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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: May 31, 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 on June 23,
2004: 14,767,023.
Part I.
Item 1. Financial Statements
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (audited)
May 31, 2004 November 30, 2003
----------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 1,043,521 $ 1,638,271
Investments 5,758,059 6,213,825
Accounts receivable, net of allowances of approximately $2,000 1,319,127 1,315,021
Inventory 136,868 146,239
Prepaid expenses and other current assets 244,986 392,783
----------------- -----------------
8,502,561 9,706,139
Property and equipment, net 1,283,178 1,133,419
Product software development costs 676,423 441,020
Accounts receivable, non-current - 1,474,674
Other assets 138,977 163,059
Investments in joint ventures 5,000 -
----------------- -----------------
$ 10,606,139 $ 12,918,311
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 996,252 $ 975,724
Leases payable, current portion 100,594 73,463
Accrued salaries and commissions 684,348 565,524
Fees reimbursable to health plans 1,086,364 182,359
Contract billings in excess of revenues 1,717,191 1,717,657
Deferred warranty revenue 27,304 33,235
Income taxes payable 8,000 6,810
----------------- -----------------
4,620,053 3,554,772
Leases payable - long term 220,847 44,429
Contract billings in excess of revenue - long term - 2,270,928
----------------- -----------------
4,840,900 5,870,129
Commitments and Contingencies
Stockholders' equity
Common stock $.001 par value; 40,000,000 shares authorized;
14,767,023 and 14,627,384 shares issued and 14,745,023 and
14,605,384 outstanding, respectively 14,766 14,627
Paid-in capital 33,799,341 33,380,751
Accumulated deficit (27,959,255) (26,264,572)
Accumulated other comprehensive income
Unrealized loss on securities available for sale (13,988) (6,999)
----------------- -----------------
5,840,864 7,123,807
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
----------------- -----------------
Total stockholders' equity 5,765,239 7,048,182
----------------- -----------------
$ 10,606,139 $ 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 For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
May 31, 2004 May 31, 2003 May 31, 2004 May 31, 2003
------------ ------------ ------------ ------------
Revenue
Disease management services $ 3,667,570 $ 3,245,017 $ 7,406,791 $ 6,850,030
Medical equipment 57,311 71,684 110,910 132,715
-------------- -------------- -------------- --------------
3,724,881 3,316,701 7,517,701 6,982,745
-------------- -------------- -------------- --------------
Cost of revenue
Disease management services 2,649,454 1,596,584 4,613,439 3,145,001
Medical equipment 41,491 34,132 78,704 80,208
-------------- -------------- -------------- --------------
2,690,945 1,630,716 4,692,143 3,225,209
-------------- -------------- -------------- --------------
Gross profit 1,033,936 1,685,985 2,825,558 3,757,536
-------------- -------------- -------------- --------------
Selling, general and
administrative expenses 2,104,908 2,089,566 3,851,063 3,645,917
Research and development expenses 243,871 195,721 498,290 446,562
-------------- -------------- -------------- --------------
Loss from operations (1,314,843) (599,302) (1,523,795) (334,943)
Interest expense (9,026) (5,776) (15,724) (12,763)
Interest income 25,350 7,127 48,883 56,744
Loss in operations of (129,750) (204,750)
joint ventures
Other income - 8,703
-------------- -------------- -------------- --------------
Loss before income tax
(provision) benefit (1,428,269) (597,951) (1,686,683) (290,962)
(Provision) benefit for
state income taxes (4,000) 10,500 (8,000) (5,500)
-------------- -------------- -------------- --------------
Net loss $ (1,432,269) $ (587,451) $ (1,694,683) $ (296,462)
============== ============== ============== ==============
Basic and Diluted loss
per share
Weighted average shares outstanding 14,737,312 14,555,717 14,695,582 14,536,551
-------------- -------------- -------------- --------------
Basic loss per share $ (.10) $ (.04) $ (.12) $ (.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 For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
