UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: November 30, 2007

 

o 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)

 

 

 

Registrant’s telephone number, including area code: (732) 544-5544

 

Securities registered pursuant to Section 12 (b) of the Act: None

 

Securities registered pursuant to

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No [X ]

 

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No [ X ]

 

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 o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements by reference in Part III of this Form 10-K or any amendment to the Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Accelerated filer o Non-accelerated filer x

 

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No [ X ]

 

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $42,970,220 on May 31, 2007, based on the last reported sales price of the registrant’s common stock on the NASDAQ Small Cap Market on such date. All executive officers, directors and 10% or more beneficial owners of the registrant’s common stock have been deemed, solely for the purpose of the foregoing calculation, “affiliates” of the registrant.

 

As of March 10, 2008, there were 17,081,688 shares of the registrant’s common stock, $.001 par value, issued and outstanding.

 

Documents incorporated by reference:

 

 

its 2007 Annual Meeting (to be filed in definitive

form within 120 days of the Registrant’s Fiscal

Year End)

 

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PART I

 

Item 1. Business

 

Forward-Looking Statements

 

Certain matters discussed herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and as such may involve risks and uncertainties. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify certain forward-looking statements. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. Our actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such forward-looking statements. For discussion of the factors that might cause such a difference, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other factors described in this Item 1 under “Industry and Other Risk Considerations.” We undertake no obligation to update or revise such forward-looking statements.

 

General

 

During November 2007, QMed Inc. ceased operations of its Managed Care Special Needs Plans and related services because the Company was unable to raise sufficient capital to fund its current reserve requirements as well as future capital requirements. The Company significantly reduced its staff and other operating expenses while continuing to operate as a disease management service provider. The Company also sold its medical equipment business to an unaffiliated third party during October 2007. As a result of the sale and termination of Special Needs plan services, the operations of QMedCare, Inc., QMedCare Dakota, LLC, Lakeshore Captive Insurance Co. and QMedCare of New Jersey, Inc., together with the medical equipment business are presented as discontinued operations.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company continues as a going concern that contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, the ability of the Company to continue as a going concern will be dependent upon its ability to raise additional capital or obtain other sources of financing in the immediate future necessary to meet its obligations and continue operations.

 

During the year ended November 30, 2007, the Company incurred net losses totaling $11,252,361 and utilized cash in operating activities of $12,745,008. These factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from this uncertainty. If the Company is unable to raise additional capital or obtain other sources of financing to meet its working capital requirements, it will have to cease business altogether.

 

Management’s plan is to raise additional capital through a variety of fund raising methods including the potential sale of its assets, and to pursue all available financing alternatives as necessary to fund operations. The Company needs to raise additional funds in the immediate future in order to continue its operations. Whereas the Company has been successful in the past in raising capital, no assurance can be given that these sources of financing will continue to be available to the Company and/or that demand for the Company’s equity/debt instruments will be sufficient to meet its capital needs. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

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To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on the Company's operations.

 

History of QMed Inc.

 

QMed^®, Inc. (QMed) was incorporated in New Jersey in 1983 and reincorporated in Delaware in 1987. QMed owns 100% of the stock of the following companies: Interactive Heart Management Corp. (“IHMC^®”), QMedCare, Inc., QMedCare of New Jersey, Inc. and Positive Directions, Inc.

 

IHMC was incorporated in 1995 and developed and often co-markets with QMed, Inc. health care information and communication services to health plans and the government.

 

QMedCare, Inc. was incorporated in December 2004. QMedCare is the sole member of QMedCare Dakota, LLC and owns 100% of Lakeshore Captive Insurance Company. These organizations assisted with the operation of a series of specialty Managed Care products serving a high-risk population of Medicare beneficiaries in South Dakota.

 

QMedCare of New Jersey, Inc. was incorporated in January 2006. This organization was established as for the purpose of operating a Medicare Special Needs Plan designed specifically for Medicare beneficiaries suffering from certain chronic conditions.

 

In April 2005, QMed acquired 100% of the stock of Positive Directions, Inc., (formerly known as Health e Monitoring, Inc.) a privately owned firm offering a comprehensive program for healthy weight and lifestyle management. In October 2005, QMed, Inc. acquired all of the assets of Disease Management Technologies, Inc. (“DMT”). DMT has developed a website for a health and wellness program.

 

The Company operated its specialty managed care products in South Dakota until November 2007 and its Medicare Special Needs Plan in New Jersey until December 2007. The Company continues to operate its disease management programs under QMed/IHMC as well as Positive Directions, Inc.

 

Our executive offices are located at 25 Christopher Way, Eatontown, New Jersey 07724 and our telephone number is (732) 544-5544.

 

We maintain an Internet website at www.qmedinc.com. We make available free of charge on our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after we electronically file such material, or furnish it to the Securities and Exchange Commission.

 

QMed, Inc./IHMC

 

The services of QMed include “ohms|cvd^®”(Online Health Management System for Cardiovascular Disease) which is an integrated cardiovascular disease management system. ohms|cvd^® includes related systems to assist health plans and government organizations 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 provide health care physicians with patient specific recommendations focused on 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.

 

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QMed is a technology formulated and fully interactive disease management company that synchronizes the latest scientific evidence to insure that the right care is received by patients all of the time. QMed is dedicated to improving clinical outcomes for individuals, providing decision support for physicians, and reducing costs for payors.

 

QMed also empowers individuals using tools such as health education, training in self-monitoring, and personalized coaching by trained professionals. In addition, timely, clinically validated, actionable “evidence based” information is provided to physicians to proactively prevent medical episodes that can result in unnecessary emergency room visits and hospitalizations. QMed has demonstrated results that our programs reduce hospitalizations and overall medical costs.

 

QMed’s dedicated professionals follow nationally accepted clinical standards of care to complete their mission. Medical expertise combined with the most current computer-based technology offers programs that are highly scalable and offer reliable results.

 

ohms|cvd^® Systems

 

ohms|cvd^® is our proprietary medical system designed as a total disease management process for Heart Failure (HF), Coronary Artery Disease (CAD), Stroke, Diabetes and Diabetic cardiovascular complications, Hypertension, Hyperlipidemia and other co-morbidities utilizing “best practice” solutions in the management of these diseases and conditions. The entire system non-invasively quantifies the probable risk of a clinical event most significantly a cardiovascular, cerebrovascular or heart failure event, and rationally directs the patient to appropriate therapy with the accent on early detection, the modification of critical risk factors and medical intervention. The ohms|cvd^® system expands upon our core technology, first incorporated in our ohms|cvd^® system, adding the capability to manage patients that have heart failure, diabetes, diabetic cardiovascular complications and the risk of stroke.

 

The systems produce clinical recommendations for physicians tailored to an individual patient. Significantly, each individual patient’s medical history inclusive of co-morbidities, risk factor profile, current medication, and other relevant patient specific information are electronically entered into the systems’ “best practices” database for primary and secondary prevention analysis and treatment.

 

The systems’ centralized digital storage of each patient’s iterative review affords continuous description and analysis of quantifiable results including:

 

 

Our proprietary medical system, ohms|cvd^®, is an active disease and care management process emphasizing a continuum of care, including modification of patient risk factors. Use of this system can result in important cost-effective improvements in diabetic care, coronary, cerebrovascular and heart failure events, improvements that have been verified by empirical health and cost outcomes. The ohms|cvd^® system continuously monitors the care process, and thus, results are reported as outcomes.

 

At November 30, 2007, we had contracts with the Center for Medicare and Medicaid Services and 4 health plans to provide disease management services in multiple health plan markets in 4 states. The number of members under contract was as follows:

 

 

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At November 30, 2007, of the approximately 725,000 plan members under contract, we had approximately 694,000 commercial members and 31,000 Medicare Advantage members.      

 

Medicare Demonstration Projects

 

The Centers for Medicare and Medicaid Services (“CMS”) selected us to participate in two demonstration projects:

 

 

CMS is a federal agency within the U.S. Department of Health and Human Services. CMS runs the Medicare and Medicaid programs – two national health care programs that benefit millions of Americans. CMS, with the Departments of Labor and Treasury, helps millions of Americans and small companies get and keep health insurance coverage, and eliminate discrimination based on health status for people buying health insurance. CMS spends billions of dollars a year buying health care services for beneficiaries of Medicare, Medicaid and SCHIP. CMS among other things:

 

 

Medicare Coordinated Care Demonstration

 

In fiscal 2002, we received a contract award to participate in the Medicare MCCD project. Our ohms|cad^® program is the only one under this demonstration that will be evaluated specifically for management of CAD.

 

CMS designed MCCD to evaluate the cost-effectiveness of reimbursing disease management services in the Medicare fee-for-service model. In accordance with the Balanced Budget Act of 1997, which mandated the demonstration, CMS “... may issue regulations to implement, on a permanent basis, the components of the demonstration projects that are proven to be cost-effective for the Medicare program.”

 

Under the award, we are implementing our ohms|cad^® disease management technology in a controlled randomized study of Medicare beneficiaries who have been diagnosed previously with CAD. Patient enrollment in California commenced in early 2002. As a result of our success in the initial enrollment stage of the project, CMS authorized doubling the patient base of the project with commensurate remuneration. This project was originally scheduled to end in January 2006 but has been extended by CMS through June 30, 2008. In January, based upon positive results to date, CMS notified the Company of an additional 2 year extension of this project through June 30, 2010.

 

BIPA Medicare Disease Management Demonstration

 

On October 23, 2002, CMS selected QMed, Inc., PacifiCare Health Systems, Inc., with its subsidiary, Prescription Solutions, and Alere Medical, Inc. – operating jointly as “HeartPartners” – to participate in its BIPA Disease Management Demonstration Project. 

 

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The HeartPartners Program provided disease management services and a comprehensive tiered prescription drug plan for chronically ill Medicare fee-for-service beneficiaries suffering from congestive heart failure. The program also addressed the significant co-morbidities of coronary artery disease and diabetes. 

 

PacifiCare Health Systems, Inc. notified CMS that PacifiCare intended to terminate this project not later than February 28, 2006 and CMS agreed to allow PacifiCare to terminate this contract effective February 28, 2006. This termination resulted in a reduction in disease management revenue of approximately $800,000 in fiscal year 2007 as compared to fiscal year 2006 and $2.7 million in fiscal year 2006 as compared to fiscal year 2005.

 

Discontinued Operations

 

As a result of the Medicare Modernization Act of 2003 (MMA), new business opportunities were created by the creation of Special Needs Plans for chronically ill Medicare beneficiaries. We entered this market through our wholly owned subsidiary QMedCare, Inc.

 

QMedCare, Inc. is the sole investor in QMedCare Dakota, LLC, a company specifically formed to administer a Medicare Advantage Coordinated Care Special Needs Plan for DAKOTACARE, a health maintenance organization in South Dakota. The Special Needs Plan was marketed as HeartLine Plus and provided exclusive health coverage for heart and stroke patients. This plan operated as a strategic alliance between QMedCare Dakota, LLC and DAKOTACARE. The goal of this alliance was to reduce disease complications, hospitalizations, and emergency room visits for members, and to improve their quality of life.

 

As part of its initiatives, QMedCare, Inc. established a Captive Insurance Company in South Carolina, LakeShore Captive Insurance Company, to provide reinsurance for the Special Needs Plan in South Dakota. Through a retrocessional reinsurance agreement with Ace American Insurance Company and its related agreements with DAKOTACARE, effective January 1, 2006 through January 1, 2008, LakeShore Captive Insurance Company assumes 100% of the risk associated with the operations of the Special Needs Plan in South Dakota. We reduced our exposure by insuring levels of coverage through reinsurance in excess of the first $200,000 of loss to a limit of $2,000,000 arising from claims by any one original insured. Upon termination of the agreement, the underlying policies in force at the time of the reinsurance coverage termination continue during the run-off period until they expire.

 

On November 1, 2007, Lakeshore Captive Insurance Company ceased its underwriting activities as it was unable to meet its current and future capital requirements. On March 7, 2008, Lakeshore Capitve Insurance Company executed a settlement agreement with DAKOTACARE limiting it and its parent and affiliates liabilities associated with all activities of the South Dakota SNP to $750,000. This settlement amount will be funded by Lakeshore Captive Insurance. Subsequent to the settlement payment, Lakeshore will file for dissolution with the State of South Carolina.

