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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 28, 2005 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 [X] No [ ]
The number of shares of the registrant's common stock outstanding on March 30,
2005: 16,545,201.
QMED, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended February 28, 2005
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
February 28, 2005 and November 30, 2004................ 1
Condensed Consolidated Statements of Operations
for the Three Months Ended February 28, 2005
and February 29, 2004.................................. 2
Condensed Consolidated Statements of
Comprehensive Income for the Three Months
Ended February 28, 2005 and February 29, 2004.......... 3
Condensed Consolidated Statements of
Stockholders' Equity for the Three Months
Ended February 28, 2005................................ 4
Condensed Consolidated Statements of Cash Flows
for the three Months Ended February 28, 2005
and February 29, 2004.................................. 5
Notes to Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 16
Item 4. Controls and Procedures................................ 16
Part II Other Information
Item 1. Legal Proceedings...................................... 17
Item 6. Exhibits............................................... 17
Signature ................................................................. 18
Certifications ............................................................ 19
Part I.
Item 1. Financial Statements
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, November 30,
2005 2004
--------------- ---------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 6,069,793 $ 3,292,571
Investments 14,754,795 2,097,362
Accounts receivable, net of allowances of $52,690 and $52,690, 3,043,805 2,750,507
respectively
Inventory, net of reserve 46,054 38,355
Prepaid expenses and other current assets 278,872 440,620
--------------- ---------------
24,193,319 8,619,415
Property and equipment, net of accumulated depreciation 1,100,133 1,180,050
Product software development costs, net 862,682 858,022
Non-current accounts receivable 44,827 -
Other assets 129,658 132,136
Investment in joint ventures 44,363 47,854
--------------- ---------------
$ 26,374,982 $ 10,837,477
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 916,534 $ 817,234
Leases payable, current portion 113,605 119,757
Accrued salaries and commissions 393,118 416,382
Fees reimbursable to health plans 29,290 161,178
Contract billings in excess of revenues 1,865,613 1,245,862
Deferred warranty revenue 20,555 23,652
Income taxes payable 52,053 16,000
--------------- ---------------
3,390,768 2,800,065
Leases payable - long term 117,805 146,742
--------------- ---------------
3,508,573 2,946,807
Commitments and Contingencies
Stockholders' equity
Common stock $.001 par value; 40,000,000 shares authorized;
16,553,901 and 15,150,054 shares issued and 16,531,901 and
15,128,054 outstanding, respectively 16,554 15,150
Paid-in capital 50,061,720 35,961,800
Accumulated deficit (27,129,214) (28,004,017)
Accumulated other comprehensive income
Unrealized loss on securities available for sale (7,026) (6,638)
--------------- ---------------
22,942,034 7,966,295
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
--------------- ---------------
Total stockholders' equity 22,866,409 7,890,670
--------------- ---------------
$ 26,374,982 $ 10,837,477
=============== ===============
See Accompanying Notes to Condensed Consolidated Financial Statements
1
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 28, 2005 February 29, 2004
--------------------- ---------------------
Revenue
Disease Management services $ 4,707,067 $ 3,739,221
Medical equipment 48,419 53,599
-------------------- --------------------
4,755,486 3,792,820
-------------------- --------------------
Cost of revenue
Disease management services 1,783,574 1,963,985
Medical equipment 37,912 37,213
-------------------- --------------------
1,821,486 2,001,198
-------------------- --------------------
Gross profit 2,934,000 1,791,622
Selling, general and administrative expenses 1,698,792 1,746,155
Research and development expenses 268,026 254,419
-------------------- --------------------
Income (loss) from operations 967,182 (208,952)
Interest expense (7,002) (6,698)
Interest income 41,160 23,533
Loss in operations of joint venture (70,885) (75,000)
Other income 1,748 8,703
-------------------- --------------------
Income (loss) before income tax provision 932,203 (258,414)
Provision for state income taxes (57,400) (4,000)