May 31, 2004 May 31, 2003 May 31, 2004 May 31, 2003
------------ ------------ ------------ ------------
Net loss $ (1,432,269) $ (587,451) $ (1,694,683) $ (296,462)
Other comprehensive income
Unrealized loss on securities
available for sale (7,674) (8,660) (3,908) (21,187)
Less: reclassification adjustment for
(gains) losses included in net (loss) (2,672) 32,453 (3,081) 28,844
income
-------------- -------------- -------------- --------------
Comprehensive loss $ (1,442,615) $ (563,658) $ (1,701,672) $ (288,805)
============== ============== ============== ==============
See Accompanying Notes to Condensed Consolidated Financial Statements
4
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended May 31, 2004
(Unaudited)
Accumulated Common Stock
Common Stock Other Held in Treasury
---------------------- Paid-in Accumulated Comprehensive -------------------
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 139,639 139 392,573 392,712
Amortization of non-employee
stock options 26,017 26,017
Net loss for the six months
ended May 31, 2004 (1,694,683) (1,694,683)
Change in unrealized holding
losses on securities
available for sale (6,989) (6,989)
---------- -------- ------------ ------------ -------- ------ --------- ------------
Balance - May 31, 2004 14,767,023 $ 14,766 $ 33,799,341 $(27,959,255) $(13,988) 22,000 $ (75,625) $ 5,765,239
========== ======== ============ ============ ======== ====== ========= ============
See Accompanying Notes to Condensed Consolidated Financial Statements
5
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months For the Six Months
Ended May 31, 2004 Ended May 31, 2003
------------------ ------------------
Cash flows from operating activities:
Net loss $ (1,694,683) $ (296,462)
Adjustments to reconcile net loss to net cash used by operating activities:
(Gain) loss on sale of investments (3,081) 28,844
Loss in operations of joint ventures 204,750 -
Depreciation and amortization 230,488 193,947
Amortization of non-employee stock options 26,017 12,444
Amortization of bond discounts and premiums 82,248 27,483
(Increase) decrease in
Accounts receivable (4,106) (2,030,049)
Inventory 9,371 24,846
Prepaid expenses and other current assets 147,797 (300,711)
Increase (decrease) in
Accounts payable and accrued liabilities 1,169,752 802,234
Contract billings in excess of revenues and deferred revenue (802,651) 487,381
Other, net 14,354 347,178
-------------- --------------
Total adjustments 1,074,939 (406,403)
-------------- --------------
(619,744) (702,865)
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 5,424,648 8,180,399
Purchases of securities available for sale (5,055,038) (8,483,100)
Capital expenditures (345,521) (173,791)
Investment in joint venture (336,145) -
-------------- --------------
(312,056) (476,492)
-------------- --------------
Cash flows from financing activities:
Payments for capital leases (55,662) (33,208)
Proceeds from issuance of common stock 392,712 218,615
-------------- --------------
337,050 185,407
-------------- --------------
Net decrease in cash and cash equivalents (594,750) (993,950)
Cash and cash equivalents at beginning of period 1,638,271 2,383,123
-------------- --------------
Cash and cash equivalents at end of period $ 1,043,521 $ 1,389,173
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period
for:
Interest $ 15,724 $ 12,776
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 and six month periods ended May 31, 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 one to three 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. 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.
7
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
May 31, 2004, based on information and data available, the Company has deferred
approximately $ 1,717,000 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 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.
Note 2 - Revenue Recognition (continued)
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 November 30, 2003, non-current accounts receivable
included $1,474,674 for services rendered on the Regence Oregon and Washington
contracts. At May 31, 2004, as a result of the settlement with the Regence Group
(see note 12), these outstanding receivables were offset against the related
deferred revenue.
