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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: February 29, 2004 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to _______________
Commission file number: 0-11411
QMed, Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2468665
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Christopher Way, Eatontown, New Jersey 07724
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(732) 544-5544
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding on April 13,
2004: 14,760,334.
Part I.
Item 1. Financial Statements
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (audited)
February 29, 2004 November 30, 2003
---------------- ----------------
ASSETS
Current assets
Cash and cash equivalents $ 1,358,461 $ 1,638,271
Investments 6,042,463 6,213,825
Accounts receivable, net of allowances of approximately $2,000 1,927,628 1,315,021
Inventory 145,706 146,239
Prepaid expenses and other current assets 336,743 392,783
---------------- ----------------
9,811,001 9,706,139
Property and equipment, net 1,217,178 1,133,419
Product software development costs 485,445 441,020
Accounts receivable, non-current 1,474,674 1,474,674
Other assets 142,642 163,059
Investment in joint venture - -
---------------- ----------------
$ 13,130,940 $ 12,918,311
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,104,789 $ 975,724
Leases payable, current portion 113,518 73,463
Accrued salaries and commissions 226,157 565,524
Fees reimbursable to health plans 233,586 182,359
Contract billings in excess of revenues 1,974,684 1,717,657
Deferred warranty revenue 31,520 33,235
Income taxes payable 4,000 6,810
---------------- ----------------
3,688,254 3,554,772
Leases payable - long term 133,072 44,429
Contract billings in excess of revenue - long term 2,270,928 2,270,928
---------------- ----------------
6,092,254 5,870,129
Commitments and Contingencies
Stockholders' equity
Common stock $.001 par value; 40,000,000 shares authorized; 14,695,750 and
14,627,384 shares issued and 14,673,750 and
14,605,384 outstanding, respectively 14,695 14,627
Paid-in capital 33,630,244 33,380,751
Accumulated deficit (26,526,986) (26,264,572)
Accumulated other comprehensive income
Unrealized loss on securities available for sale (3,642) (6,999)
---------------- ----------------
7,114,311 7,123,807
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
---------------- ----------------
Total stockholders' equity 7,038,686 7,048,182
---------------- ----------------
$ 13,130,940 $ 12,918,311
================ ================
See Accompanying Notes to Condensed Consolidated Financial Statements
2
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 29, 2004 February 28, 2003
----------------- -----------------
Revenue
Disease Management services $ 3,739,221 $ 3,605,013
Medical equipment 53,599 61,031
-------------- --------------
3,792,820 3,666,044
Cost of revenue
Disease management services 1,963,985 1,548,417
Medical equipment 37,213 46,076
-------------- --------------
2,001,198 1,594,493
-------------- --------------
Gross profit 1,791,622 2,071,551
-------------- --------------
Selling, general and administrative expenses 1,746,155 1,556,351
Research and development expenses 254,419 250,841
-------------- --------------
(Loss) income from operations (208,952) 264,359
Interest expense (6,698) (6,987)
Interest income 23,533 49,617
Loss in operations of joint venture (75,000) -
Other income 8,703 -
-------------- --------------
(Loss) income before income tax provision (258,414) 306,989
Provision for state income taxes (4,000) (16,000)
-------------- --------------
Net (loss) income $ (262,414) $ 290,989
============== ==============
Basic (loss) income per share
Weighted average shares outstanding 14,644,546 14,516,959
============== ==============
Basic (loss) earnings per share $ (.02) $ .02
============== ==============
Diluted (loss) income per share
Weighted average shares outstanding 14,644,546 16,292,207
============== ==============
Diluted earnings per share $ (.02) $ .02
============== ==============
See Accompanying Notes to Condensed Consolidated Financial Statements
3
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 29, 2004 February 28, 2003
----------------- -----------------
Net (loss) income $ (262,414) $ 290,989
Other comprehensive income
Unrealized gain (loss) on securities available for sale 3,766 (12,527)
Less: reclassification adjustment for gains included
in net (loss) income (409) (3,609)
------------ -----------
Comprehensive (loss) income $ (259,057) $ 274,853
============ ===========
See Accompanying Notes to Condensed Consolidated Financial Statements
4
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended February 29, 2004
(Unaudited)
Accumulated
Other Common Stock
Common Stock Compre- Held in Treasury
-------------------- Paid-in Accumulated hensive --------------------
Shares Amount Capital Deficit Income Shares Amount Total
------ ------ ------- ------- ------ ------ ------ -----
Balance - November 30, 2003 14,627,384 $14,627 $33,380,751 $(26,264,572) $(6,999) 22,000 $(75,625) $7,048,182