-------------------- --------------------
Net income (loss) $ 874,803 $ (262,414)
==================== ====================
Basic earnings (loss) per share
Weighted average shares outstanding 15,837,577 14,644,546
==================== ====================
Basic earnings (loss) per share $ .06 $ (.02)
==================== ====================
Diluted earnings (loss) per share
Weighted average shares outstanding 17,972,943 14,644,546
==================== ====================
Diluted earnings (loss) per share $ .05 $ (.02)
==================== ====================
See Accompanying Notes to Condensed Consolidated Financial Statements
2
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 28, 2005 February 29, 2004
--------------------- ---------------------
Net income (loss) income $ 874,803 $ (262,414)
Other comprehensive income
Unrealized (loss) gain on securities available for sale (388) 3,766
Less: reclassification adjustment for losses included
in net loss - (409)
--------------------- ---------------------
Comprehensive (loss) income $ 874,415 $ (259,057)
===================== =====================
See Accompanying Notes to Condensed Consolidated Financial Statements
3
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended February 28, 2005
(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, 2004 15,150,054 $15,150 $35,961,800 $(28,004,017) $ (6,638) 22,000 $(75,625) $ 7,890,670
Exercise of stock options
and warrants 53,307 53 209,074 209,127
Issuance in connection with
Directors Equity Plan 701 1 8,002 8,003
Amortization of non-employee
stock options 15,625 15,625
Issuance of common stock and
investment rights through private
placement for cash (net of expense) 1,349,839 1,350 13,867,219 13,868,569
Net income for the three months
ended February 28, 2005 874,803 874,803
Change in unrealized holding losses
on securities available for sale (388) (388)
---------- ------- ----------- ------------ -------- ------ -------- -----------
Balance - February 28, 2005 16,553,901 $16,554 $50,061,720 $(27,129,214) $ (7,026) 22,000 $(75,625) $22,866,409
========== ======= =========== ============ ======== ====== ======== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements
4
QMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 28, 2005 February 29, 2004
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 874,803 $ (262,414)
Adjustments to reconcile net income (loss) to cash and
cash equivalents (used in) provided by (used in)
operating activities:
(Gain) loss on sale of investments - (409)
Loss in operations of joint venture 70,885 75,000
Depreciation and amortization 127,906 111,768
Stock compensation expense 8,003
Amortization of non-employee stock options 15,625 15,796
Amortization of bond discounts and premiums (9,437) 39,695
(Increase) decrease in
Accounts receivable (338,125) (612,607)
Inventory (7,699) 533
Prepaid expenses and other current assets 161,748 56,040
Increase (decrease) in
Accounts payable and accrued liabilities (9,604) (114,075)
Contract billings in excess of revenues and deferred revenue 616,654 255,312
Other, net 36,053 12,063
---------------- ----------------
Total adjustments 672,009 (160,884)
---------------- ----------------
1,546,812 (423,298)
---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 2,374,000 2,678,560
Purchases of securities available for sale (15,022,384) (2,543,127)
Capital expenditures (50,171) (84,876)
Investment in joint ventures (113,642) (120,000)
---------------- ----------------
(12,812,197) (69,443)
---------------- ----------------
Cash flows from financing activities:
Payments for capital leases (35,089) (20,834)
Proceeds from issuance of common stock and investment rights 14,077,696 233,765
---------------- ----------------
14,042,607 212,931
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 2,777,222 (279,810)
Cash and cash equivalents at beginning of period 3,292,571 1,638,271
---------------- ----------------
Cash and cash equivalents at end of period $ 6,069,793 $ 1,358,461
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,002 $ 6,698
Income taxes 12,000 8,300
See Accompanying Notes to Condensed Consolidated Financial Statements
5
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 28, 2005 are not necessarily
indicative of the results that may be expected for the year ending November 30,
2005. These condensed consolidated financials statements include the accounts of
QMed, Inc., its wholly owned subsidiaries, Interactive Heart Management Corp.
("IHMC") and QMEDCare, Inc., 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, 2004.