Note 3 - Investments in Securities
Investment in securities available-for-sale as of May 31, 2004 were as follows:
Unrealized Gain
Cost Market Value (Loss)
---- ------------ ---------------
Corporate debt securities $ 4,521,448 $ 4,512,055 $ (9,393)
Certificates of deposit 117,625 116,253 (1,372)
U.S. Government short term obligations
1,132,974 1,129,751 (3,223)
----------- ----------- ---------
$ 5,772,047 $ 5,758,059 $ (13,988)
=========== =========== =========
8
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
May 31, 2004 November 30,
(Unaudited) 2003
---------------- ---------------
Raw materials (component parts) $ 117,385 $ 119,228
Finished units 19,483 27,011
---------------- ---------------
$ 136,868 $ 146,239
================ ===============
Note 5 - Product Software Development Costs
During the three and six months ended May 31, 2004, the Company capitalized
approximately $220,000 and $294,000 in product software development costs,
respectively. These costs are amortized over a five-year useful life.
During the three and six months ended May 31, 2004, amortization costs related
to product software development costs were approximately $29,000 and $59,000,
respectively.
Note 6 - Investments in Joint Ventures
The Company has a 50% interest in HeartMasters, LLC. ("HM"). The management
agreement provides for profits and losses to be allocated based on the Company's
50% interest. As of May 31, 2004, the Company has recorded losses to date of
approximately $801,000 bringing the investment in joint venture to zero. This
joint venture is not a variable interest entity and therefore is not required to
be consolidated under the provisions of FIN 46.
The Company has a 33.33% interest in Healthsuite Partners, LLC ("HSP"). The
management agreement provides for profits and losses to be allocated based on
the Company's 33.33% interest. As of May 31, 2004, the Company has recorded
losses to date of approximately $3,000 bringing its investment in this joint
venture to $5,000. This joint venture is not a variable interest entity and
therefore is not required to be consolidated under the provisions of FIN 46.
Note 7 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
May 31, 2004 November 30,
(Unaudited) 2003
--------------- ---------------
Account payable trade $ 557,020 $ 479,472
Insurance premiums payable 106,362 183,243
Other accrued expenses - none in
excess of 5% of current liabilities 332,870 313,009
--------------- ---------------
$ 996,252 $ 975,724
=============== ===============
9
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8 - Fees Reimbursable to Health Plans
Fees reimbursable to health plans include amounts due health plan as part of the
contract reconciliation process.. As of May 31, 2004 approximately $941,000 in
these fees were payable to health plans resulting from contract reconciliations.
Note 9 - Business Segment Information
The Company presents segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
established reporting and disclosure standards for an enterprise's operating
segments. Operating segments are defined as components of an enterprise for
which separate financial information is available and regularly reviewed by the
Company's senior management.
The Company segments are organized into two business units, disease-management
services and medical equipment sales, which are considered reportable segments.
The segments are managed separately and the Company evaluates performance on
operating profits of the respective segments. The Company supports both segments
with shared human resources, clinical, marketing and information technology
resources. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies in Note 1.
Income (loss) before income taxes by operating segment excludes interest income,
interest expense and general corporate expenses.
Summarized financial information by operating segment for three and six months
ended May 31, 2004 and 2003, is as follows:
Three Months Ended
-------------------------------------------
May 31, 2004 May 31, 2003
----------------- -----------------
(Unaudited) (Unaudited)
Revenue
Disease management services $ 3,667,570 $ 3,245,017
Medical equipment sales 57,311 71,684
----------------- -----------------
$ 3,724,881 $ 3,316,701
================= =================
(Loss) income before income taxes:
Disease management services $ (622,223) $ 40,110
Medical equipment sales 15,820 9,347
----------------- -----------------
Total segments (606,403) 49,457
General corporate expenses - net (821,866) (647,408)
----------------- -----------------
$ (1,428,269) $ (597,951)
================= =================
10
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9 - Business Segment Information (continued)
Six Months Ended
------------------------------------------
May 31, 2004 May 31, 2003
----------------- -----------------
(Unaudited) (Unaudited)
Revenue
Disease management services $ 7,406,791 $ 6,850,030
Medical equipment sales 110,910 132,715
----------------- -----------------
$ 7,517,701 $ 6,982,745
================= =================
(Loss) income before income taxes:
Disease management services $ (409,756) $ 879,737
Medical equipment sales 32,235 24,302