Exercise of stock options and warrants 68,366 68 233,697 233,765
Amortization of non-employee
stock options 15,796 15,796
Net loss for the three months
ended February 29, 2004 (262,414) (262,414)
Change in unrealized holding
losses on securities available
for sale 3,357 3,357
---------- ------- ----------- ------------ ------- ------ -------- ----------
Balance - February 29, 2004 14,695,750 $14,695 $33,630,244 $(26,526,986) $(3,642) 22,000 $(75,625) $7,038,686
========== ======= =========== ============ ======= ====== ======== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements
5
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 29, 2004 February 28, 2003
----------------- -----------------
Cash flows from operating activities:
Net (loss) income $ (262,414) $ 290,989
Adjustments to reconcile net (loss) income to cash and cash
equivalents (used in) provided by operating activities:
(Gain) loss on sale of investments (409) 3,609
Loss in operations of joint venture 75,000 -
Depreciation and amortization 111,768 94,041
Amortization of non-employee stock options 15,796 7,467
Amortization of bond discounts and premiums 39,695 -
(Increase) decrease in
Accounts receivable (612,607) (2,412,268)
Inventory 533 9,629
Prepaid expenses and other current assets 56,040 8,954
Increase (decrease) in
Accounts payable and accrued liabilities (114,075) 399,887
Contract billings in excess of revenues 255,312 495,414
Other, net 12,063 (24,000)
---------------- ---------------
Total adjustments (160,884) (1,417,267)
---------------- ---------------
(423,298) (1,126,278)
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 2,678,560 4,087,398
Purchases of securities available for sale (2,543,127) (3,493,361)
Capital expenditures (84,876) (91,984)
Investment in joint venture (120,000) -
---------------- ---------------
(69,443) 502,053
---------------- ---------------
Cash flows from financing activities:
Payments for capital leases (20,834) (16,908)
Proceeds from issuance of common stock 233,765 78,653
---------------- ---------------
212,931 61,745
---------------- ---------------
Net decrease in cash and cash equivalents (279,810) (562,480)
Cash and cash equivalents at beginning of period 1,638,271 2,383,123
---------------- ---------------
Cash and cash equivalents at end of period $ 1,358,461 $ 1,820,643
================ ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,698 $ 7,000
Income taxes 8,300 39,000
See Accompanying Notes to Condensed Consolidated Financial Statements
6
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Reporting
The accompanying unaudited condensed consolidated financial statements of QMed,
Inc. and its subsidiaries (the "Company") 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 three month period ended February 29, 2004 are not necessarily
indicative of the results that may be expected for the year ending November 30,
2004. These condensed consolidated financials statements include the accounts of
QMed, Inc., its wholly owned subsidiary Interactive Heart Management Corp.
("IHMC"), and QMed, Inc.'s majority owned (83%) inactive subsidiary HeartMap,
Inc. 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, 2003.
Note 2 - Revenue Recognition
The Company enters into contractual arrangements with health plans to provide
disease management services. Fees under the Company's health plan contracts are
generally determined by multiplying a contractually negotiated rate per health
plan member per month ("PMPM") by the number of health plan members covered by
the Company's services during the month. The PMPM rates usually differ between
contracts due to the various types of health plan product groups (e.g. PPO, HMO,
Medicare+Choice). These contracts are generally for terms of three to five years
with provisions for subsequent renewal, and typically provide that all or a
portion of the Company's fees may be "performance-based". 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 membership
retroactivity and where the results are less then the contracted measured
targets. The Company adjusts or defers revenue for contracts where it believes
results could be less then the contracted measured targets, 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 as well as general
membership changes. 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. The Company reviews these
estimates periodically and makes adjustments, as interim information is
available.
The Company determines its level of performance at interim periods based on
medical claims data, achievement of enrollment targets or 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 and not covered by reinsurance 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 claims 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
February 29, 2004, based on information and data available, the Company has
deferred approximately $4,200,000 of revenue, which may be subject to refund.
This deferral has been reflected as contract billings in excess of revenues on
the balance sheet.