Note 2 - Revenue Recognition- Disease Management
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 Advantage). 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 member
retroactivity and a shortfall in performance. The Company adjusts or defers
revenue for contracts where it believes performance is short of contractual
obligations, 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 shortfalls in
performance targets 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 supplied by
the health plan. In the event these interim performance measures indicate that
performance targets are not being met or sufficient data is unavailable, fees
subject to refund are not recorded as revenues but rather are recorded as a
current liability entitled "contract billings in excess of revenues." Under
performance based arrangements, the ability to make estimates at interim periods
can be challenging due to the inherent nature of the medical claims process and
the 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 28, 2005, based on information and
data available, the Company has deferred approximately $1,866,000 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 majority of contract billings in excess of revenues on the balance sheet are
subject to reconciliation at future periods. If future reconciliations provide
positive results, revenue will be recorded at that time. The Company believes
these estimates adequately provide for any potential adjustments that may be
applied to revenues from these contracts. During the three months ended February
28, 2005, approximately 43% of disease management services were derived from
three health plans that each comprised more than 10% of the Company's revenues.
6
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3 - Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of deferral, 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.
Note 4 - Investments in Securities
Investment in securities available-for-sale as of February 28, 2005 were as
follows:
Unrealized
Cost Market Value Gain (Loss)
-------------- ------------- -------------
Corporate debt securities $ 13,056,266 $ 13,051,179 $ (5,086)
Certificate of deposits 65,813 65,576 (237)
U.S. Government short term obligations 1,639,742 1,638,040 (1,702)
-------------- ------------- -------------
$ 14,761,821 $ 14,754,795 $ (7,026)
============== ============= =============
Note 5 - Accounts Receivable
Accounts receivable primarily represent fees that are contractually due in the
ordinary course of providing a service, net of contractual adjustments.
Note 6 - 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 28,
2005 November 30,
(Unaudited) 2004
-------------- -------------
Raw materials (component parts) $ 118,950 $ 120,533
Finished units 28,532 19,250
-------------- -------------
Total Inventory $ 147,482 $ 139,783
Reserve for Slow Moving Inventory $ 101,428 $ 101,428
-------------- -------------
Net Inventory $ 46,054 $ 38,355
============== =============
Note 7 - Product Software Development Costs
During the three months ended February 28, 2005, the Company capitalized
approximately $41,000 in product software development costs. These costs are
amortized over a five-year useful life.
During the three months ended February 28, 2005 and February 29, 2004,
amortization costs related to product software development costs were
approximately $36,000 and $29,000, respectively.
Note 8 - Investment in Joint Ventures
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 28, 2005, the Company has recorded losses to date
of approximately $1,072,000 bringing the investment in the 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.
7
QMED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8 - Investment in Joint Ventures (continued)
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 February 28, 2005, the Company has recorded
losses to date of approximately $101,000 bringing its investment in this joint
venture to approximately $44,000. This joint venture is not a variable interest
entity and therefore is not required to be consolidated under the provisions of
FIN 46. Included in accounts receivable as of February 28, 2005 is approximately
$709,000 due from this joint venture.
Note 9 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
February 28,
2005 November 30,
(Unaudited) 2004
------------- -------------
Account payable trade $ 340,123 $ 278,319
Insurance premiums payable 90,111 71,720
Professional fees payable 272,206 209,503
Other accrued expenses - none in
excess of 5% of current liabilities 214,094 257,692
------------- -------------
$ 916,534 $ 817,234
============= =============
Note 10 - Fees Reimbursable to Health Plans
Health plans utilizing the disease management program of the Company pay
participating physicians fees for their services related to use of the program.
Such fees are additional costs to the health plan, which in some cases are
deducted from fees paid to the Company. As of February 28, 2005 and November 30,
2004 there were $29,290 and $161,178 outstanding under these provisions,
respectively.
Note 11 - 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.
