 4.8 (13.6)
Interest income 2.2 2.6 2.0 2.8 2.6 35.9
Other income - - 1.0 - - *
----- ----- ----- -----
Income (loss) before income tax benefit (22.4) (18.0) 1.8 (28.1) 46.3 *
Income tax benefit - gain on sale of
state net operating loss carryovers - - 1.4 4.4 - (43.2)
----- ----- ----- -----
Net income (loss) (22.4) (18.0) 3.2 (23.7) 46.3 *
===== ===== ===== =====
* Not meaningful
Revenues for the three and nine month periods ended August 31, 2002 increased
17% and 84%, 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 programs. As of August 31, 2002, our programs
covered approximately 1,570,000 members compared to approximately 850,000
members as of August 31, 2001. At August 31, 2002, of the total health plan
members under contract, the Company had approximately 1,335,000 million
commercial members and 235,000 Medicare+Choice members compared to approximately
715,000 commercial members and 135,000 Medicare+Choice members at May 31, 2001.
Revenue from Medicare+Choice members is significantly higher than commercial
members. During the third quarter of fiscal 2002 the Company continued
implementation of its contract with Providence Health Plan in Oregon, which
represents our third health plan in that state. During June 2002 the Company
also began implementation of its program with PacifiCare of Arizona and during
September 2002 began in PacifiCare of Colorado. The Company has also begun the
enrollment process for the Medicare Coordinated Care Demonstration during July
2002. 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 began in
California during July 2002 and the Company will receive fees from the Centers
for Medicare and Medicaid Services for up to four years. 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, subject to certain
performance guarantees, as well as those continuing to be enrolled under the
Medicare program.
Gross profit margins for the three months ended August 31, 2002 decreased to
43.1% from 54.3% in the prior year and remained at approximately 55% for the
nine month period ending August 31, 2002. This decrease was directly related to
the increase of revenue reserved as described above. Without the additional
reserve of approximately $1.4 million, gross profit margins would have risen to
approximately 63% compared to 54% for the comparable three month period and to
61% compared to 56% for the comparable nine month periods. This increase would
have been attributable to our leveraging staffing resources in states where the
Company has multiple health plan contracts as well as improvements in product
software development. Software improvements have enhanced the speed at which
information flows from our database to the physician and permitted the Company
to serve significantly larger populations with modest staff increases.
13
Selling, general and administrative expenses for the three months ended August
31, 2002 decreased by less than 1% compared to the prior year. Selling, general
and administrative costs for the nine months ended August 31, 2002 increased by
14% compared with the prior period. The increase was primarily due to an
increase in administrative staff, legal costs associated with contracting
issues, and consulting expenses. 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 complete in November 2002.
Research and development expenses for the three and nine months ended August 31,
2002 increased by 59% and 68%, 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 have 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 $6,848,781 at August 31, 2002 compared to
$5,749,732 at November 30, 2001 and ratios of current assets to current
liabilities of 3.5:1 as of August 31, 2002 and 5.0:1 as of November 30, 2001.
The working capital increase of approximately $1,100,000 was primarily due to
the net income of approximately $300,000 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 August 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
available funds for investment. We ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in short term high-credit quality
securities.
Item 4. Controls and Procedures
Within the 90 days preceding the filing of this report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the single officer presently serving as Company's CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including such officer, concluded that the Company's disclosure
controls and procedures were effective as of August 31, 2002. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to August 31, 2002.
Subsequent to August 31, 2002, the Company hired a chief financial officer, and
effective October 21, 2002, the responsibilities of CEO and CFO will no longer
be performed by a single executive.
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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 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
None.
Item 5. Other Information
On September 23, 2002, the company entered into an employment
agreement with Bill Schmitt. Pursuant to the agreement, Mr.
Schmitt will, beginning October 21, 2002, serve as the
Company's Senior Vice President and Chief Financial Officer.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this
report:
10.1 Employment Agreement dated September 23,
2002 between QMed, Inc. and Bill Schmitt.
99.1 Certification pursuant to 18 U.S.C. Section
1350
99.2 Certification pursuant to 18 U.S.C. Section
1350
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: October 15, 2002
16
CERTIFICATION
I, Michael W. Cox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of QMed, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respect the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
October 15, 2002 /s/ Michael W. Cox
--------------------------------------
Michael W. Cox, President, CEO and CFO
17