7
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2 - Revenue Recognition (continued)
The contract billings in excess of revenues on the balance sheet represent fees
which are subject to a reconciliation process. In contracts where the Company
believes results could be less then the contracted measured targets the revenue
from that agreement, which is estimated to be subject to refund, is deferred in
accordance with our revenue recognition policy. The Company believes these
estimates adequately provide for any potential adjustments that may be applied
to revenues from these contracts. If future reconciliations provide positive
results, revenue will be recorded at that time. Although the majority of
contracts entered into by the company are multi-year agreements, the Regence
Oregon and Washington contracts were terminated early, as of January 31, 2003.
As of February 29, 2004, non-current accounts receivable includes approximately
$1,500,000 for services rendered and owed on the Regence Oregon and Washington
contracts.
Note 3 - Investments in Securities
Investment in securities available-for-sale as of February 29, 2004 were as
follows:
Unrealized Gain
Cost Market Value (Loss)
---------------- -------------- -----------
Corporate debt securities $ 4,413,252 $ 4,410,337 $ (2,915)
U.S. Government short term obligations
1,632,853 1,632,126 (727)
---------------- -------------- -----------
$ 6,046,105 $ 6,042,463 $ (3,642)
================ ============== ===========
Note 4 - 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:
February 29, 2004 November 30,
(Unaudited) 2003
---------------- ---------------
Raw materials (component parts) $ 119,115 $ 119,228
Finished units 26,591 27,011
---------------- ---------------
$ 145,706 $ 146,239
================ ===============
Note 5 - Product Software Development Costs
During the three months ended February 29, 2004, the Company capitalized
approximately $74,000 in product software development costs. These costs are
amortized over a five-year useful life.
During the three months ended February 29, 2004, amortization costs related to
product software development costs were approximately $29,000.
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 February 29, 2004, the Company has recorded losses to date
of approximately $674,000 bringing the investment in joint venture to zero. This
joint venture in not a variable interest entity and there for is not required to
be consolidated under the provisions of FIN 46.
8
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
February 29, 2004 November 30, 2003
(Unaudited)
----------------- ------------------
Account payable trade $ 563,020 $ 479,472
Insurance premiums payable 156,134 183,243
Other accrued expenses - none in
excess of 5% of current liabilities 385,635 313,009
----------------- ------------------
$ 1,104,789 $ 975,724
================= ==================
Note 8 - 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 months ended
February 29, 2004 and February 28, 2003, is as follows:
Three Months Ended
-----------------------------------------
February 29, 2004 February 28, 2003
Revenue
Disease management services $ 3,739,221 $ 3,605,013
Medical equipment sales 53,599 61,031
--------------- -------------
$ 3,792,820 $ 3,666,044
=============== =============
Income (loss) before income taxes:
Disease management services $ 212,467 $ 839,627
Medical equipment sales 12,452 14,955
--------------- -------------
Total segments 224,919 854,582
General corporate expenses - net (483,333) (547,593)
--------------- -------------
$ (258,414) $ 306,989
=============== =============
9
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9 -Stock-Based Compensation
The Company accounts for its stock options issued to employees and outside
directors pursuant to Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and has adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", and
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123". Accordingly, no
compensation expense has been recognized in connection with the issuance of
stock options.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation.
Three Months Ended
--------------------- ---------------------
February 29, 2004 February 28, 2003
Net (loss) income, as reported $ (262,414) $ 290,989
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for all
awards, net of related tax
effects (271,386) (147,692)
---------------- ----------------
Pro forma net (loss) income $ (533,800) $ 143,297
================ ================
Weighted average common
shares outstanding 14,644,546 14,516,959
Dilutive effect of stock options and
warrants - 1,775,248
---------------- ----------------
Diluted shares outstanding 14,644,546 16,292,207
================ ================
(Loss) earning per share:
Basic, as reported $ (.02) $ .02
================ ================
Basic, pro forma $ (.04) $ .01
================ ================
Diluted, as reported $ (.02) $ .02
================ ================
Diluted, pro forma $ (.04) $ .01
================ ================
Potentially dilutive options and warrants to purchase 2,208,491 shares of the
common stock were outstanding as of February 29, 2004, but were not included in
the computation of diluted loss per share because the effect of their inclusion
would have been anti-dilutive. Additionally, options to purchase 29,725 shares
of common stock were outstanding as of February 29, 2004 but were also not
included in the computation of diluted loss per share because the options
exercise price was greater than the average market price of the common shares.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS 123 and the Emerging Issues Task Force ("EITF") Issue No.