----------------- -----------------
Total segments (377,521) 904,039
General corporate expenses - net (1,309,162) (1,195,001)
----------------- -----------------
$ (1,686,683) $ (290,962)
================= =================
Note 10 - 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 Six Months Ended
----------------------------------- -----------------------------------
May 31, 2004 May 31, 2003 May 31, 2004 May 31, 2003
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net loss, as reported $ (1,432,269) $ (587,951) $ (1,694,683) $ (296,462)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax
effects 297,403 216,961 568,789 364,653
-------------- -------------- -------------- --------------
Pro forma net loss $ (1,729,672) $ (804,912) $ (2,263,472) $ (661,115)
============== ============== ============== ==============
11
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10 - Stock-Based Compensation (continued)
Three Months Ended Six Months Ended
----------------------------------- -----------------------------------
May 31, 2004 May 31, 2003 May 31, 2004 May 31, 2003
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Weighted average common
shares outstanding 14,733,310 14,555,717 14,689,173 14,536,551
Dilutive effect of stock
options and warrants - - - -
-------------- -------------- -------------- --------------
Diluted shares outstanding 14,733,310 14,555,717 14,689,173 14,536,551
============== ============== ============== ==============
Loss per share:
Basic and Diluted,
As reported $ (.10) $ (.04) $ (.12) $ (.02)
============== ============== ============== ==============
Basic and Diluted,
pro forma $ (.12) $ (.06) $ (.15) $ (.05)
============== ============== ============== ==============
Potentially dilutive options and warrants to purchase 2,136,496 and 2,245,755
shares of the common stock were outstanding for the three and six months ending
May 31, 2004, respectively, 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 19,686 shares of common stock
were outstanding as of May 31, 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.
12
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11 - Line of Credit
On September 11, 2001, the Company entered into a loan agreement with First
Union National Bank for a $1 million line of credit. The annual interest rate is
the lower of the bank's reference rate minus 1% or the LIBOR Market Index Rate
plus 1.5%. The line is collateralized by securities owned by the Company.
Borrowings under this line of credit were $-0- at May 31, 2004 and November 30,
2003.
Note 12 - Commitments and Contingencies
Litigation
- ----------
On June 15, 2004, the Company entered into an agreement to settle its dispute
with The Regence Group, including all issues surrounding HeartMasters LLC's
arbitration. The settlement agreement provides QMed, Inc. and IHMC with releases
from any and all claims related to Regence and the Regence contract in exchange
for a financial guarantee of certain payments due from HeartMasters LLC to
Regence. The amount of the financial guarantee can range between $-0- and
$2,300,000 and is contingent upon the outcome of a separate arbitration being
pursed by Regence and HeartMasters LLC against the reinsurer, Centre Insurance.
Based upon management's estimates, the Company has increased its reserve
estimate to $1,150,001, which has resulted in a reduction in current revenue of
approximately $353,000. The Company has made an advance payment on this
guarantee of $1,150,001on June 15, 2004. The advance payment is subject to
refund with interest based upon certain recovery targets under the Centre
Insurance arbitration, if successful. HeartMasters LLC, a limited liability
company 50% owned by our IHMC subsidiary, had received a Demand for Arbitration
before the American Arbitration Association of approximately $17,000,000 plus
interest, of which approximately $8,500,000 had related to IHMC, for claims
under certain terminated disease management agreements. The claims had alleged a
breach of the disease management agreements between Regence of Washington and
Oregon and HeartMasters LLC. HeartMasters LLC had received a notice from a
reinsurer, Centre, denying coverage for the Regence of Oregon HMO first year
coverage period which had asserted that the 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."
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 additional
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 May 31, 2004 total open commitments under these purchase orders
are approximately $313,000.
13
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13 - 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.
14
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, diabetes, 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 May 31, 2004, we had contracts to provide these services to 14
health plans in 11 states covering approximately 2.3 million health plan members
and 2 medicare demonstration projects operating in 3 states.
As of May 31, 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;
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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, diabetes, 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.