 

QMedCare of New Jersey, Inc. was incorporated in January 2006. This organization is a licensed Health Maintenance Organization in certain counties in New Jersey established for the purpose of operating a Medicare Special Needs Plan designed specifically for Medicare beneficiaries suffering from certain chronic conditions. The Company commenced enrollment in January 2007. Due to capital restrictions imposed on the Parent Company by its South Dakota operations, the Company, together with the New Jersey Department of Banking and Insurance and CMS, determined to conclude the operations of QMedCare of New Jersey, Inc. effective in November 2007. QMedCare of New Jersey, Inc. is currently winding down its operations.

 

Positive Directions, Inc.

 

Positive Directions, Inc. is a wholly owned subsidiary of QMed, Inc. In May of 2005, QMed, Inc. acquired Positive Directions, Inc., (formerly Health e Monitoring, Inc.), a privately owned firm offering a comprehensive program for healthy weight and lifestyle management. In October 2005, QMed, Inc. acquired all of the assets of Disease Management Technologies, Inc. (“DMT”). DMT has developed a website for a health and wellness program.

 

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Its program focuses on the role of wellness and prevention to establish healthy lifestyle habits, dietary and nutrition education, exercise regimens and behavioral modifications. QMed, Inc. will incorporate this program as part of its disease management product offerings.

 

Business Strategy

 

Our strategy is to sell, merge or continue as a DM service Company. In the event we are successful, we will (1) obtain adequate financing through various alternatives; (2) pursue contract opportunities with new health plans to provide disease management services; (3) add disease states to our platform; and (4) pursue other opportunities within the healthcare industry. We anticipate that we will utilize our medical information-communication technologies to gain and maintain competitive advantage in delivering care coordination and its narrower subset, disease management services.

 

Marketing

 

We market our disease management services to health plans, large physician practice groups, and governmental agencies through our sales staff. A key to the marketing of our services is the relationships we develop with providers, physicians and patients. QMed builds the critical links among them that result in improved patient outcomes and reduced costs.

 

We have developed a comprehensive Medicare strategy, and we project that a large portion of our future business will be in contracts with the federal and state governments. In our current Medicare projects, our relationships with physicians have given us a key advantage in identifying patients for the projects. We will continue to promote these relationships, as they are critical to patient enrollment.

 

Contracting efforts are conducted and coordinated by senior management personnel, with the aid, where appropriate, of certain independent consultants. We generally pursue business opportunities through the traditional competitive process where a Request for Proposals (“RFP”) or a Request for Qualifications (“RFQ”) is issued by a managed care, employer or government organization, to which a number of companies respond. We utilize demographic and cost of service data from the organization as well as statistical information to conduct an initial cost analysis to determine program feasibility. As part of our sales efforts, management meets with appropriate personnel from the organization making the request to best determine the organization’s needs. In the RFQ process, the requesting agency selects a firm it believes is the most qualified to provide the requested services and then negotiates the terms of the contract with that firm, including the price at which its services are to be provided.

 

 

We believe ohms|cvd^® offers a unique solution for cardiovascular disease management. However, there are several entities, including pharmaceutical companies, pharmacy benefit managers and independent companies that are pursuing disease management, which we consider to be competition.

 

We believe we have competitive advantages because our clinical platform links the physician, patient and nurse to a coordinated plan of care therefore improving adherence to evidence-based medicine and reducing “gaps in care”. We have a specialty field management team dedicated to working directly with physicians and their office staff to promote the benefits of our disease management program. The entire management system and its components are proprietary and patented. We have documented improvements, for a health plan customer, in its HEDIS (Health Plan Employer Data and Information Set) audit, a competitive advantage for each customer, and the financial and clinical outcomes for our programs. However, we cannot assure you that we can compete effectively with these other entities in the marketplace.

 

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Competition may increase and such competition could come from companies that are considerably larger and have greater financial and marketing resources.

 

Consolidation has been, and may continue to be, an important factor in all aspects of the health- care industry. We cannot assure you that we can effectively compete with companies formed as a result of industry consolidation or that we can retain existing customers if they are acquired by other health plans which already have or are not interested in health and care support programs.

 

Research and Development

 

In fiscal 2007, 2006 and 2005, we expended approximately $2,096,000, $1,558,000 and $1,323,000 respectively, for research and development. During these years, research and development was primarily focused on the development of patient care programs and advanced algorithms which coordinate care more rigorously and cost-effectively, and systems which improve our patient out-reach capabilities.

 

Patent Protection and Proprietary Information

 

We maintain a policy of seeking patent protection in the United States and other countries in connection with certain elements of our technology. Our Monitor One technology has been granted patents in the United States (Patent No. 4679144), Canada (Patent No. 1281081), and Spain (Patent No. 547040). We received a U.S. patent for the nDx technology on March 29, 1994 (Patent No. 5299119) and a patent for the ohms|cvd^® system (Patent No. 5,724,580) on March 3, 1998. Certain patents relating to our technology began expiring in 2004. In October 2006, QMed filed an application for a patent for certain elements of our technology related to the collection of medical information and its identification in relation to patient diagnoses. The patent application is currently pending.

 

The patent laws of foreign countries may differ from those of the United States as to the patentability of our products and, accordingly the degree of protection afforded by the pendency or issuance of foreign patents may be different than the protection afforded under corresponding United States patents. There can be no assurance that patents will be obtained in foreign jurisdictions with respect to our products or that the United States patents and any foreign patents will significantly protect or be commercially beneficial to us.

 

We do not intend to rely solely on patent protection for our proprietary technology. We also rely upon trade secrets, copyright protection, confidentiality agreements with employees, know-how, expertise, and lead-time to attain and maintain our competitive position. To the extent that we rely upon these measures, there can be no assurance that others might not independently develop similar technology or that secrecy will not be breached.

 

We sold the patent for the nDx technology in October 2007 as part of the sale of the medical equipment business to Innovative Diagnostics for $230,000 in cash. See Note 1 – Discontinued Operations.

 

Privacy Issues

 

Because our applications and services are utilized to transmit and manage highly sensitive and confidential health information, the security and confidentiality concerns of our customers and their patients are a primary concern. In order to enable our applications and services to transmit sensitive and confidential medical information, we utilize advanced technologies designed to ensure a high degree of security. These technologies generally include:

 

 

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Our customers also implement their own procedures to protect the confidentiality of information being transferred into and out of their computer network. Despite these efforts, it is not possible to assure 100% data security.

 

Internally, we work to ensure the safe handling of confidential data by employees by:

 

 

We monitor proposed regulations that might affect our applications and services, in order to ensure that we are in compliance with such regulations when and if they are affected.

 

Government Regulation

 

HEALTHCARE REGULATION. As a participant in the healthcare industry, our operations and relationships are subject to regulation by federal and state laws and regulations and enforcement by federal and state governmental agencies. Sanctions may be imposed for violation of these laws. We believe our operations are in substantial compliance with existing laws that are material to our operations.

 

The cost of complying with our contractual privacy obligations has not, to date, had a material negative impact on our results of operations and financial condition. In 2005, health plans, most health-care providers and certain other entities were required to comply with federal security regulations issued pursuant to HIPAA, which require the use of administrative, physician, and technical safeguards to protect the confidentiality, integrity and availability of electronic individually-identifiable health information.

 

FDA REGULATION. The Food and Drug Administration, or FDA, generally has the authority to regulate medical devices including computer applications when devices are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. We do not believe that any of our current services are subject to FDA regulation as medical devices, however, expansion of our application and service offerings could subject us to FDA regulation.

 

Our products, to the extent they may be deemed “medical devices,” are regulated by the FDA under the Federal Food, Drug and Cosmetics Act (the “FDCA”) and related regulations.

 

All medical devices sold in interstate commerce are subject to FDA clearance. Our monitors were subject to pre-market notification (510(k)), pursuant to which the FDA determines whether a new medical product is “substantially equivalent” to a product that was on the market prior to May 28, 1976. Products found to be “substantially equivalent” to those products may thereafter be sold. The FDA has the authority, which it has not yet exercised, to issue performance standards for the type of monitors manufactured by us.

 

Regulations by the FDA, known as Good Manufacturing Practices (“GMP”), provide standards for manufacturing processes, facilities, and record-keeping requirements with which our contract manufacturers and we must also comply. We believe that the manufacturing and quality control procedures employed by us and our contract manufacturers meet the GMP requirements. If the FDA should determine that our monitors were not manufactured in accordance with GMP’s, it has the authority to order us to cease production and could require us to recall products already sold by us. In addition, any facilities used to manufacture or assemble our products will be subject to inspection by the FDA at least biannually.

 

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The FDCA is not the exclusive source of regulation of medical devices and, by its terms, allows state and local authorities to adopt more stringent regulations for medical devices.

 

REGULATION OF THE INTERNET. Laws and regulations applicable to communications or commerce over the Internet may be adopted covering user privacy, pricing, content, copyright, distribution, and characteristics and quality of products and services. In addition, some states or foreign countries could apply existing laws concerning issues such as property ownership, sales tax, libel, and personal privacy to transactions conducted over the Internet. Additional laws or regulations or application of laws to transactions over the Internet could require us to change our operations and/or increase our cost of doing business.

 

To our knowledge and other than what we have described in this report and other than occupational health and safety laws and labor laws which are generally applicable to most companies, our products are not subject to governmental regulation by any federal, state or local agencies that would affect the manufacture, sale or use of our products. We cannot, of course, predict what sort of regulations of this type may be imposed in the future, but we do not anticipate any unusual difficulties in complying with governmental regulations that may be adopted in the future.

 

Insurance

 

We maintain managed care errors and omissions, product liability, directors and officers, reinsurance, and general liability insurance for our locations and operations. While we believe our insurance policies to be adequate in amount and coverage for our current operations, there can be no assurance that coverage is sufficient to cover all future claims. In recent years, the cost of liability and other forms of insurance have increased significantly. There is no assurance that such insurance will continue to be available in adequate amounts or at reasonable costs. Our liability insurance coverage provides for certain deductible levels to be paid by us. We also maintain property and workers compensation insurance for each of our locations with commercial carriers on relatively standard commercial terms and conditions.

 

Employees

 

We had 28 employees as of November 30, 2007, none of which are subject to a collective bargaining agreement. We believe our relations with employees are good.

 

Executive Officers of the Registrant

 

The following sets forth certain information concerning our executive officers as of January 31, 2008:

 

 

Officer and Director

 

Officer and Treasurer

 

 

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Item 1A. Risk Factors.

 

See Management’s Discussion and Analysis and Risk Factors contained later in this report.

 

Item 1B. Unresolved Staff Comments.

 

There are no unresolved staff comments.

 

Item 2. Properties.

Our executive offices occupy approximately 20,000 square feet of office space in Eatontown, New Jersey, pursuant to a lease agreement, which expires in November 2012. These facilities are used principally for administrative offices, sales training, and marketing. We are currently negotiating with our landlord to reduce the office space to meet our present needs.

 

 

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 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 could have ranged between $0 and $2,300,000 and was contingent upon the outcome of a separate arbitration being pursued by Regence and HeartMasters LLC against the insurer, Centre Insurance. The Company made an advance payment on this guarantee of $1,150,001 on June 15, 2004. The advance payment, and any subsequent payment, was 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, was 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.

 

On August 18, 2005, HeartMasters LLC and The Regence Group entered into a settlement agreement with Centre, resolving the dispute. The settlement resulted in the elimination of any further contingent liability for the Company, under the guarantee to Regence. The Company received $500,000 on September 15, 2005, which has been reflected as revenue for the period ended November 30, 2005.

 

On January 30, 2006, the Company filed an action against Healthcare First, a division of Gallagher Insurance Services, Inc., and of Arthur J. Gallagher & Co. (“HCF”), seeking recovery in the amount of approximately $3,700,000 against the financial intermediary/broker involved in obtaining the insurance policies from Centre Insurance, which was the subject of the prior proceeding against Centre. Following a mediation process, the matter was resolved on terms including a payment to the Company of $400,000, which was received in June 2007.

 

On November 21, 2005, the Company brought an arbitration proceeding against Alere Medical Incorporated (“Alere”), seeking damages and an award for unjust enrichment of approximately $17,000,000, on allegations that Alere materially misled and misrepresented to the Company, its intentions to enter into long-term agreements with the Company for the provision of disease management services.