96-18, "Accounting for Equity Instruments that are Issued to other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services."
Under SFAS 123, the cost is measured at the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measured.
10
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10 - 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 February 29, 2004 and November
30, 2003.
Note 11 - Commitments and Contingencies
Litigation
On March 28, 2003, HeartMasters LLC, a limited liability company 50% owned by
our IHMC subsidiary, received a Demand for Arbitration before the American
Arbitration Association of approximately $13,000,000 plus interest, of which
approximately $6,500,000 relates to IHMC, for claims under certain terminated
disease management agreements. The claims allege breach of disease management
agreements between Regence of Washington and Oregon and HeartMasters LLC.
Regence has since amended its demand, and now claims nearly $17,000,000, of
which approximately half relates to IHMC. Settlement discussions have taken
place and discovery has been scheduled. HeartMasters LLC also received a notice
from a reinsurer, Centre, denying coverage for the Regence of Oregon HMO first
year coverage period asserting that an outside actuarial report concerning
Regence's claims history and other information, which were considered by the
reinsurer prior to issuance of coverage, contained "grossly incorrect data."
HeartMasters LLC has denied the claims of Regence and asserted counter claims.
In addition, HeartMasters has demanded payment of the insurance coverage. The
dispute with Centre over the insurance coverage is now the subject of an
arbitration proceeding. Initially, the company sued over the nonpayment of the
policies; the court determined that this must be resolved in the arbitration
with Centre. At this stage, management is unable to predict the outcome of these
matters.
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.
Sales Guarantees
Typically, the Company's fees or incentives are higher in contracts with
increased financial risk such as those contracts with performance-based fees or
guarantees against cost increases. The failure to achieve targeted cost
reductions could, in certain cases, render a contract unprofitable and could
have a material negative impact on the Company's results of operations.
Purchase Commitments
The Company is obligated to purchase heart-monitoring equipment under various
orders from one supplier, all of which are expected to be fulfilled with no
adverse consequences material to the companies operations or financial
condition. As of February 29, 2004 total open commitments under these purchase
orders are approximately $291,000.
Note 12 - Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003. A public company that does
not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, 2003, must apply the provisions of
FIN 46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The Company adopted FIN 46 and FIN 46R during the quarter ended
February 29, 2004. The adoption of FIN 46 had no impact on the financial
condition or results of operations since the Company does not have investments
in VIE's.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
QMed(R), Inc. is a Delaware corporation incorporated in 1987, whose business was
organized in 1983. Interactive Heart Management Corp. ("IHMC(R)") is a wholly
owned subsidiary of QMed, which was incorporated in 1995. IHMC developed and is
co-marketing with QMed health care information and communication services to
health plans, governments and private companies. These services include
"ohms|cvd(R)" (Online Health Management System for Cardiovascular Disease) which
is an integrated cardiovascular disease management system. ohms|cvd 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 health care
physicians in the use of optimal "evidence based" 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 mortality, morbidity and
cost. As of February 29, 2004, we had contracts to provide these services to 13
health plans in 8 states covering approximately 2.2 million health plan members.
As of February 29, 2004, the Company continues to provide services in its
current Medicare demonstration project. In October 2002, we were selected to
participate with two other entities in a second disease management program for
the Centers for Medicare and Medicaid Services. This program commenced
enrollment in January 2004.
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 us 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:
o our 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 our
results of operations;
o our ability to execute new contracts for health plan disease
management services;
o the risks associated with a significant concentration of our
revenues with a limited number of health plan customers;
o our 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 us;
o the ability of our health plan customers to provide timely and
accurate data that is essential to the operation and
measurement of our performance under the terms of its health
plan contracts;
o our ability to resolve favorably contract billing and
interpretation issues with its health plan customers;
o our ability to effectively integrate new technologies into our
care management information technology platform;
o our ability to obtain adequate financing to provide the
capital that may be needed to support the growth of our health
plan operations and financing or insurance to support our
performance under new health plan contracts;
o 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 with which we
have executed disease management contracts;
o 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 us;
o our ability to attract and/or retain and effectively manage
the employees required to implement our agreements with health
plan organizations;
o the impact of future state and federal healthcare legislation
and regulations on our ability to deliver services
o the financial health of our customers and their willingness to
purchase our services
o the impact of litigation or arbitration
o general economic conditions
We undertake no obligation to update or revise any such forward-looking
statements.