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
May 31, 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 one to three 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,
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which always includes the amount, if any that may be subject to refund for
membership retroactivity. 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 May 31,
2004, based on information and data available, we deferred approximately
$1,717,000 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 May 31, 2004, approximately 62.2% 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 the For the
Three Six
Months Months
For the Three Months Ended For the Six Months Ended May Ended May
May 31, Ended May 31, 31, 31,
------------------------------- ------------------------------- ------------- -------------
2004 vs. 2004 vs.
2004 2003 2004 2003 2003 2003
-------------- ------------- -------------- ------------- ------------- -------------
Revenue 100.0 % 100.0 % 100.0 % 100.0 % 12.3 % 7.7 %
Cost of revenue 72.2 49.2 62.4 46.2 65.0 45.5
---------- ---------- ---------- ----------
Gross Profit 27.8 50.8 37.6 53.8 (38.7) (24.8)
Selling general
and administrative 56.5 63.0 51.2 52.2 0.7 5.6
Research and
development 6.5 5.9 6.6 6.4 24.6 11.6
---------- ---------- ---------- ----------
Loss from
operations (35.3) (18.1) (20.3) (4.8) 119.4 354.9
Interest expense (0.2) (0.2) (0.2) (0.2) 56.3 23.2
Interest income,
net 0.7 0.2 0.7 0.8 255.7 (13.9)
Loss on operations
of joint venture (3.5) - (2.7) - - *
Other income - 0.1 - - *
---------- ---------- ---------- ----------
Loss before tax
(provision) benefit (38.3) (18.0) (22.4) (4.2) 138.9 479.7
Income tax
(provision) benefit (0.1) 0.3 (0.1) - (138.1) 45.5
---------- ---------- ---------- ----------
Net loss (38.5) (17.7) (22.5) (4.2) 143.8 471.6
========== ========== ========== ==========
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* Not meaningful
Three Months Ended May 31, 2004 Compared to Three Months Ended May 31,2003
Revenue for the three months ended May 31, 2004 increased approximately $408,000
or 12.3% over the three months ended May 31, 2003. This increase consists of (i)
approximately $1.1 million of additional revenue related to expansion of
existing contracts and the addition of new contracts entered into since May 31,
2003 and (ii) recognition of approximately $163,000 related to recognition of
revenue previously deferred. This increase was offset by a reduction of revenue
of (i) approximately $492,000 related to market exits and reductions in
membership under existing disease management programs, the termination of
disease management programs under agreements with the Regence Group and the
renegotiation of a contract with a customer in Oregon and (ii) a reduction of
approximately $353,000 related an increase in management's deferred revenue
estimate related to its settlement with the Regence Group.
Gross profit margins for the three months ended May 31, 2004 decreased to 27.8%
from 50.8% for the three months ended May 31, 2003. This decrease was primarily
due to a reduction of revenue of approximately $353,000 related to an increase
in management's deferred revenue estimate related to its settlement with the
Regence Group and implementation costs associated with our expansion into new
market places related to new contracts, including costs associated with one
contract totaling approximately $454,000. 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.
Selling, general and administrative expenses for the three months ended May 31,
2004 remain relatively flat compared to the three months ended May 31, 2003 at
approximately $2.1 million.
Research and development expenses for the three months ended May 31, increased
approximately $48,000 or 24.6% compared to the three months ended May 31, 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 May 31, 2004 was
generated primarily from legal fees associated the arbitration between Regence
of Washington and Oregon and HeartMasters LLC.
Six Months Ended May 31, 2004 Compared to Six Months Ended May 31,2003
Revenue for the six months ended May 31, 2004 increased approximately $535,000
or 7.7% over the six months ended May 31, 2003. This increase consists of (i)
approximately $2.0 million of additional revenue related to expansion of
existing contracts and the addition of new contracts entered into since May 31,
2003 and (ii) recognition of approximately $163,000 related to recognition of
revenue previously deferred. This increase was offset by a reduction of revenue
of (i) approximately $1.2 million related to market exits and reductions in
membership under existing disease management programs, the termination of
disease management programs under agreements with the Regence Group and the
renegotiation of a contract with a customer in Oregon and (ii) a reduction of
approximately $353,000 related an increase in management's deferred revenue
estimate related to its settlement with the Regence Group.