 

In the arbitration, Alere counterclaimed, asserting that, under a seventh agreement between the parties, there was no obligation to enter into a long term agreement, and thus, claimed Alere, the Company’s claims were not well founded and Alere is allegedly entitled to damages for breach of the duty of good faith and fair dealing, as well as its attorneys’ fees. Alere also filed a lawsuit in state court, in the Second Judicial District Court of Nevada, Washoe County, seeking essentially the same relief. Alere sought damages in an unspecified amount stated to be in excess of $40,000.

 

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Following extensive discovery, these matters were mediated, and both the arbitration and the litigation were resolved during December 2006. As part of the resolution, in December 2006, the Company received a payment totaling $1,975,000 bringing these matters to a conclusion.

 

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 4. Submission of Matters to a Vote of Security Holders.

 

 

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PART II

 

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters.

 

Market Price and Dividend Information

 

Our common stock is traded in the Nasdaq Small Cap Market, under symbol “QMED”. The following table sets forth the range of high and low bid quotations for our shares reported by the Nasdaq Small Cap Market. This information represents inter-dealer quotations, without retail mark-ups, markdowns, or commissions, and does not necessarily represent actual transactions.

 

 

Approximate Number of Holders of Common Stock

 

As of March 10, 2008, the Company’s common stock was held of record by 260 persons. Based upon requests from record holders for additional materials for our 2007 annual meeting, we believe that there are at least 3,500 beneficial holders of our common stock. On March 10, 2008, the closing price reported was $.13.

 

Dividends

 

We have never paid a cash dividend on our common stock. It is the current policy of our Board of Directors to retain any earnings to finance the operations and expansion of our business. The payment of dividends in the future will depend upon our earnings, financial condition and capital needs and on other factors deemed pertinent by the Board of Directors.

 

Recent Sales of Unregistered Securities

 

We did not issue any unregistered securities during the fiscal fourth quarter of 2007.

 

Repurchase of Securities

 

We have not repurchased any of our securities in the fiscal fourth quarter of 2007.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

See Item 12 of this report.

 

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Item 6. Selected Financial Data.

 

 

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⁽¹⁾ Amounts have been restated as a result of discontinued operations consisting of the Special Needs Plans in New Jersey and South Dakota and the medical equipment business. Selected quarterly financial data shown below has also been restated as a result of these discontinued operations.

 

 

Selected Quarterly Financial Data (Unaudited)

 

 

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results
             of Operations.

 

The following discussion should be read in conjunction with our Consolidated Financial Statements, and Notes thereto, contained elsewhere in this report. 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:

 

 

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Critical Accounting Policies and Estimates

 

Our accounting policies are described in Note 1 of the consolidated financial statements included in this Annual Report on Form 10-K for the fiscal year ended November 30, 2007. 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 policies 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 have typically provided that a portion of our fees may be “performance-based”. As of November 30, 2007, the Company did not have any fee risk based contracts. Performance-based contracts have varying degrees of risk associated with our ability to deliver the guaranteed financial cost savings or certain clinical measures. In some 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 a member’s 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 contracts 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 patient 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

 

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entitled “contract billings in excess of revenues.” Under performance based arrangements, the ability to make estimates at interim periods can be challenging due to the inherent nature of the medical claims process and the lag time associated with it. In most cases, 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 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 customer until agreement is reached with respect to identified issues.

 

During the fiscal year ended November 30, 2007, approximately 95% of disease management services were derived from five health plans that each comprised more than 10% of the Company’s revenues. During the fiscal year ended November 30, 2006, approximately 63% of disease management services were derived from two health plans that each comprised more than 10% of the Company’s revenues. During the fiscal year ended November 30, 2005, approximately 69% of disease management services were derived from three health plans that each comprised more than 10% of the Company’s revenues. The Company continues to anticipate a concentration of revenues from a limited number of customers in fiscal year 2008.

 

During fiscal 2008, the Company anticipates one contract to comprise approximately 40% of total revenues. This contract has an expiration date of June 3, 2008 and the Company is currently negotiating a contract renewal however no assurance can be given that such negotiations will be successful.

 

In a letter dated October 4, 2006, the Company was notified by HealthSuite Partners, a joint venture with Alere Medical, Airlogix and the Company, that the HealthSuite Partners contract with HealthPartners, a Minnesota managed care organization, would not be extended beyond April 5, 2007. This notice of nonrenewal resulted in a reduction in revenue of approximately $2.3 million in 2007.

 

Impairment of Intangible Assets

 

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is required to review intangible assets for impairment on an annual basis or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable.

 

The Company amortizes other identifiable intangible assets, such as acquired technologies, customer contracts, and other intangibles, on the straight-line method over their estimated useful lives, except for trade names, which have an indefinite life and are not subject to amortization. The Company reviews intangible assets not subject to amortization on an annual basis or more frequently whenever events or circumstances indicate that the assets might be impaired. The Company also assesses the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable.

 

If the Company determines that the carrying value of other identifiable intangible assets may not be recoverable, the Company calculates any impairment using an estimate of the asset’s fair value based on the projected undiscounted cash flows expected to result from that asset, including eventual disposition. During the year ended November 30, 2006, the company recorded an impairment charge of approximately $32,000.

 

Future events could cause the Company to conclude that impairment indicators exist and that acquired intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

 

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Share Based Compensation

 

On December 1, 2005, we adopted SFAS No. 123(R), “Share-Based Payment,” which requires the Company to measure and recognize compensation expense for all share-based payment awards based on estimated fair values at the date of grant. Determining the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and expected stock option exercise behavior. In addition, it requires judgment in estimating the number of share-based awards that are expected to be forfeited. The Company contracts with a third party to assist in developing the assumptions used in estimating the fair values of stock options.

 

Recent Accounting Pronouncements

 

Refer to note 1 in the accompanying consolidated financial statements.

 

Results of Operations

 

The following table presents the percentage of total revenue for the periods indicated and changes from period to period of certain items included in the Company’s Consolidated Statements of Operations.

 

 

* Not meaningful

 

Fiscal 2007 Compared to Fiscal 2006

 

Revenue for fiscal year 2007 decreased approximately $2.9 million or 35.5% as compared to fiscal year 2006. This decrease is attributable to (i) a decrease of approximately $5.2 million in revenue related to the expiration of five contracts; (ii) a decrease of approximately $49,000 of revenue related to a reduction in health plan membership associated with an existing contract; and (iii) a decrease of approximately $182,000 related to a reconciliation of performance measurements under contracts in fiscal 2006. These decreases were offset by (i) an increase in revenue of approximately $1,368,000 related to increasing enrollment in two existing contracts and the commencement of a new contract during the first quarter of fiscal 2007; (ii) the recognition of approximately $550,000 of revenue related to the reconciliation of performance measurements under a contract in fiscal 2007; and (iii) the reduction of approximately $635,000 in deferred revenue under two contracts in fiscal 2006.

 

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Gross profit margins for fiscal year 2007 increased to 47.8% from 41.4% for fiscal year 2006. This increase is related to (i) a decrease of approximately $1,994,000 of labor costs associated with the reduction in workforce and operating costs related to the non renewal of contracts; (ii) a decrease of approximately $411,000 related to the outsourcing of certain call center services for our disease management programs; and (iii) the decrease of approximately $161,000 in compensation costs associated with the adoption of SFAS No. 123(R) “Share Based Payments”.

 

Selling, general and administrative expenses for fiscal year 2007 decreased by approximately $4.6 million over fiscal year 2006. The decrease was attributable to (i) a decrease of approximately $1,015,000 in salaries related to a reduction in headcount; (ii) a decrease of approximately $943,000 related to the accrual for employment agreement obligations for our former CEO in fiscal 2006; (iii) a decrease of approximately $240,000 in travel and entertainment expenses related to development and/or launch activities associated with Positive Directions, Inc. that occurred in fiscal 2006; (iv) a decrease of approximately $1,015,000 in compensation costs associated with the adoption of SFAS No. 123(R) “Share Based Payments” due to forfeitures related to headcount reductions; (v) a decrease of approximately $263,000 in marketing and advertising expenses primarily related to the strategic decision to reduce marketing efforts; (vi) a decrease of approximately $1,216,000 of legal fees related to general corporate and litigation matters; and (vii) a decrease of approximately $121,000 in consulting services. These decreases were offset by an increase in depreciation and amortization of approximately $304,000 primarily related to the amortization of completed product software development projects.

 

Research and development expenses for fiscal year 2007 increased approximately $538,000 or 34.5% over fiscal year 2006. Our accounting policy is to capitalize certain software development costs during development and amortize them upon implementation. Subsequent to implementation any further costs (i.e. maintenance costs) are expensed as incurred. The increase in expenses is primarily attributable to (i) an increase of approximately $229,000 in salaries and related costs associated with new hires; and (ii) an increase of approximately $392,000 in consulting costs approximately. The increase in expenses was offset by (i) a decrease of approximately $30,000 in compensation costs associated with the adoption of SFAS No. 123(R) “Share Based Payments”; and (ii) a reduction of approximately $51,000 in travel and entertainment expenses. During fiscal year 2007, there was a decrease of approximately $852,000 in capitalization of costs, which include salaries and consultant fees, incurred for development as compared to fiscal year 2006. Certain costs associated with the development of new product software to be incorporated into our disease management programs are capitalized and amortized over a two to five year useful life.

 

Interest income for fiscal year 2007 was approximately $223,000 as compared to $697,000 for fiscal year 2006. This decrease is attributable to the reduction of funds available for investment.

 

Other income for fiscal year 2007 increased approximately $1.9 million as compared to fiscal year 2006. The increase represents the proceeds from the settlement agreement with Alere of $1,975,000 and Healthcare First of $400,000 during 2007 offset by the sale of a patent for $450,000 to a third party in May 2006.

 

Our effective tax rate for fiscal year 2007 is (.21)%. The difference in the Company’s effective tax rate from the federal statutory rate is primarily due to a 100% valuation allowance provided for all deferred tax assets.

 

Loss from discontinued operations includes the results of operations associated with SNP in South Dakota as a result of the termination of the Lakeshore Captive Insurance Company reinsurance agreements in November 2007, the results of operations of QMedCare of New Jersey, Inc. as the SNP was terminated and the medical

 

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equipment business as the assets of the business were sold in October 2007. The loss from discontinued operations for fiscal year 2007 increased $1.9 million as compared to fiscal year 2006. The increase is primarily attributable to the increase in the loss of approximately $2.6 million associated with the commencement of operations of QMedCare of New Jersey, Inc. in January 2007 offset by a decrease of approximately $0.9 million in the loss related to the SNP in South Dakota due to the settlement agreement with DAKOTACARE in March 2008.

 

The gain on sale of discontinued operations of approximately $217,000 represents the proceeds from the sale of the medical device equipment business in October 2007.

 

Fiscal 2006 Compared to Fiscal 2005

 

Revenue for fiscal year 2006 decreased approximately $13.8 million or 62.9% as compared to fiscal year 2005. This decrease is attributable to (i) a decrease of approximately $11.9 million in revenue related to the expiration of four contracts; (ii) a decrease of approximately $768,000 of revenue related to a reduction in health plan membership and/or fees associated with existing contracts; (iii) a decrease of approximately $1.0 million related to the deferred revenue that was recognized under two contracts in fiscal 2005; and (iv) a decrease of approximately $500,000 in revenue recognized related to the settlement with Regence in the third quarter of fiscal 2005. These decreases were offset by (i) an increase in revenue of approximately $196,000 related to increasing enrollment in three existing contracts and the commencement of a new contract during the first quarter of fiscal 2006; (ii) the recognition of approximately $201,000 of revenue related to the reconciliation of performance measurements under contracts in fiscal 2006.

 

Gross profit margins for fiscal year 2006 decreased to 41.4% from 66.6% for fiscal year 2005. This decrease is related to (i) a decrease in revenue of approximately $11.9 million attributable to the expiration of four contracts; (ii) approximately $190,000 related to the outsourcing of certain call center services for our disease management programs; (iii) the increase of approximately $153,000 in compensation costs associated with the adoption of SFAS No. 123(R) “Share Based Payments”. The decrease in gross profit margins was offset by a decrease of approximately $2,898,000 of labor costs associated with the reduction in workforce and operating costs related to the non-renewal of contracts.