12
Critical Accounting Policies
Our accounting policies are described in Note 2 of the condensed consolidated
financial statements included in this Report on Form 10-Q for the quarter ended
February 29, 2004. 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.
We consider the following policy to be the most critical in understanding the
judgments involved in preparing the financial statements and the uncertainties
that could impact our results of operations, financial condition and cash flows.
Revenue Recognition
We enter into contractual arrangements with health plans to provide disease
management services. Fees under our health plan contracts are generally
determined by multiplying a contractually negotiated rate per health plan member
per month ("PMPM") by the number of health plan members covered by our services
during the month. The PMPM rates usually differ between contracts due to the
various types of health plan product groups (e.g. PPO, HMO, Medicare+Choice).
These contracts are generally for terms of three to five years with provisions
for subsequent renewal, and typically provide that all or a portion of our fees
may be "performance- based". Performance-based contracts have varying degrees of
risk associated with our ability to deliver the guaranteed financial cost
savings. In most cases we guarantee 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
our 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. We bill our 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
membership retroactivity and where the results are less then the contracted
measured targets. We adjust or defer revenue for contracts where we believe
results could be less then the contracted measured targets, 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 as well as general
membership changes. 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. We review these estimates
periodically and make adjustments, as interim information is available.
We determine our level of performance at interim periods based on medical claims
data, achievement of enrollment targets or 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 and not covered by reinsurance 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 claims 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 February 29,
2004, based on information and data available, we deferred approximately
$4,200,000 of revenue, which may be subject to refund. This deferral has been
reflected as contract billings in excess of revenues on the balance sheet.
The contract billings in excess of revenues on the balance sheet represent fees
which are subject to a reconciliation process. In contracts where we believe
results could be less then the contracted measured targets the revenue from that
agreement, which is estimated to be subject to refund, is deferred in accordance
with our revenue recognition policy. We believe these estimates adequately
provide for any potential adjustments that may be applied to revenues from these
contracts. If future reconciliations provide positive results, revenue will be
recorded at that time.
As of February 29, 2004, approximately 68.5% of disease management services were
derived from four health plans that each comprised more than 10% of our
revenues.
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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 our
Condensed Consolidated Statements of Operations.
% For Three Months Ended Period-to-Period
February 29, February 28, % Change
2004 2003 2004
---- ---- ----
Revenue 100.0 % 100.0 % 3.5 %
Cost of revenue 52.8 43.5 25.5
Gross Profit 47.2 56.5 (13.5)
Selling general and administrative 46.0 42.5 12.2
Research and development 6.7 6.8 1.4
Loss (income) from operations (5.5) 7.2 *
Interest expense (0.2) (0.2) (4.1)
Interest income, net 0.6 1.4 (52.6)
Loss on operations of joint venture (2.0) - *
Other income 0.3 - *
(Loss) income before tax (provision) benefit (6.8) 8.4 *
Income tax (provision) benefit (0.1) (0.5) (75.0)
Net (loss) income (6.9) 7.9 *
* Not meaningful
Three Months Ended February 29, 2004 Compared to Three Months Ended
February 28, 2003
Revenue for the three months ended February 29, 2004 increased approximately
$127,000 or 3.5% over the three months ended February 28, 2003. This increase
consists of approximately $1.2 million of additional revenue related to
expansion of existing contracts and a new contract entered into since February
28, 2003. This increase was offset by a reduction of revenue of approximately
$1.1 million related to market exits and reductions in membership under existing
disease management programs and the termination of disease management programs
under HeartMasters agreements with Regence of Oregon, and Washington,
termination of disease management programs with Regence of Idaho, and Utah and
the renegotiation of a contract with a customer in Oregon.
Gross profit margins for the three months ended February 29, 2004 decreased to
47.2% from 56.5% for the three months ended February 28, 2003. This decrease was
due to the increased costs associated with our expansion into new market places
related to new contracts, including costs associated with one contract totaling
approximately $350,000. Salaries, travel and other direct costs are all factors
in the initial implementation related to any new markets and contracts. The
direct costs will decrease as a percentage of revenue once a marketplace and
contract matures with a significant number of members being enrolled.
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Selling, general and administrative expenses for the three months ended February
29, 2004 increased approximately $189,000 or 12.2% compared to the three months
ended February 28, 2003. The increase was primarily due to an increase in both
executive and administrative staff, and costs associated with negotiating and
closing new disease management services contracts.