8
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11 - Business Segment Information - (continued)
Summarized financial information by operating segment for three months ended
February 28, 2005 and February 29, 2004, is as follows:
Three Months Ended
--------------------------------------
February 28, February 29,
2005 2004
--------------- ---------------
Revenue
Disease management services $ 4,707,067 $ 3,739,221
Medical equipment sales 48,419 53,599
--------------- ---------------
$ 4,755,486 $ 3,792,820
=============== ===============
Income (loss) before income taxes:
Disease management services $ 1,545,143 $ 212,467
Medical equipment sales 10,507 12,452
--------------- ---------------
Total segments 1,555,650 224,919
General corporate expenses - net (623,447) (483,333)
--------------- ---------------
$ 932,203 $ (258,414)
=============== ===============
Note 12 - 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 28, 2005 February 29, 2004
----------------- -----------------
Net income (loss), as reported $ 874,803 $ (262,414)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (235,299) (271,386)
------------ ------------
Pro forma net income (loss) $ 639,504 $ (533,800)
============ ============
Weighted average common
shares outstanding 15,837,577 14,644,546
Dilutive effect of stock options and
warrants 2,135,366 -
------------ ------------
Diluted shares outstanding 17,972,943 14,644,546
============ ============
9
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12 - Stock-Based Compensation - (continued)
Three Months Ended
--------------------------------------
February 28, 2005 February 29, 2004
----------------- -----------------
Earning (loss) per share:
Basic, as reported $ .06 $ (.02)
============ ============
Basic, pro forma $ .04 $ (.04)
============ ============
Diluted, as reported $ .05 $ (.02)
============ ============
Diluted, pro forma $ .04 $ (.04)
============ ============
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 2,225 and
29,725 shares of common stock were outstanding as of February 28, 2005 and
February 29, 2004, respectively, 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.
Note 13 - 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 and
expires on September 1, 2005. Borrowings under this line of credit were $-0- at
February 28, 2005 and November 30, 2004.
Note 14 - Stockholders' Equity
Private Placement Equity Transactions
On December 6, 2004, the Company issued to institutional investors 571,428
shares of the Company's common stock, together with additional investment rights
to acquire up to an additional 142,856 shares of common stock at a price of $11
per share, for $6,000,000. The fair value of these investment rights was
estimated at $207,000 and was included in additional paid-in capital. These
investment rights were exercised on February 14, 2005 for $1,572,000.
On February 14, 2005, the Company issued to institutional investors 635,555
shares of the Company's common stock, together with additional investment rights
to acquire up to an additional 158,888 shares of common stock at a price of
$11.75 per share, for $7,150,000. The fair value of these investment rights was
estimated at $174,000 and was included in additional paid-in capital. These
investment rights will expire thirty days after a registration statement is
declared effective by the US Securities and Exchange Commission.
Note 15 - 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
pursued by Regence and
10
QMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15 - Commitments and Contingencies
Litigation - (continued)
HeartMasters LLC against the reinsurer, Centre Insurance. The Company made an
advance payment on this guarantee of $1,150,001on June 15, 2004. The advance
payment could be subject to refund based upon certain recovery targets under the
Centre Insurance arbitration, if successful.
The dispute with Centre over the insurance coverage on all of the relevant
Regence disease management plans, for which coverage was purchased, is now the
subject of an arbitration proceeding. Initially, the Company sued Centre 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.
This settlement was in response to the following: HeartMasters LLC, a limited
liability company 50% owned by our IHMC subsidiary, had received a Demand for
Arbitration before the American Arbitration Association for claims under certain
terminated disease management agreements.
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." HeartMasters has demanded
payment of the insurance coverage. The dispute with Centre over the insurance
coverage, is now the subject of an arbitration proceeding in which HeartMasters
seeks payment of all policies.
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 February 28, 2005 total open commitments under these purchase
orders are approximately $301,000.
Note 16 - Recently Issued Accounting Standards
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first interim or
annual period beginning after June 15, 2005. We will adopt SFAS No. 123(R) on
September 1, 2005 using the modified prospective method. We have disclosed the
pro forma impact of adopting SFAS No. 123(R) on net income and earnings per
share for the three months ended February 28, 2005 and February 29, 2004 in Note
11, which includes all share-based payment transactions to date. We do not yet
know the impact that any future share-based payment transactions will have on
our financial position or results of operations.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
QMed(R), Inc. was incorporated in New Jersey in 1983 and reincorporated in
Delaware in 1987. Interactive Heart Management Corp. ("IHMC(R)") is a wholly
owned subsidiary of QMed, which was incorporated in 1995. IHMC developed and
often co-markets with QMed health care information and communication services to
health plans, governments and private companies. The services of QMed 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 care, and cost of diabetes, cardiovascular conditions,
including coronary artery disease ("CAD"), stroke, heart failure ("CHF"),
hypertension, hyperlipidemia and the cardiovascular complications of diabetes.