 

Selling, general and administrative expenses for fiscal year 2006 increased by approximately $4.8 million over fiscal year 2005. The increase was attributable to (i) an increase of approximately $370,000 in salaries related to new executives and additional new hires for the operations of Positive Directions, Inc. (formerly Health e Monitoring, Inc.); (ii) an increase of approximately $943,000 related to the accrual for employment agreement obligations for our former CEO; (iii) an increase of approximately $1,668,000 in compensation costs associated with the adoption of SFAS No. 123(R) “Share Based Payments”; (iv) an increase of approximately $203,000 in marketing and advertising expenses primarily related to Positive Directions, Inc.; (v) an increase of approximately $1,361,000 of legal fees related to general corporate and litigation matters; (vi) an increase in depreciation and amortization of approximately $274,000 attributable to the intangibles associated with the acquisition of Positive Directions, Inc. in the second quarter of fiscal year 2005 and Disease Management Technologies, Inc. in the fourth quarter of 2005; and (vii) an increase of approximately $69,000 in recruitment costs related to new hires. These increases were offset by a decrease of approximately $163,000 of consulting services rendered. Included within selling, general and administrative expenses for fiscal year 2006 (which incorporates the expenses noted above) was approximately $1,800,000 related to implementation costs of Positive Directions, Inc.

 

Research and development expenses for fiscal year 2006 increased approximately $235,000 or 17.8% over fiscal year 2005. Our accounting policy is to capitalize certain software development costs during development and amortize them upon implementation. Subsequent to implementation any further costs (i.e. maintenance costs) are expensed as incurred. The increase in expenses is primarily attributable to (i) an increase of approximately $232,000 in salaries and related costs associated with new hires; and (ii) approximately $78,000 in compensation costs associated with the adoption of SFAS No. 123(R) “Share Based Payments.” The increase in expenses was offset by (i) a decrease of approximately $85,000 in consulting costs. During fiscal year 2006, there was an increase of approximately $753,000 in capitalization of costs, which include salaries and consultant fees, incurred for development as compared to fiscal year 2005. We continue to focus our efforts on the development of new,

 

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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 and SNP programs are capitalized and amortized over a two to five year useful life.

 

Interest income for fiscal year 2006 was approximately $697,000 as compared to $441,000 for fiscal year 2005. This increase is attributable to the investment of the funds that were generated by the private placements in the first six months of fiscal year 2005 along with the cash generated from operations in fiscal 2005.

 

Loss on operations of joint ventures for fiscal year 2006 decreased approximately $770,000 as compared to fiscal year 2005. The decrease is primarily attributable to reduction in costs incurred associated with the settlement with The Regence Group and Centre Insurance in fiscal 2005 and the dissolution of the respective joint venture in December 2005. The decrease in costs was offset by costs related to a joint venture entered into with two partners to provide services under a disease management contract in Minnesota.

 

Other income for fiscal year 2006 increased approximately $447,000 as compared to fiscal year 2005. The increase was attributable to the sale of a patent for $450,000 to a third party in May 2006.

 

Our effective tax rate for fiscal year 2006 was .27%. The difference in the Company’s effective tax rate from the federal statutory rate is primarily due to a 100% valuation allowance provided for all deferred tax assets and the adoption of SFAS No. 123(R) “Share Based Payments”.

 

Loss from discontinued operations includes the results of operations associated with SNP in South Dakota as a result of the termination of the Lakeshore Captive Insurance Company reinsurance agreements in November 2007, the results of operations of QMedCare of New Jersey, Inc. as the SNP was terminated and the medical equipment business as the assets of the business were sold in October 2007. The loss from discontinued operations for fiscal year 2006 increased $3.6 million as compared to fiscal year 2005. The increase is primarily attributable to the increase in the loss of approximately $1.3 million associated with the start up costs of QMedCare of New Jersey, Inc. in 2006 and an increase of approximately $2.3 million in the loss related to the commencement of operations of the SNP in South Dakota in January 2006.

 

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 $48,100,000 less applicable expenses.

 

We had working capital of approximately $2.2 million at November 30, 2007 as compared to approximately $11.9 million of working capital at November 30, 2006 and ratios of current assets to current liabilities of 1.3:1 as of November 30, 2007 and 3.3:1 as of November 30, 2006. The working capital decrease of approximately $9.7 million was primarily due to the net loss of approximately $11.2 million resulting in cash used in operations of approximately $12.7 million.

 

The accompanying financial statements have been prepared assuming that the Company continues as a going concern that contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, the ability of the Company to continue as a going concern will be dependent upon its ability to raise additional capital or obtain other sources of financing in the immediate future necessary to meet its obligations and continue operations.

 

During the year ended November 30, 2007, the Company incurred net losses totaling $11,252,361 and utilized  cash in operating activities of $12,745,008. These factors raise substantial doubt as to the Company’s ability to continue as a going concern. The Company needs to raise additional funds in the immediate future in order to continue its operations. Whereas the Company has been successful in the past in raising capital, no assurance

 

can be given that these sources of financing will continue to be available to the Company and/or that demand for the Company’s equity/debt instruments will be sufficient to meet its capital needs. If the Company is unable to raise additional capital or obtain other sources of financing to meet its working capital requirements, it will have to cease business altogether. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on the Company's operations.

 

On March 20, 2008, the Company entered into an agreement with investors to receive up to $750,000 in working capital. The financing is structured to provide $375,000 to the Company at closing, with an additional $375,000 deposited in an escrow account, which could be released upon achieving certain milestones. See Note 18 - Subsequent Events.

 

Material Commitments

 

The following schedule summarizes our contractual cost obligations as of November 30, 2007 in the periods indicated.

 

 

Risk Factors

 

You should carefully consider each of the following risks and all of the other information set forth in this MD&A or elsewhere in the Form 10-K. These risks and other factors may affect forward-looking statements including those in this MD&A or made by the Company elsewhere, such as in investor calls or conference presentations. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

 

If any of the following risks and uncertainties develops into an actual event, this could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our common stock could decline materially.

 

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We have experienced significant losses and expect to incur losses in the future. As a result, the amount of cash, cash equivalents, and investments in marketable securities has materially declined. If we are unable to access sufficient working capital, we will be unable to fund future operations and operate as a going concern.

 

The Company has two consecutive years of operating losses, has utilized most of its available cash to support its SNP activities and anticipates that the losses will continue for the foreseeable future. Management’s current expectations may be impacted by a number of factors that could cause actual results to differ materially from those stated herein. These factors include our ability to raise additional funds in the immediate future in order to continue our operations. Whereas the Company has been successful in the past in raising capital, no assurance can be given that these sources of financing will continue to be available to the Company and/or that demand for the Company’s equity/debt instruments will be sufficient to meet our capital needs. If we are unable to raise additional capital or obtain other sources of financing to meet our working capital requirements, we will cease business altogether. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

We currently do not meet the continued listing requirements of the Nasdaq Capital Market. Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from the Nasdaq Capital Market.

 

On December 18, 2007, we received a Nasdaq Staff Deficiency Letter from Nasdaq, on which our common stock is listed (“Nasdaq”), indicating that for the last 30 business days, the bid price of our common stock has closed below the minimum $1.00 per share requirement of Nasdaq for continued listing set forth in Marketplace Rule 4350(c)(4). In accordance with Nasdaq’s marketplace rules, we have until June 16, 2008 to regain compliance.

 

If we have not regained compliance by the end of the cure period, Nasdaq rules require its staff to determine whether we meet the Nasdaq Capital Market initial listing criteria as set forth in Marketplace Rule 4350(c), except for the bid price requirement. If at that time we meet the initial listing criteria, the Nasdaq staff will notify us that we will be granted an additional 180 calendar day compliance period. However, if we are not eligible for an additional compliance period, the Nasdaq staff will provide written notification to us that our common stock will be delisted. At that time, we may appeal the delisting determination to a Listing Qualifications Panel, but no assurance can be given that any such appeal would be successful.

 

Additionally, we received a second letter from Nasdaq indicating that we do not meet the majority independent director and audit committee composition requirements as set forth in Marketplace Rules 435(c)(1) and 435(d)(4), respectively. Consistent with Marketplace Rules 435(c)(1) and 435(d)(4), Nasdaq has provided us with a cure period in order to regain compliance as follows: (1) until the earlier of the Company’s next annual shareholders’ meeting or November 12, 2008; or (2) if the next annual shareholders’ meeting is held before May 12, 2008, then we must evidence compliance no later then May 12, 2008. In the event we do not regain compliance by the required date, Nasdaq rules require Staff to provide written notification to us that our common stock will be delisted.

 

Alternatively, if our common stock is delisted by Nasdaq, our common stock may be eligible to trade on another quotation system, or on the pink sheets where an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of our common stock, although there can be no assurance that our common stock will be eligible for trading on any alternative exchanges or markets.

 

Delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities.

 

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Fluctuations in our quarterly operating results may cause volatility in the price of our common stock.

 

Given the nature of the markets in which we participate, we cannot reliably predict future revenue and profitability. Our quarterly revenue and operating results depend upon a number of factors including, but not limited to, the timing of contracts signed, enrollment of plan members and progress of programs implemented during the quarter, which are difficult to forecast. In addition, a portion of our operating expenses is fixed in nature due to our revenue, research and development costs; to the extent that projected revenue does not meet forecast, these fixed cost would impact operating results.

 

We and our customers are subject to various governmental regulations, compliance with which may cause us to incur significant expenses, and if we fail to maintain satisfactory compliance with certain regulations, we may be forced to curtail operations, and we could be subject to civil or criminal penalties.

 

Our businesses are subject to various significant federal, state, and local health and safety, health information disclosure, and labor regulations. These regulations are complex, change frequently, and have tended to become more stringent over time. We may be required to incur significant expenses in order to comply with these regulations or to remedy violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations, or portions of our operations, or impositions of fines and restrictions on our ability to carry on or expand our operations.

 

Litigation regarding patents or intellectual property could be costly and time consuming.

 

Any litigation regarding patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of our products.

 

Third parties may infringe our intellectual property, and suffer competitive injury.

 

Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results.

 

Our pending patent and trademark registration applications may not be allowed, or competitors may challenge the validity or scope of these patents or trademark registrations. In addition, our patents may not provide us a meaningful competitive advantage.

 

We depend on payments from CMS and health plans, and cost reductions within those entities may adversely affect our business and results of operations.

 

The healthcare industry in which we operate is currently subject to significant cost reduction pressures as a result of constrained revenues from governmental and private sources as well as from the increasing underlying cost of medical care. We believe that these pressures will continue and possibly intensify. While we believe that our services are geared specifically to assist health plans and governmental agencies in controlling the high costs associated with the treatment of chronic diseases, the pressures to reduce costs immediately may have a

 

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negative effect, in certain circumstances, on the ability of or the length of time required for us to sign new contracts. In addition, this focus on cost reduction may result in increased focus from health plans on contract restructurings that reduce the fees paid to us for our services. There can be no assurance that these financial pressures will not have a negative impact on our operations.

 

Compliance with new federal and state legislation and regulation could adversely affect our results of operations or may require us to invest substantial amounts acquiring and implementing new information systems and/or modifying existing systems.

 

Health plans and employers are subject to considerable state and federal government regulation. Many of these regulations are vaguely written and subject to differing interpretations that may, in certain cases, result in unintended consequences that may impact our ability to effectively deliver our services. The focus on regulatory and legislative efforts to protect the confidentiality of patient identifiable medical information, as evidenced by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), is one such example. We believe that our ability to obtain from health plans and CMS patient identifiable medical information for disease management purposes is protected in federal regulations governing medical record confidentiality. State legislation or regulation of this information may be more restrictive. We are continually determining the extent to which specific state legislation or regulations govern our health plan operations. New federal or state legislation or regulation in this area, which prohibitively restricts the availability of certain critical information to us, would have a material negative impact on our operations.

 

The disease management industry experiences a lengthy sales cycle for new contracts.

 

The disease management industry has many entrants marketing various services and products labeled as “disease management.” The generic label of disease management has been utilized to characterize a wide range of activities from the sale of medical supplies and drugs to services aimed at disease management. As a result, health plan purchasers of these services have had a challenging experience purchasing, evaluating, or monitoring such services; this generally results in a lengthy sales cycle for new health plan contracts. Until we sign and implement additional health plan contracts, the loss or a downward restructuring of a contract would negatively and materially impact our results of operations and financial condition.