Research and development expenses for the three months ended February 29, 2004
remain relatively flat compared to the three months ended February 28, 2003. We
continue to focus our efforts on the development of new, advanced software
programs to assist in the identification and evaluation of patients who are at
risk for developing various disease conditions. These programs incorporate state
of the art telecommunications, data management, and security and information
technology. Certain costs associated with the development of new product
software to be incorporated into our disease management programs are capitalized
and amortized over a 5-year useful life. We intend to continue to improve and
expand the capabilities of the ohms|cvd system.
Loss on operations of joint venture for the three months ended February 29, 2004
was generated primarily from legal fees associated the arbitration between
Regence of Washington and Oregon and HeartMasters LLC.
Liquidity and Capital Resources
To date, our principal sources of working capital have been the proceeds from
public and private placements of securities. Since our inception, sales of
securities, including the proceeds from the exercise of outstanding options and
warrants, have generated approximately $31,000,000 less applicable expenses.
We had working capital of approximately $6,123,000 at February 29, 2004 compared
to working capital of approximately $6,151,000 at November 30, 2003 and ratios
of current assets to current liabilities of 2.6:1 as of February 29, 2004, and
2.7:1 as of November 30, 2003. The working capital decrease of approximately
$28,000 was due to a net loss of approximately $262,000 offset by the proceeds
from the sale of common stock through the exercise of outstanding options and
warrants of approximately $234,000. In September 2001 we entered into a
$1,000,000 line of credit agreement with Wachovia Bank, National Associated.
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 February
29, 2004 the entire $1,000,0000 was available under this credit line.
We anticipate 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 our
operations requires significant additional resources or certain forms of
financial guarantees to assure our performance under the terms of new health
plan contracts, we 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 us.
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Material Commitments
The following schedule summarizes our contractual cost obligation as of February
29, 2004 in the periods indicated.
Contractual
Obligations Payments Due by Period
----------------------------------- ---------------- ------------------- --------------- ---------------- --------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
----------------------------------- ---------------- ------------------- --------------- ---------------- --------------
Long-Term Debt $ - $ - $ - $ - $ -
Capital Lease Obligations 277,000 132,000 145,000 - -
Operating Leases 1,589,000 507,000 953,000 129,000 -
Unconditional Purchase Obligations 291,000 291,000 - - -
Other Long-Term Obligations 1,054,000 661,000 394,000 - -
Total Contractual Cash Obligations $ 3,212,000 $ 1,591,000 $ 1,492,000 $ 129,000 $ -
----------------------------------- ---------------- ------------------- --------------- ---------------- ------------
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
Under the supervision and with the participation of our management, including
Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no changes in our internal control over
financial reporting during the quarter ended February 29, 2004 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
On March 28, 2003, HeartMasters LLC, a limited liability company 50%
owned by our IHMC subsidiary, received a Demand for Arbitration before
the American Arbitration Association of approximately $13,000,000 plus
interest, of which approximately $6,500,000 relates to IHMC, for claims
under certain terminated disease management agreements. The claims
allege breach of disease management agreements between Regence of
Washington and Oregon and HeartMasters LLC. Regence has since amended
its demand, and now claims nearly $17,000,000, of which approximately
half relates to IHMC. Settlement discussions have taken place and
discovery has been scheduled. HeartMasters LLC also received a notice
from a reinsurer, Centre, denying coverage for the Regence of Oregon
HMO first year coverage period asserting that an outside actuarial
report concerning Regence's claims history and other information, which
were considered by the reinsurer prior to issuance of coverage,
contained "grossly incorrect data." HeartMasters LLC has denied the
claims of Regence and asserted counter claims. In addition,
HeartMasters has demanded payment of the insurance coverage. The
dispute with Centre over the insurance coverage is now the subject of
an arbitration proceeding. Initially, the company sued over the
nonpayment of the policies; the court determined that this must be
resolved in the arbitration with Centre. At this stage, management is
unable to predict the outcome of these matters.
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
31.1 Certification of Chief Executive Officer of Periodic Report
pursuant to Rule 13a-14a and Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic Report
pursuant to Rule 13a-14a and Rule 15d-14(a).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. - Section 1350.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
period covered by this report.
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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 and Chief Executive Officer
By: /s/ William T. Schmitt, Jr.
----------------------------------------
William T. Schmitt, Jr.
Senior Vice President, Chief Financial
Officer and Treasurer
April 14, 2003
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