These systems are designed to aid health care physicians in the optimal use of
"evidence based" medical management for patients with these conditions including
co-morbidities, as well as those at high risk of developing these conditions.
The net impact of this approach is the improvement in health and the associated
reduction in mortality, morbidity and cost. As of February 28, 2005, we had 2
contracts to provide these services to two Medicare demonstration projects and
13 licensed health plans in 11 states covering approximately 1.1 million health
plan members.
Our disease management program is for members identified with chronic disease
conditions as well as being at high risk for significant and costly episodes of
care. The program is supported by technology that is designed to deliver the
best clinical and financial outcomes to our customers.
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 our
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 the timing and costs of implementation, and the effect, of
regulatory rules and interpretations relating to the Medicare
Prescription Drug, Improvement, and Modernization Act 2003;
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,
complete and accurate data that is essential to the operation
and measurement of our performance under the terms of our
health plan contracts and our accurate analysis of such data;
o our ability to resolve favorably contract billing and
interpretation issues with our 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 chronic conditions,
including coronary artery disease ("CAD"), stroke, heart
failure ("HF"), hypertension, hyperlipidemia and the
cardiovascular complications of diabetes with which we have
executed disease management contracts;
o the impact of the introduction of new technologies;
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;
12
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 our ability to accurately estimate our performance and revenue
recognition under the terms of our contracts;
o our ability to develop new products and deliver outcomes on
those products;
o our ability to implement our strategy within expected cost
estimates;
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
February 28, 2005. 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 and government agencies
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
Advantage). 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,
which always includes the amount, if any, that may be subject to refund for
retroactive member terminations and a shortfall in performance. We adjust or
defer revenue for contracts where we believe performance is short of contractual
obligations, 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. We recognize revenue, in accordance
with SEC Staff Accounting Bulletins No. 101 and No. 104, as follows: 1.) we
recognize the fixed portion of our monthly fee as revenue during the period we
perform the services; 2.) we recognize the performance - based portion of the
monthly fees based on indicators of performance to date in the contract year;
and 3.) we recognize previously recorded deferred revenue upon final settlement
of the contract measurement year. Adjustments for shortfalls in performance
targets 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 assess our estimates by analyzing various information including but not
limited to, medical claims data, prior performance under the contract and review
of physician and patient participation levels. 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 physician and patients participation levels or other data
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, which could be subject to refund, are not recorded as revenue
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
13
the medical claims process and the lag time associated with it. In most cases,
complete paid claims data is not available until up to six months after claims
are incurred. Although interim data measurements are indicative of performance
objectives, actual results could differ from our estimates.
The settlement process under a contract, which includes the settlement of any
performance-based fees and involves reconciliation of health-care claims and
clinical data, is generally not completed until sometime after the end of the
contract year. Data reconciliation differences between the Company and the
customer can arise due to health plan data deficiencies, omissions and/or data
discrepancies, for which the Company negotiates with the plan until agreement is
reached with respect to identified issues.
As of February 28, 2005, approximately 43.0% of disease management services were
derived from three health plans that each comprised more than 10% of our
revenues.
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 28, February 29, % Changes
2005 2004 2005 vs. 2004
--------------- --------------- --------------
Revenue 100.0% 100.0% 25.4%
Cost of revenue 38.3 52.8 (9.0)
--------------- ---------------
Gross Profit 61.7 47.2 63.8
--------------- ---------------
Selling, general and administrative 35.8 46.0 (2.7)
Research and development 5.6 6.7 5.3
--------------- ---------------
(Income) loss from operations 20.3 (5.5) *
Interest expense (0.1) (0.2) 4.5
Interest income, net 0.9 0.6 74.9
Loss on operations of joint venture (1.5) (2.0) (5.5)
Other income 0.0 0.3 *
--------------- ---------------
Income (loss) before tax (provision) benefit 19.6 (6.8) *
Income tax (provision) benefit (1.2) (0.1) *
--------------- ---------------
Net income (loss) 18.4 (6.9) *
=============== ===============
* Not meaningful
Three Months Ended February 28, 2005 Compared to Three Months Ended February 29,
2004
Revenue for the three months ended February 28, 2005 increased approximately $1
million or 25.4% over the three months ended February 29, 2004. This increase
consists of (i) approximately $2.5 million of additional revenue related to new
contracts entered into since the three months ended February 29, 2004. This
increase was offset by a reduction in revenue of approximately $1.5 million
related to market exits and reductions in membership under existing disease
management programs and the termination of a disease management program under
agreements with a customer in Oregon.