 

The disease management industry depends on effectively using information systems and the failure of these systems could adversely affect our business.

 

The disease management industry is dependent on the effective use of information technology. We believe that our state-of-the-art technology provides us with a competitive advantage in the industry, however these system requirements expose us to technology obsolescence risks. Accordingly, we amortize our computer software and hardware over three to five years.

 

Our revenue is subject to seasonal pressure resulting from the disenrollment process of our health plan clients.

 

The membership enrollment and disenrollment processes of our health plan customers can result in a cyclical reduction of lives under management, especially during our first quarter. Employers typically make decisions about health insurance carriers at the end of each calendar year. Health plans also periodically assess the types of markets they service as well as the contractual arrangements of medical groups within those markets. In any event, all of these factors will have an effect on membership as of January 1 of each year. A health plan’s decision to exit markets or non-renewal of contracts with its medical groups will result in a loss of covered lives under management as of January 1. Although these decisions may also result in a gain of members, the process of identification and enrollment will typically lag by six months or longer. The result of these cyclical changes has not, to date, had a material impact on the company’s revenues or results of operations but could have such an effect in the future.

 

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A potential seasonal impact on covered membership could be caused by a decision by a health plan to withdraw or expand coverage thereby automatically disenrolling previously covered members or enrolling new members, and/or would significant shifts in employer’s participation in the plans.

 

Contract renewals

 

No assurances can be given that results from contract restructurings and possible terminations at or prior to renewal would not have a material negative impact on our operations and financial condition.

 

Share prices of healthcare companies and our share price in particular may be volatile. The volatility may be influenced by the market’s perceptions of the healthcare sector in general, or of other companies believed to be similar to us or by the market’s perception of our operations and future prospects. Many of these perceptions are beyond our control.

 

ERISA

 

The provision of services to certain employee benefit plans including certain Health Care, Group Insurance and Large Case Pensions benefit plans, is subject to ERISA, a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service and the Department of Labor (the “DOL”). ERISA regulates certain aspects of the relationships between us and employers who maintain employee benefit plans subject to ERISA. Some of our administrative services and other activities may also be subject to regulation under ERISA. In addition, some states require licensure or registration of companies providing third-party claims administration services for benefit plans.

 

DOL regulations under ERISA set standards for claim payment and member appeals along with associated notice and disclosure requirements. We have invested significant time and attention to compliance with these new standards, which represent an additional regulatory burden for us.

 

We face a wide range of risks, and our success depends on our ability to identify, prioritize and appropriately manage our enterprise risk exposures.

 

Operating in a complex industry, we expect to encounter a variety of risks. The risks we face include, among other matters, the range of industry, competitive, regulatory, operational or external risks identified in this Risk Factor discussion. Failure to appropriately identify, manage and/or mitigate these risks can affect our profitability, our ability to retain or grow business, or, in the event of extreme circumstances, our financial condition or viability.

 

We also face other risks that could adversely affect our business, results of operations or financial condition, which include:

 

Any requirement to restate financial results in the event of inappropriate application of accounting principles;

 

Financial loss from inadequate insurance coverage due to self-insurance levels or unavailability of coverage for credit or other reasons;                                                                                                                                    

 

 

We undertake no obligation to update or revise any such forward-looking statements.

 

28

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

The Company does not issue or invest in financial instruments or derivatives for trading or speculative purposes. All of the operations of the Company are conducted in the United States, and, as such, are not subject to material foreign currency exchange rate risk. At November 30, 2007, the Company had no outstanding long-term debt. Although the Company's assets included approximately $1.2 million in cash and cash equivalents and approximately $3.0 million in cash and cash equivalents in statutory reserves included within the assets of discontinued operations, market rate risk associated with changing interest rates in the United States is not material. See also Note 2 of the Notes to Consolidated Financial Statements.

 

Item 8. Financial Statements and Supplementary Data.

Attached.

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures

 

Evaluation of the Company’s Disclosure Controls and Internal Controls. We evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” as of the end of the period covered by the Annual Report. This evaluation (the Controls Evaluation) was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Attached as exhibits to this Annual Report are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

 

Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of November 30, 2007. This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.

 

Disclosure Controls and Internal Controls. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (Exchange Act), such as this Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of

 

control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within our Disclosure Controls, they are included in the scope of our quarterly controls evaluation.

 

Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure Controls included a review of the controls’ objectives and design, the controls’ implementation by the company and the effect of the controls on the information generated for use in this Report. In the course of the controls evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.

 

The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.

 

In accordance with SEC requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations noted above at the end of the period covered by this Annual Report, our Disclosure Controls are effective to provide reasonable assurance that material information relating to QMed and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

 

30

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31

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Report of Independent Registered Public Accounting Firm

 

 

Board of Directors

QMed, Inc. and Subsidiaries

 

We have audited the accompanying consolidated balance sheets of QMed, Inc. and Subsidiaries as of November 30, 2007 and 2006, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years ended November 30, 2007, 2006, and 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board of United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QMed, Inc. and Subsidiaries as of November 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years ended November 30, 2007, 2006, and 2005, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, the accompanying consolidated balance sheet as of November 30, 2006 and the related statements of operations and cash flows for the years ended November 30, 2006 and 2005 have been restated to give effect to the Company’s equipment and Special Needs business as discontinued operations.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has incurred losses from operations, discontinued its special needs business and has limited cash available for operations that raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

In 2006, the Company adopted the provision of Statement of Financial Accounting Standards No. 123 (revised), "Share-Based Payment".

 

In connection with our audits of the financial statements referred to above, we audited Schedule II - Valuation and Qualifying Accounts. In our opinion, the financial schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.

 

/s/ Amper, Politziner & Mattia, P.C.

 

Edison, New Jersey

March 25, 2008

 

F-1

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F-2

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QMED, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years Ended November 30,

 

 

F-3

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QMED, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

For the Years Ended November 30,

 

 

 

F-4

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F-5

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QMED, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended November 30,

 

F-6

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QMED, INC. AND SUBSIDIARIES

Notes to Financial Statements

 

Note 1 - Basis of Presentation and Description of Business

Nature of Business

QMed, Inc. (the "Company”) operates in the disease-management services industry. The Company and Interactive Heart Management Corp. (“IHMC”), a wholly owned subsidiary, provide disease management services to health plans nationwide. In April 2005, the Company acquired Positive Directions, Inc., (formerly Health e Monitoring, Inc.), a wholly owned subsidiary, to provide wellness and weight management programs. In 2005, the Company established QMedCare, Inc., a wholly owned subsidiary, to assist in providing specialty managed care services to chronically ill Medicare recipients under a Special Needs Plan (“SNP”) agreement with DAKOTACARE, an HMO in South Dakota. In 2006, the Company established QMedCare of New Jersey, Inc., a wholly owned subsidiary and a licensed HMO in New Jersey providing specialty managed care services to chronically ill Medicare Beneficiaries under a second SNP.

 

Discontinued Operations

Medical Equipment

On October 5, 2007 the Company entered into an Acquisition Agreement pursuant to which it sold its medical equipment business to Innovative Diagnostics, Inc., (“IDX”) an unaffiliated third party (“Purchaser”). The sale includes all inventory, property, furniture, fixtures and equipment from the equipment business and includes the Patent, intellectual property and rights in the 510K filing with the U.S. Food and Drug Administration (“FDA”) that pertains to the Monitor-One tehnology. In consideration for the sale, IDX paid the purchase price of $230,000 during October 2007 resulting in a gain of $216,952. The parties also simultaneously entered into a Patent License Agreement whereby IDX will license back to the Company, certain rights under the Patent for continuing the use of the Monitor-One STRX in the Company’s disease management business.

 

Special Needs Plans

On November 2, 2007 the Company announced it was unable to raise adequate capital to support both its operational needs and statutory reserve requirements and, as a result, was disengaging from Special Needs Plan related activity in South Dakota. Additionally, the Company announced it will be working to transition or conclude involvement in its New Jersey Special Needs Plan.

 

In March 2008, the Company executed a settlement agreement with DAKOTACARE settling any liability in connection with its activities, including but not limited to; Incurred But Not Reported and Paid (IBNP) claims of approximately $7.5 million associated with the HeartLine Plus SNP in South Dakota, outstanding invoices for TPA services rendered of approximately $220,000. The Company has agreed to pay DAKOTACARE $750,000 for a full release of any and all liabilities related to the SNP and additional liabilities of approximately $380,000. Based on this settlement agreement, management believes the Company has no further liability. In addition, the Company recorded an impairment charge related to product software development of approximately $445,000 and expensed approximately $400,000 of prepaid broker commissions related to 2007 enrollment. As a result of the settlement, the Company had a decrease in its estimated liability of approximately $6.5 million primarily attributable to a decrease in its IBNP in the fourth quarter of fiscal 2007, which is reflected as part of discontinued operations.

 

Accordingly, the sale of the equipment business and all Special Needs Plans activity and their results of operations have been classified as discontinued operations in this financial statement. As a result, our financial statements for the years 2006 and 2005 have been restated to reflect the equipment and Special Needs Plans as discontinued operations in our consolidated balance sheet, statements of operations and cash flows. Statement of operations information presented in the notes to consolidated financial statements has been restated to reflect continuing operations for all periods presented.

 

F-7

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Note 1 - Basis of Presentation and Description of Business (continued)

 

The following is a summary of financial information of our discontinued and continuing operations for the 2007, 2006 and 2005 fiscal years:

 

 

 

F-8

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Note 1 - Basis of Presentation and Description of Business (continued)

Discontinued Operations (continued)

 

 

The following is a summary of the balance sheet amounts related to discontinued operations:

 

 

Going Concern

The accompanying financial statements have been prepared assuming that the Company continues as a going concern that contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, the ability of the Company to continue as a going concern will be dependent upon its ability to raise additional capital or obtain other sources of financing in the immediate future necessary to meet its obligations and continue operations.

 

F-9

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Note 1 - Basis of Presentation and Description of Business (continued)

Going Concern (continued)

During the year ended November 30, 2007, the Company incurred net losses totaling $11,252,361 and utilized cash in operating activities of $12,745,008. These factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from this uncertainty. If the Company is unable to raise additional capital or obtain other sources of financing to meet its working capital requirements, it will have to cease business altogether.

 

Management’s plan is to raise additional capital through a variety of fund raising methods including the potential sale of its assets, which may include the sale of assets and to pursue all available financing alternatives as necessary to fund operations. The Company needs to raise additional funds in the immediate future in order to continue its operations. Whereas the Company has been successful in the past in raising capital, no assurance can be given that these sources of financing will continue to be available to the Company and/or that demand for the Company’s equity/debt instruments will be sufficient to meet its capital needs. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on the Company's operations.

 

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, IHMC, QMedCare, Inc., QMedCare of New Jersey, Inc., Positive Directions, Inc. and the Company’s majority-owned (83%) inactive subsidiary, Heart Map, Inc. (dissolved in December 2005). All intercompany accounts and transactions have been eliminated in consolidation. Investments in joint ventures are accounted for under the equity method.

 

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents for financial statement purposes.

 

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. The Company restricts cash and cash equivalents to financial institutions with high credit standings.

 

Accounts Receivable

Accounts receivable primarily represent fees that are contractually due in the ordinary course of providing a service, net of contractual adjustments. Included in accounts receivable are unbilled balances totaling approximately $47,000 and $104,000 at November 30, 2007 and 2006, respectively.

 

F-10

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Note 1 - Basis of Presentation and Description of Business (continued)

Summary of Significant Accounting Policies (continued)

Investments in Securities

The Company accounts for investments in securities pursuant to the Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under this Statement, the Company's securities with a readily determinable fair value and which meet the definitions set forth in SFAS No. 115 have been classified as “available for sale” and are carried at fair value. Net unrealized gains and losses on marketable securities are credited or charged to accumulated other comprehensive income, net of income taxes.

 

Depreciation and Amortization

Property and equipment are carried at cost. Depreciation is computed using the straight-line method over a three to five-year period. Leasehold improvements are amortized on a straight-line basis over the term of the lease. Repair and maintenance costs are expensed, while additions and betterments are capitalized. The cost and related accumulated depreciation of assets sold or retired are eliminated from the accounts and any gains or losses are reflected in earnings.