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Gross profit margins for the six months ended May 31, 2004 decreased to 37.6%
from 53.8% for the six months ended May 31, 2003. This decrease was primarily
due to a reduction of revenue of approximately $353,000 related to an increase
in management's deferred revenue estimate related to its settlement with the
Regence Group and implementation costs associated with our expansion into new
market places related to new contracts, including costs associated with one
contract totaling approximately $804,000. 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.
Selling, general and administrative expenses for the six months ended May 31,
2004 increased approximately $205,000 or 5.6% compared to the six months ended
May 31,, 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 six months ended May 31, increased
approximately $52,000 or 11.6% compared to the six months ended May 31, 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 six months ended May 31, 2004 was
generated primarily from legal fees associated the arbitration with the Regence
Group.
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.
At May 31, 2004, we had working capital of approximately $3,888,000 (net of a
$1.15 million reserve related to the settlement with the Regence Group) compared
to working capital at November 30, 2003 of approximately $5,355,000 (net of an
approximately $797,000 reserve related to the settlement with the Regence Group)
and ratios of current assets to current liabilities of 1.8:1 as of May 31, 2004,
and 1.9:1 as of November 30, 2003. The working capital decrease of approximately
$1,467,000 was due to a net loss of approximately $1,695,000 and capital
expenditures of approximately $345,000 offset by the proceeds from the sale of
common stock through the exercise of outstanding options and warrants of
approximately $393,000. 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 May 31, 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 May 31,
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 240,0000 116,000 124,000 - -
Operating Leases 1,457,000 375,000 953,000 129,000 -
Unconditional Obligations 2,548,000 2,548,000 - - -
Other Long-Term Obligations 879,000 616,000 263,000 - -
Total Contractual Cash Obligations $5,124,000 $ 3,655,000 $ 1,340,000 $ 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 May 31, 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
HeartMasters LLC, a limited liability company 50% owned by our IHMC
subsidiary, received a Demand for Arbitration before the American
Arbitration Association of approximately $17,000,000 plus interest, of
which approximately $8,500,000 related 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. HeartMasters LLC 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 has demanded payment
of the insurance coverage. The dispute with Centre over the insurance
coverage is now the subject of an arbitration proceeding. On June 15,
2004, the Company entered into an agreement to settle its dispute with
The Regence Group, including all issues surrounding HeartMasters LLC's
arbitration. The settlement agreement provides QMed, Inc. and IHMC with
releases from any and all claims related to Regence and the Regence
contract in exchange for a financial guarantee of certain payments due
from HeartMasters LLC to Regence. The amount of the financial guarantee
can range between $-0- and $2,300,000 and is contingent upon the
outcome of a separate arbitration being pursed by Regence and
HeartMasters LLC against the reinsurer, Centre Insurance. Based upon
management's estimates, the Company has increased its reserve estimate
to $1,150,001, which has resulted in a reduction in current revenue of
approximately $353,000. The Company has made an advance payment on this
guarantee of $1,150,001on June 15, 2004. The advance payment is subject
to refund with interest based upon certain recovery targets under the
Centre Insurance arbitration, if successful.
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 additional 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
-----------------
(a) None
(b) There have been no material changes to the procedures by which
security holders may recommend nominees to the Company's Board
of Directors.
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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.
One report of Form 8-K was filed on April 20, 2004 during the
quarter ended May 31, 2004 reporting matters under Items 9 and
12.
This report submitted to the Securities and Exchange
Commission which included information "furnished" pursuant to
Items 9 and 12 in such report is not subject to the
liabilities of Section 18 of the Securities Exchange Act of
1934, is not incorporated into this Report on Form 10-Q and
the Company does not intend to incorporate this report by
reference into any filing under the Securities Act or the
Exchange Act.
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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
July 1, 2004
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