Gross profit margins for the three months ended February 28, 2005 increased to
61.7% from 47.2% for the three months ended February 29, 2004. The percentage
increase in 2005 primarily relates to an increase in revenue attributable to
increased members enrolled in contracts that began in 2004. While the direct
costs associated with the initial implementation of these contracts were
incurred in 2004, the incremental costs associated with the increased enrollment
were not as significant as the initial costs. In addition, the company
experienced cost reductions associated with efficiencies related to enhancements
in our program.
14
Selling, general and administrative expenses for the three months ended February
28, 2005 were comparable to the three months ended February 29, 2004.
Research and development expenses for the three months ended February 28, 2005
were comparable to the three months ended February 29, 2004. 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 ventures for the three months ended February 28,
2005 were flat compared to the three months ended February 29, 2004. The expense
for the three months ended February 28, 2005 primarily represents legal fees for
the arbitration with the Centre Insurance and costs related to a joint venture
entered into with two partners to provide services under a disease management
contract in Minnesota. Loss on operations of joint venture for the three months
ended February 28, 2004 primarily represents 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 $47,000,000 less applicable expenses.
We had working capital of approximately $20.8 million at February 28, 2005
compared to approximately $5.8 million at November 30, 2004 and ratios of
current assets to current liabilities of 7.1:1 as of February 28, 2005 and 3.1:1
as of November 30, 2004. The working capital increase of approximately $15
million was due to two private placement equity transaction during the quarter,
whereby the company sold common stock for approximately $13.9 million, net of
expenses, proceeds from the sale of common stock through the exercise of
outstanding options and warrants of approximately $209,000 and cash flow from
operations of approximately $1.5 million. In September 2001 we entered into a
$1,000,000 line of credit agreement with Wachovia Bank, National Association.
The line is collateralized by securities owned by the Company and expires on
September 1, 2005. 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 28, 2005 no debt was outstanding and the entire
$1,000,000 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 and our existing commitments. 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.
Material Commitments
The following schedule summarizes our contractual cost obligation as of February
28, 2005 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 252,000 129,000 123,000 - -
Operating Leases 1,094,000 494,000 600,000 - -
Unconditional Purchase Obligations 301,000 301,000 - - -
Other Long-Term Obligations 545,000 545,000 - - -
Total Contractual Cash Obligations $ 2,192,000 $ 1,469,000 $ 723,000 $ - $ -
- ---------------------------------------- -------------- ----------------- --------------- ------------- --------------
15
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 28, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
16
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
for claims under certain terminated disease management
agreements. . The claims alleged breach of disease management
agreements between Regence of Washington and Oregon and
HeartMasters LLC. 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 denied the claims of Regence and
asserted counter claims. In addition, Heartmasters demanded
payment of the insurance coverage.
On June 15, 2004, the Company entered into an agreement to
settle its dispute with The Regence Group, including all
issues surrounding the HeartMasters LLC's arbitration. The
settlement agreement provided 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 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 pursued by Regence and HeartMasters LLC against the
reinsurer, Centre Insurance. . The Company made an advance
payment on this guarantee of $1,150,001on June 15, 2004. The
advance payment, and any subsequent payment, could be subject
to refund based upon certain recovery targets under the Centre
Insurance arbitration, if successful.
The dispute with Centre over the insurance coverage on all of
the relevant Regence disease management plans, for which
coverage was purchased, is now the subject of an arbitration
proceeding. Initially, the Company sued Centre 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 other amounts we may be required to pay will not
have a material effect on the financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Non applicable
.. (b) Non applicable
(c) 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.
Item 6. Exhibits
(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).
17
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.
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 4, 2005
18