 

Comprehensive Income (Loss)

Comprehensive income (loss) as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income (loss), as presented on the accompanying consolidated balance sheets consists of unrealized gains on securities, net of income tax.

 

Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of November 30, 2007 and 2006, because of the relative short maturity of these instruments. The carrying value of leases payable approximated fair value at November 30, 2007 and 2006, based upon current rates for the same or similar instruments.

 

Product Software Development Costs

The Company recognizes Product Software development costs in accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." As such, the Company expenses all costs incurred that relate to the planning and post implementation phases of development. Costs incurred in the development phase are capitalized and amortized over the estimated useful life of the software developed, which is between two to five years.

 

Impairment of Intangible Assets

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is required to review intangible assets for impairment on an annual basis or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable.

 

Impairment of Intangible Assets (continued)

The Company amortizes other identifiable intangible assets, such as acquired technologies, customer contracts, and other intangibles, on the straight-line method over their estimated useful lives, except for trade names, which have an indefinite life and are not subject to amortization. The Company reviews intangible assets not subject to amortization on an annual basis or more frequently whenever events or circumstances indicate that the assets might be impaired. The Company also assesses the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable.

 

Contract Billings in Excess of Revenues

Contract billings in excess of revenues represent performance based fees subject to refund that the Company does not recognize in revenue because either 1) data from the customer is insufficient or incomplete to measure performance; or 2) interim performance measures indicate that we are not meeting performance targets.

 

F-11

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Note 1 - Basis of Presentation and Description of Business (continued)

Summary of Significant Accounting Policies (continued)

 

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 have typically provided that a portion of the Company’s fees may be “performance-based”. As of November 30, 2007, the Company does not have any fee risk based contracts. Performance-based contracts have varying degrees of risk associated with the Company’s ability to deliver the guaranteed financial cost savings or certain clinical meausres. In some 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 that there could be an issue of non-performance, possibly resulting in a refund of fees or where fees generated may be subject to further retroactive adjustment associated with a contract or plan’s decision to completely terminate its coverage in a geographic market as well as general membership changes. For example, general terminations can be due to death, member change of health plan, etc. Adjustments for non-performance under the terms of the contract or other factors affecting revenue recognition are accrued on an estimated basis in the period the services are provided and are adjusted in future periods when final settlement is determined. The Company reviews these estimates periodically and makes adjustments, as interim information is available.

 

The Company determines its level of performance at interim periods based on medical claims data, achievement of enrollment targets or other data required to be supplied by the health plan. In the event these interim performance measures indicate that performance targets are not being met or sufficient data is unavailable, fees subject to refund and not covered by reinsurance are not recorded as revenues but rather are recorded as a current liability entitled “contract billings in excess of revenues.” Under performance based arrangements, the ability to make estimates at interim periods can be challenging due to the inherent nature of the medical claims process and the claims lag time associated with it. In most cases, paid claims data is not available until up to six months after claims are incurred. Although interim data measurement is indicative of performance objectives, actual results could differ from those estimates. As of November 30, 2007 and 2006, based on information and data available, the Company has deferred approximately $197,000 and $1,396,000 of revenue, respectively, 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 fiscal year ended November 30, 2007, approximately 95% of disease management services were derived from five health plans that each comprised more than 10% of the Company’s revenues. During the fiscal year ended November 30, 2006, approximately 63% of disease management services were derived from two health plans that each comprised more than 10% of the Company’s revenues. During the fiscal year ended November 30, 2005, approximately 69% of disease management services were derived from three health plans that each comprised more than 10% of the Company’s revenues.

 

F-12

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Note 1 - Basis of Presentation and Description of Business (continued)

Summary of Significant Accounting Policies (continued)

 

(Loss) Earnings Per Share

Earnings (loss) per share is reported under SFAS No. 128 “Earnings per Share”. The presentation of basic earnings per share is based upon weighted average common shares outstanding during the period. Diluted earnings (loss) per share is based on average common shares outstanding during the period plus the dilutive effect of stock options and warrants outstanding.

 

Share Based Compensation

On December 1, 2005, we adopted SFAS No. 123(R), “Share-Based Payment,” which requires the Company to measure and recognize compensation expense for all share-based payment awards based on estimated fair values at the date of grant. Determining the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and expected stock option exercise behavior. In addition, it requires judgment in estimating the number of share-based awards that are expected to be forfeited. The Company contracts with a third party to assist in developing the assumptions used in estimating the fair values of stock options.

 

Research and Development Expenses

Costs associated with the development of new products and changes to existing products are charged to operations as incurred.

 

Income Taxes

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

 

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.

 

New Accounting Pronouncements

Accounting for Uncertainty in Income Taxes

In June 2006 the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”  FIN No. 48 creates a single model to address uncertainty in income tax positions by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  It is effective for fiscal years beginning after December 15, 2006.  The adoption of FIN No. 48 will not have a material impact on our financial position or results of operations.

 

F-13

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Note 1 - Basis of Presentation and Description of Business (continued)

Summary of Significant Accounting Policies (continued)

Fair Value Measurement

In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurement,” which provides guidance for using fair value to measure assets and liabilities, including a fair value hierarchy that prioritizes the information used to develop fair value assumptions.  It also requires expanded disclosure about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings.  The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. 

 

SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The adoption of SFAS No. 157 will not have a material impact on our financial position or results of operations.

 

Note 2 - Investments in Securities

There were no investments in securities available for sale as of November 30, 2007. Investments in securities available-for-sale as of November 30, 2006 were as follows:

 

 

During the years ended November 30, 2007 and 2006, the Company sold available for sale securities for approximately $9,416,000 and $12,060,000, respectively, resulting in losses of approximately $25,548 and $0, respectively.

 

Note 3 - Property and Equipment

 

 

At November 30, 2007 and 2006, the equipment under the capital leases had net book values of approximately $118,000 and $189,000, respectively. Depreciation expenses were approximately $373,000, $376,000 and $363,000 for 2007, 2006 and 2005, respectively.

 

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Note 4 - Product Software Development Costs

During the years ended November 30, 2007 and 2006, the Company capitalized approximately $325,000 and $1,177,000 in product software development costs, respectively. These costs are amortized over their estimated useful lives, between two to five years.

 

During the years ended November 30, 2007, 2006 and 2005, amortization costs related to product software development costs were approximately $608,000 and $285,000 and $174,000, respectively. Accumulated amortization was $1,508,266 and $900,754 at November 30, 2007 and 2006, respectively. Estimated amortization expense is $582,000, $542,000, $358,000, $252,000 and $35,000 for the next five fiscal years, respectively.

 

Note 5 – Acquired Intangibles

In April 2005 the Company acquired all of the outstanding common stock of Positive Directions, Inc. (formerly Health e Monitoring, Inc.). Positive Directions has developed a comprehensive weight management program but had not yet commenced significant operations. In accordance with SFAS No. 141 “Business Combinations,” this transaction was accounted for as a purchase of assets as defined by EITF Issue No. 98-3 “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business” rather than a business combination. Accordingly, no goodwill was recorded from this acquisition, as consideration in excess of the fair value of identified assets was allocated pro-rata to the identified intangible assets. The aggregate purchase price was $500,000, which consisted of $200,000 in cash and $300,000 of common stock. In addition, transaction costs were approximately $30,000. As additional consideration under the purchase agreement, the company would be obligated to release an additional 60,709 shares of common stock upon certain targets being achieved in 2006. The targets for 2006 were not achieved and as a result, the company has no obligation to release these shares. Pursuant to FAS No. 141 the direct costs to acquire Positive Directions have been allocated to the assets acquired based upon an independent appraisal and the contingent consideration will be recorded if and when it becomes due and payable.

 

In October 2005 the Company acquired all of the assets of Disease Management Technologies, Inc. (“DMT”). DMT had developed a website for a weight management program that will complement Positive Direction’s existing comprehensive weight management program but had not yet commenced significant operations. In accordance with SFAS No. 141 “Business Combinations,” this transaction was accounted for as a purchase of assets as defined by EITF Issue No. 98-3 “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business” rather than a business combination. Accordingly, no goodwill was recorded from this acquisition, as consideration in excess of the fair value of identified assets was allocated pro-rata to the identified intangible assets. The aggregate purchase price was $302,000, which consisted of $250,000 in cash and $52,000 of common stock. In addition, transaction costs were approximately $42,000. As additional consideration under the purchase agreement, the company would be obligated to issue an additional 87,664 shares of common stock upon certain targets being achieved in 2006. The targets for 2006 were not achieved and as a result, the company has no obligation to release these shares. Pursuant to FAS No. 141 the direct costs to acquire DMT have been allocated to the assets acquired based upon an independent appraisal and the contingent consideration will be recorded if and when it becomes due and payable.

 

F-15

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Note 5 – Acquired Intangibles (continued)

The following table summarizes the estimated fair value of the assets acquired and their balances as of November 30,:

 

 

 

During the year ended November 30, 2007, amortization expense related to the covenant not to compete, acquired technology and software and contents, was $96,673, $9,261, and $59,869, respectively. During the year ended November 30, 2006, amortization expense related to the covenant not to compete, acquired technology, software and contents, and assembled workforce was $96,673, $9,261, $59,870 and $43,016, respectively. During the year ended November 30, 2006, the company recorded an impairment charge within selling, general and administrative expenses of approximately $32,000 related to a write down of assembled workforce. Estimated amortization expense is $166,000 for fiscal years 2008 and 2009 and $90,000 for the fiscal year thereafter.

 

Note 6 - Investment in Joint Ventures

 

The Company had a 50% interest in HeartMasters, L.L.C. (“HM”). The management agreement provided for profits and losses to be allocated based on the Company’s 50% interest. As of November 30, 2006, the Company had recorded losses to date of approximately $1,799,000 bringing the investment in the joint venture to zero. This joint venture was not a variable interest entity and therefore was not required to be consolidated under the provisions of FIN 46R. In December 2005, this joint venture was dissolved.

 

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Note 6 - Investment in Joint Ventures (continued)

 

The unaudited summary financial information for HM as of and for the period ended November 30, is as follows:

 

 

The Company had a 33.33% interest in HealthSuite Partners, LLC (“HSP”). The management agreement provided for profits and losses to be allocated based on the Company’s 33.33% interest. As of November 30, 2007, the Company has recorded losses to date of approximately $234,000 bringing its investment in this joint venture to $0. This joint venture was not a variable interest entity and therefore was not required to be consolidated under the provisions of FIN 46. In November 2007, this joint venture was dissolved. As of November 30, 2006, approximately $790,000 was due from this joint venture which was included in accounts receivable.

 

The unaudited summary financial information for HSP as of and for the period ended November 30, is as follows:

 

 

Note 7- Accounts Payable and Accrued Liabilities

 

 

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Note 8 - 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 November 30, 2007 and 2006, there was $12,900 and $47,005 outstanding under these provisions.

 

Note 9 - Line of Credit

On September 11, 2001, the Company entered into a loan agreement with Wachovia Bank, N.A., formerly First Union National Bank, for a $1 million line of credit. The annual interest rate is the lower of the bank's prime 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, 2006. The line of credit was extended for 90 days however management decided not to renew the line of credit and requested a release of the collateral. Borrowings under this line of credit were $-0- at November 30, 2007 and 2006.

 

Note 10 - Capital Lease Obligations

The Company has entered into various capital leases for equipment expiring through October 2010, with aggregate monthly payments of approximately $5,200.

 

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of November 30, 2007:

 

 

 

Note 11 – Accrued Severance Payable

On November 28, 2006, the Company announced that its CEO was appointed as a special advisor to the Board for Strategic Development and Expansion Issues. He will continue to be a director of the Company, but will no longer serve in the capacity as either the CEO or the President of the Company.

 

As a result, the Company incurred certain obligations under the terms of the employment agreement. These obligations consist of: (i) three times last base salary, to be paid in three equal annual installments, with the first installment to be paid no later than thirty (30) days after November 28, 2006 (the “Payment Date”), and thereafter, the second and third installments on each of the next two annual anniversaries of the payment date; (ii) immediate vesting of all options; and (iii) continued coverage, at the Company’s expense for a period of 36 months from November 28, 2006 under all executive health plans in which the Executive participates as of November 28, 2006. As of November 30, 2007, the Company has recorded $641,260 representing the present value of these obligations using an interest rate of 4% of which $332,002 is recorded as current and $309,258 is long term. At November 30, 2006, the Company had recorded $943,419 of which $323,776 was recorded as current and $619,643 was long term. The Company had a payment due on December 28, 2007 in the amount of $310,000, which was not made due to the limited financial resources to continue as a going concern. Should the Company obtain adequate financing, the payment will be made upon closing of such transaction.

 

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Note 12 - Income Taxes

The federal and state income tax provision (benefit) allocable to the consolidated statements of income and balance sheet line items was as follows:

 

 

Income tax (benefit) expense is made up of the following:

 

 

For November 30, 2006, the current state tax provision of $18,000 was offset by a refund of state taxes of approximately $56,000 received in fiscal 2006.

 

The effective tax rate varied from the statutory rate as follows:

 

 

Deferred tax attributes resulting from differences between financial accounting amounts and tax basis of assets and liabilities at November 30, 2007 and 2006, follow:

 

 

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Note 12 - Income Taxes (continued)

 

 

The Company has cumulative pre-tax losses through fiscal 2007 for financial reporting purposes. Recognition of deferred tax assets will require generation of future taxable income. Given the recent terminated contracts and the start up costs associated with the new business segments, there can be no assurance that the Company will generate earnings in future years. Therefore, the Company established a valuation allowance on deferred tax assets of approximately $17,958,000 and $13,611,000 as of November 30, 2007 and 2006, respectively.

 

As of November 30, 2007, the Company has available the following federal net operating loss carryforwards for tax purposes of $40,799,000 beginning to expire in 2010 through 2022.

 

The Company has net operating loss carryforwards for state tax purposes of approximately $37,274,000 expiring at various times from fiscal years ending 2008 through 2021. The utilization of these net operating loss carryforwards may be significantly limited under the Internal Revenue Code as a result of ownership changes due to the Company's stock and ownership changes.

 

During the year ended November 30, 2005 the Company completed the sale of approximately $2,057,000 of its New Jersey net operating loss carryforwards and received approximately $116,000. Proceeds from these transactions are recorded as a gain on sale of net state tax benefits.

 

Note 13 - 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 expired on June 1, 2005, thirty days after the registration statement was declared effective by the US Securities and Exchange Commission.

 

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Note 13 - Stockholders' Equity (continued)

2003 Outside Directors Equity Plan

The Company has adopted an Outside Directors Equity Plan to better enable the retention and attraction of qualified outside directors to serve on the Company’s Board of Directors. The plan requires up to 250,000 shares to be authorized for issuance under the plan and is designed to allow outside directors the option to receive a portion of their fees in the form of the Company’s common stock in lieu of cash, and 15,000, 47,000 and 12,500 options were issued to Directors during the years ended November 30, 2007, 2006 and 2005, respectively. As of November 30, 2007, 205,000 shares remain available for issuance under the plan.

 

Stock Options and Warrants

The QMed, Inc. 1999 Equity Incentive Plan provides for stock options, stock appreciation rights, restricted stock or deferred stock awards up to 1,000,000 shares of the Company's common stock to be granted to employees and consultants of the Company until September 2009. The Plan also provides for Director Non-Qualified stock options to be granted to directors of the Company (other than directors who are also officers or employees of the Company). The Plan was amended by a vote of stockholders on May 22, 2002 to increase the number of shares available for awards from 1,000,000 to 2,000,000. At the Company’s annual shareholder meeting on April 28, 2006, the amendment to the 1999 Equity Incentive Plan to increase the number of shares reserved for issuance under such plan from 2,000,000 to 3,000,000 and to ensure compliance with Section 409A of the Internal Revenue Code was approved. At November 30, 2007, the Company has reserved approximately 1,318,000 shares for future equity grants.

 

The QMed, Inc. 1997 Equity Incentive Plan provides for stock options, stock appreciation rights, restricted stock or deferred stock awards for up to 600,000 shares of the Company's common stock to be granted to employees of the Company until May 2007. The Plan also provides for director stock options to be granted to directors of the Company (other than directors who are also officers or employees of the Company).

 

The QMed, Inc. 1990 Employee Stock Incentive Plan provides for stock options, stock appreciation rights, restricted stock or deferred stock awards for up to 1,000,000 shares of the Company's common stock to be granted to employees of the Company until October 2000. Currently, there are no shares of the Company's common stock reserved for future equity grants from this plan.

 

Under the 1990, 1997 and 1999 plans, most options are exercisable in cumulative 33% increments after the first and each subsequent anniversary of the date of the grant. The incentive and nonqualifying stock options expire ten years after the date of the grant.

 

Options granted under all plans must be at a price per share not less than the fair-market value per share of common stock on the date the option is granted.

 

The Company has shareholder-approved stock incentive plans for employees. Prior to December 1, 2005, the Company accounted for these plans under the recognition and measurement provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS” or “Statement”) No. 123, “Accounting for Stock-Based Compensation.”

 

For the year ended November 30, 2005, the Company recorded compensation expense under APB No. 25 of approximately $55,000. This expense resulted from the grant of stock options to directors of the Company in June 2004 and September 2005. The Company recognized compensation expense related to these stock options on a straight-line basis over the vesting period.

 

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Note 13 - Stockholders' Equity – (continued)

Stock Options and Warrants (continued)

 

Effective December 1, 2005, we adopted SFAS No. 123(R), “Share-Based Payment,” using the modified prospective transition method. Under the modified prospective transition method, recognized compensation cost for the year ended November 30, 2006 includes: 1) compensation cost for all share-based payments granted prior to, but not yet vested as of, December 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123; and 2) compensation cost for all share-based payments granted on or after December 1, 2005, based on the grant date fair value estimated in accordance with Statement 123(R). In accordance with the modified prospective method, we have not restated prior period results.

 

Under the terms of an employment agreement, all unvested stock would immediately vest upon separation. As of November 28, 2006, a separation in service occurred resulting in the immediate vesting of the unvested options. As a result, the Company recognized additional share-based compensation cost of approximately $313,000 related to the vesting of these options in fiscal 2006.

 

For the year ended November 30, 2007, we recognized share based compensation cost of $585,750, which consisted of $68,701 in cost of services and $469,015 in selling, general and administrative expenses and $48,034 in research and development, respectively.

 

For the year ended November 30, 2006, we recognized share-based compensation cost of $1,899,490, which consisted of $153,414 in cost of services and $1,667,585 in selling, general and administrative expenses and $78,491 in research and development, respectively. The Company did not capitalize any share-based compensation cost.

 

As a result of adopting Statement 123(R), loss before income taxes and net loss for the year ended November 30, 2007 and 2006 totaling $585,750 and $1,899,490, respectively, were lower than if the Company had continued to account for share-based compensation under APB 25. The effect of adopting Statement 123(R) on basic and diluted earnings per share for the year ended November 30, 2007 and 2006 was $.03 and $.11, respectively, per share.

 

Prior to adopting Statement 123(R), we presented the tax benefit of stock option exercises as operating cash flows. Statement 123(R) requires that tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options be classified as financing cash flows.

 

Statement 123(R) also requires companies to calculate an initial “pool” of excess tax benefits available at the adoption date to absorb any tax deficiencies that may be recognized under Statement 123(R). The pool includes the net excess tax benefits that would have been recognized if the company had adopted Statement 123 for recognition purposes on its effective date.

 

The Company has elected to calculate the pool of excess tax benefits under the alternative transition method described in FASB Staff Position (“FSP”) No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards,” which also specifies the method we must use to calculate excess tax benefits reported on the statement of cash flows. The Company is in a net operating loss position; therefore, no excess tax benefits from share-based payment arrangements have been recognized for the years ended November 30, 2007 and 2006.

 

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 for the year ended November 30, 2005.

 

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Note 13 - Stockholders' Equity – (continued)

Stock Options and Warrants (continued)

 

 

Potentially dilutive options and warrants to purchase 39,219, 1,418,726, and -0- shares of the common stock were outstanding as of November 30, 2007, 2006 and 2005, 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 1,053,643, 892,556, and 6,562 shares of common stock were outstanding as of November 30, 2007, 2006 and 2005, 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, and would have been anti-dilutive.

 

As of November 30, 2007, there was $1,318,667 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock incentive plans. That cost is expected to be recognized over a weighted-average period of1.6 years.

 

For the years ended November 30, 2007 and 2006, the Company based expected volatility on both historical volatility and implied volatility on the Company’s stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The Company used historical data to estimate expected option exercise and post-vesting employment termination behavior. The Company utilized the risk-free interest rate for periods equal to the expected term of the option based upon the U.S. Treasury yield curve in effect at the time of the grant. The Company has no intention of declaring any dividends for the foreseeable future.

 

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Note 13 - Stockholders' Equity – (continued)

Stock Options and Warrants (continued)

For the year ended November 30, 2005, we estimated the fair value of each option award on the date of grant using the Black-Scholes model. The Company based expected volatility on historical volatility. The Company estimated the expected term of stock options using historical exercise and employee termination experience.

 

The following table shows the weighted average grant date fair values and the weighted average assumptions the Company used to develop the fair value estimates under each of the option valuation models for the years ended November 30, 2007, 2006 and 2005:

 

 

A summary of option activity as of November 30, 2007 and changes during the year then ended is presented below:

 

 

The total intrinsic value, which represents the difference between the underlying stock’s market price and the option’s exercise price, of options exercised during the years ended November 30, 2007, 2006 and 2005 was $265,049, $71,287 and $1,351,057, respectively. The total fair value of options vested during the year ended November 30, 2007 and 2006 was $1,271,656 and $2,092,968, respectively.

 

Cash received from option and warrant exercises under all share-based payment arrangements for the years ended November 30, 2007, 2006 and 2005 was $420,919, $131,659 and 987,645, respectively. No tax benefit was realized from option exercises of the share-based payment arrangements for the years ended November 30, 2007 and 2006. A $7,000 benefit was recorded for the year ended November 30, 2005.

 

As of November 30, 2006, the Company also has 1,672,522 stock warrants outstanding at a weighted average exercise price of $1.85. As of December 1, 2005, the adoption date of Statement 123(R), these warrants were exercisable; therefore, no expense has been recognized in the current period. During the fourth quarter of fiscal 2007, 23,302 warrants were exercised at an exercise price of $1.67 per share. As of November 30, 2007, the warrants are no longer outstanding as the warrants expired in November 2007.

 

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Note 14 - Retirement Plan

The Company has a 401(k) plan which allows its employees to set aside a part of their earnings, tax deferred, to be matched by the Company as determined each year by resolution of the Board of Directors. During the years ended 2007, 2006 and 2005, the Company matched $.25 for each dollar up to 6% of an employee's contribution on a monthly basis, which amounted to approximately $63,000, $83,000 and $74,000, respectively.

 

Note 15 - Commitments and Contingencies

Leases  

The Company leases office space and equipment under noncancellable operating leases expiring through September 2009. Management is currently negotiating with the landlord to reduce the office space to meet our present needs. Monthly payments under the current leases are approximately $49,000.

 

The following is a schedule by years of approximate future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of November 30, 2007.

 

 

Rent expense for the years ended November 30, 2007, 2006 and 2005 was approximately $491,000, $495,000 and $467,000, respectively.

 

Litigation

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 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 could have ranged between $0 and $2,300,000 and was contingent upon the outcome of a separate arbitration being pursued by Regence and HeartMasters LLC against the insurer, Centre Insurance. The Company made an advance payment on this guarantee of $1,150,001 on June 15, 2004. The advance payment, and any subsequent payment, were 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, was 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.

 

On August 18, 2005, HeartMasters LLC and The Regence Group entered into a settlement agreement with Centre, resolving the dispute. The settlement resulted in the elimination of any further contingent liability for the Company, under the guarantee to Regence. The Company received $500,000 on September 15, 2005, which has been reflected as revenue for the period ended November 30, 2005.

 

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Note 15 - Commitments and Contingencies (continued)

Litigation (continued)

 

On January 30, 2006, the Company filed an action against Healthcare First, a division of Gallagher Insurance Services, Inc., and of Arthur J. Gallagher & Co. (“HCF”), seeking recovery in the amount of approximately $3,700,000 against the financial intermediary/broker involved in obtaining the insurance policies from Centre Insurance, which were the subject of the prior proceeding against Centre. Following a mediation process, the matter was resolved on terms including a payment to the Company of $400,000, which was received in June 2007 and has been reflected as other income for the year ended November 30, 2007.

 

On November 21, 2005, the Company brought an arbitration proceeding against Alere Medical Incorporated (“Alere”), seeking damages and an award for unjust enrichment of approximately $17,000,000, on allegations that Alere materially misled and misrepresented to the Company, its intentions to enter into long-term agreements with the Company for the provision of disease management services.

 

In the arbitration, Alere counterclaimed, asserting that, under a seventh agreement between the parties, there was no obligation to enter into a long term agreement, and thus, claimed Alere, the Company’s claims were not well founded and Alere is allegedly entitled to damages for breach of the duty of good faith and fair dealing, as well as its attorneys’ fees. Alere also filed a lawsuit in state court, in the Second Judicial District Court of Nevada, Washoe County, seeking esssentially the same relief. Damages were sought by Alere in an unspecified amount stated to be in excess of $40,000.

 

Following extensive discovery, these matters were mediated, and both the arbitration and the litigation were resolved during December 2006. As part of the resolution, in December 2006, the Company received a payment totaling $1,975,000 bringing these matters to a conclusion. This amount has been reflected as other income for the year ended November 30, 2007.

 

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.

 

Major Customers

The Company had five major customers during 2007, two major customers during 2006 and three major customers during 2005 and 2004. Major customers were considered to be those who account for more than 10% of total revenue. The major customers accounted for approximately 95%, 63% and 69% for 2007, 2006 and 2005, respectively.

 

During fiscal 2008, the Company anticipates one contract to comprise approximately 40% of total revenues. This contract has an expiration date of June 3, 2008 and the Company is currently negotiating a contract renewal however no assurance can be given that such negotiations will be successful.

 

In a letter dated October 4, 2006, the Company was notified by HealthSuite Partners, a joint venture with Alere Medical, Airlogix and the Company, that the HealthSuite Partners contract with HealthPartners, a Minnesota managed care organization, would not be extended beyond April 5, 2007.

 

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Note 16 – Sale of Intellectual Property

On May 22, 2006 the Company entered into an agreement to amend a certain patent license agreement with a third party resulting in the sale of the patent for $450,000. The Company received the proceeds from the sale on May 26, 2006. Accordingly, the proceeds from the transaction were recorded within other income.

 

Note 17 – Fourth Quarter Adjustments

In March 2008, the Company executed a settlement agreement with DAKOTACARE settling any liabilty in connection with ts activities including but not limited to; Incurred But Not Reported and Paid (IBNP) claims of approximately $7.5 million associated with the HeartLine Plus SNP in South Dakota and outstanding invoices for TPA services rendered of approximately $220,000. The Company as agreed to pay DAKOTACARE $750,000 for a full release of any and all liabilities related to the SNP and additional liabilities of approximately $380,000. Based on this settlement agreement, management believes the Company has no further liability. In addition, the Company recorded an impairment charge related to product software development of approximately $445,000 and expensed approximately $400,000 of prepaid broker commissions related to 2007 enrollment. As a result of the settlement, the Company had a decrease in its estimated liability of approximately $6.5 million primarily attributable to a decrease in its IBNP in the fourth quarter of fiscal 2007, which is reflected as part of discontinued operations.

 

During the fourth quarter, the Company completed a reconciliation under its joint venture’s contract with HealthPartners, which reflected the achievement of targeted performance measures. As a result, during the fourth quarter of fiscal 2007, the Company recognized approximately $169,000 of previously deferred revenue under this contract with HealthPartners.

 

Note 18 - Subsequent Events

In February 2008, the Company negotiated a contingent settlement agreement with a vendor for consulting services rendered in 2007. The Company agreed to pay the vendor 45% of the outstanding amount of approximately $545,000 should the Company obtain adequate financing. If the Company cannot obtain adequate financing, the liability will revert back to the full amount due. The financial statements do not include any adjustment related to this agreement.

 

On December 18, 2007, the Company received a Nasdaq Staff Deficiency Letter from Nasdaq, on which the Company’s common stock is listed (“Nasdaq”). The letter indicated that for the last 30 business days, the bid price of the Company’s common stock has closed below the minimum $1.00 per share requirement of Nasdaq for continued listing set forth in Marketplace Rule 4350(c)(4). The Letter also stated that the Company had been provided a cure period by Nasdaq until June 16, 2008 in order for the Company to become compliant again with Nasdaq’s Marketplace Rules.

 

If the Company has not regained compliance by the end of the cure period, Nasdaq rules require its staff to determine whether the Company meets the Nasdaq Capital Market initial listing criteria as set forth in Marketplace Rule 4350(c), except for the bid price requirement. According to the Letter, if at that time the Company meets the initial listing criteria, the Nasdaq staff will notify the Company that it will be granted an additional 180 calendar day compliance period. However, if the Company is not eligible for an additional compliance period, the Nasdaq staff will provide written notification to the Company that its securities will be delisted. At that time, the Company may appeal the delisting determination to a Listing Qualifications Panel.

 

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Note 18 - Subsequent Events (continued)
Additionally, the Company had received a second letter from Nasdaq indicating the Company does not meet the majority independent director and audit committee composition requirements as set forth in Marketplace Rules 435(c)(1) and 435(d)(4), respectively. Consistent with Marketplace Rules 435(c)(1) and 435(d)(4), NASDAQ has provided the Company a cure period in order to regain compliance as follows: (1) until the earlier of the Company’s next annual shareholders’ meeting or November 12, 2008; or (2) if the next annual shareholders’ meeting is held before May 12, 2008, then the Company must evidence compliance no later then May 12, 2008. In the event the Company does not regain compliance by the required date, Nasdaq rules require Staff to provide written notification to the Company that its securities will be delisted.

On March 20, 2008, the Company entered into an agreement with the former CEO of the Company, a former director of the company and a third individual (the “Investors”), to receive up to $750,000 in working capital. The financing is structured to provide $375,000 to the Company at closing, with an additional $375,000 to be deposited into an escrow account, which could be released at the Company’s request, in two stages, upon achieving certain milestones in connection with the possible sale of the Company or its assets, within certain specified time frames. Either the Company, on reaching the milestones, or such investors, may require the release of such funds to the Company. The loan proceeds plus interest, together with up to $620,000 in severance obligations owed to the former CEO, will be secured by substantially all assets of the Company, other than securities and other investment property. As noted above, the former CEO has agreed to forbear on his severance obligations of up to $620,000, until the earlier of January 15, 2009 and the closing of either an asset or stock sale.

At the closing of this financing, the Company will issue to the Investors warrants to acquire up to 19.9% of the Company’s common stock at an exercise price of $.001 per share; of which, warrants to purchase up to 9.95% of the Company’s common stock will immediately be exercisable, with the balance becoming exercisable in proportion to the remaining proceeds in the escrow being released to the Company. The investors will be entitled, in the case of a sale or exchange of all or, under certain circumstances, a majority of the outstanding shares, or an issuance of new shares constituting a majority of the outstanding shares, or a sale of all or substantially all of the Company’s assets, to receive, either from the Company or by virtue of the transaction itself, the consideration payable in connection with the transaction on the shares underlying their warrants, or if no consideration is payable with respect to the shares in the transaction (such as in a new issuance of shares or in certain asset sale transactions), the market value of the shares after giving effect to the transaction, in each case net of the exercise price of the warrants. Pursuant to the transaction, the Investors have the right to have two observers present at Board Meetings.

The staff at Nasdaq has informed the Company verbally that they are of the opinion that, even though the director of the Company involved in the transaction resigned on March 18, 2008, this transaction would violate a NASDAQ rule unless shareholder approval was obtained, as the issuance of warrants in the transaction may be deemed compensation. Due to the Company’s need for working capital, and that the Company is already in receipt of delisting letters from NASDAQ, the Company has decided to proceed with the transaction without seeking shareholder approval. As a result, the Company’s shares may be delisted by Nasdaq. The Company has not yet determined whether it will appeal Nasdaq’s or its staff’s determination.

 

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Note 19 - Selected Quarterly Financial Data (Unaudited)

Amounts have been restated as a result of discontinued operations consisting of the Special Needs Plans in New Jersey and South Dakata and the medical equipment business. Selected quarterly financial data shown below has been restated as a result of these discontinued operations.

 

 

 

 

 

 

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PART III

 

Item 10. Directors and Executive Officers of the Registrant.

 

Information with respect to executive officers and directors of the Company will be set forth in the Company’s definitive proxy statement which is expected to be filed within 120 days of November 30, 2007 and is incorporated herein by reference.

 

Pursuant to General Instruction G(3), information concerning executive officers is included in Part I of this form under the caption “Executive Officers of the Registrant.”

 

Item 11. Executive Compensation.

 

Information with respect to executive compensation will be set forth in the Company’s definitive proxy statement which is expected to be filed within 120 days of November 30, 2007 and is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Information with respect to the ownership of the Company’s securities by certain persons will be set forth in the Company’s definitive proxy statement which is expected to be filed within 120 days of November 30, 2007 and is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions.

 

Information with respect to transactions with management and others will be set forth in the Company’s definitive proxy statement which is expected to be filed within 120 days of November 30, 2007 and is incorporated herein by reference.

 

Item 14.  Principal Accounting Fees and Services 

 

Information regarding our relationship with our principal public accountant will be set forth in the Company’s definitive proxy statement which is expected to be filed within 120 days of November 30, 2007 and is incorporated herein by reference.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

 

(a) (1) Financial Statements.

 

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Balance Sheets as of November 30, 2007 and 2006

 

Consolidated Statement of Operations for each of the three years

ended November 30, 2007, 2006 and 2005

 

Consolidated Statement of Comprehensive Income (Loss) for each of the

three years ended November 30, 2007, 2006 and 2005

 

Consolidated Statement of Stockholder’s Equity for each of

the three years ended November 30, 2007, 2006 and 2005

 

Consolidated Statement of Cash Flows for each of the three

years ended November 30, 2007, 2006 and 2005

 

Notes to Consolidated Financial Statements

 

(a)(2) Financial Statement Schedules:

 

II - Valuation and Qualifying Accounts

 

Other schedules have been omitted because they are not applicable.

 

(a)(3) The following Exhibits are filed as part of this report. Where such filing is made by incorporation by reference (I/B/R) to a previously filed statement or report, such statement or report is identified in parentheses:

 

 

 of Q-Med, Inc. as in effect on July 11, 1987 (Exhibit 3.3 to

 

 

 

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 Incorporation of Q-Med, Inc., dated May 22, 2002 (Exhibit 3.1

 

    4.1                       Specimen Common Stock Certificate (Exhibit 4.1 to

 

 

 $1.67 per share until November 15, 2005 (Exhibit 4.1 to

 

 $2.87 per share until November 15, 2005 (Exhibit 4.2 to

 

 

(Exhibit 10.1 to the Company’s report on Form 8-K dated

 

 Quest Diagnostics Ventures LLC, dated as of October

 21, 2004 (Exhibit 10.2 to the Company’s report on

 

 

 

 between the Company and several stockholders dated

 as of November 16, 1998 (Exhibit 99.4 to the Company’s

 

 

 Alexandria Atrium Associates (Exhibit 28.1 to the

 

 

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  Inc. and several stockholders dated as of November 15,

  1998 (Exhibit 99.3 to the Company’s report on Form 8-K

 

     10.5                    Q-Med, Inc. 1999 Equity Incentive Plan (Exhibit 4.1

 

 

  between Interactive Heart Management Corp. and

  HeartMasters, LLC dated April 14, 2000 (Exhibit 99.2

 

  First Union National Bank and Q-Med, Inc. (Exhibit

  10.1 to the Company’s Form 10-Q Report dated

 

 

 

 

 

 

 

 

35

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  IV, Inc. and the Company dated June 19, 2002 (Exhibit

  10.2 to the Company’s Report on Form 10-Q dated

      10.17                  Retainer Agreement between Sommer & Schneider LLP

 

 

 

 

 

 

 

 

  and Michael W. Cox (Exhibit 10.1 to the Company’s Report

 

 

 

 

 

 

 

36

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________

 

** Management contract or compensatory plan or arrangement

 

37

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated:

 

 

 

 

 

 

 

A. Bruce Campbell, M.D.

 

Richard I. Levin, M.D.

 

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SEC FILED COPY ONLY - NOT BOUND WITH FINANCIAL

Schedule II