UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM            10-Q

(Mark            One)

 

xQuarterly Report pursuant to Section 13            or 15(d) of the Securities Exchange Act of 1934

 

|   | For the quarterly period ended: February 29, 2008                            or |
|--------|---------------------------------------------------------------------------------|

 

oTransition report pursuant to Section 13            or 15(d) of the Securities Exchange Act of 1934

 

|   | For the transition period from ______________ to                            _______________ |
|--------|---------------------------------------------------------------------------------------------|

 

Commission file number:0-11411

 

|   | QMed, Inc. |
|--------|------------|

(Exact name of registrant as specified in its charter)

 

| Delaware                                                             |   | 22-2468665          |
|----------------------------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                                      |   | (I.R.S. Employer    |
| incorporation or organization)                                       |   | Identification No.) |
|                                                                 |   |                |
| 25 Christopher Way, Eatontown, New                            Jersey |   | 07724               |
| (Address of principal executive offices)                             |   | (Zip Code)          |

 

  (732) 544-5544

(Registrant’s telephone number, including area code)

 

N/A

Former Name, Former Address and Former Fiscal Year,

if            Changed Since Last Report

 

Indicate by check mark whether the registrant (1) has filed all reports            required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934            during the preceding 12 months (or for such shorter period that the registrant was            required to file such reports), and (2) has been subject to such filing requirements            for the past 90 days. YesxNoo

 

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 fileroAccelerated            fileroNon-accelerated            filerx

 

Indicate by check mark whether the registrant is a shell company (as            defined in Rule 12b-2 of the Exchange Act).

| Yeso | No  x |
|------|-----------------|

 

The            number of shares of the registrant’s common stock outstanding on April 14, 2008:            17,081,668.

 

----

QMED,            INC. AND SUBSIDIARIES 

FORM            10-Q

 

For            the Quarter Ended February 29, 2008

 

INDEX

 

|           |                  |                                                                                          | Page                                                                                                                                             |
|----------------|-----------------------|------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| Part I.   | Financial Information |                                                                                                                   |
|           | Item 1.          | Financial Statements                                                                                                   |                                                                                                                                             |
|           |                  |                                                                                                                   | Condensed Consolidated Balance Sheets as of February 29,                            2008 and November 30, 2007                                   | 1 |
|           |                  |                                                                                                                   | Condensed Consolidated Statements of Operations for the                            Three Months EndedFebruary 29, 2008 and 2007                  | 2 |
|           |                  |                                                                                                                   | Condensed Consolidated Statements of Comprehensive                            (Loss) Income for theThree Months Ended February 29, 2008 and 2007 | 3 |
|           |                  |                                                                                                                   | Condensed Consolidated Statements of Stockholders’                            Equity for the Three MonthsEnded February 29, 2008           | 4 |
|           |                  |                                                                                                                   | Condensed Consolidated Statements of Cash Flows for the                            Three Months EndedFebruary 29, 2008 and 2007                  | 5 |
|           |                  |                                                                                                                   | Notes to Condensed Consolidated Financial                            Statements                                                                  | 6 |
|           | Item 2.          | Management’s Discussion and Analysis of Financial                            Condition and Results of Operations | 19                                                                                                                                               |
|           | Item 3.          | Quantitative and Qualitative Disclosures About Market                            Risk                                  | 24                                                                                                                                               |
|           | Item 4.          | Controls and Procedures                                                                                                | 24                                                                                                                                               |
| Part II   | Other Information     |                                                                                                                   |
|           | Item 1.          | Legal Proceedings                                                                                                      | 25                                                                                                                                               |
|           | Item 2.          | Unregistered Sales of Equity Securities and Use of                            Proceeds                                 | 25                                                                                                                                               |
|           | Item 3.          | Defaults Upon Senior Securities                                                                                        | 25                                                                                                                                               |
|           | Item 4.          | Submission of Matters to a Vote of Security                            Holders                                         | 25                                                                                                                                               |
|           | Item 5.          | Other Information                                                                                                      | 25                                                                                                                                               |
|           | Item 6.          | Exhibits                                                                                                               | 25                                                                                                                                               |
| Signature      |                  |
| Certifications |                  |
|                |                       |                                                                                                                        |                                                                                                                                                  |  |  |  |

 

----

**Part            I.**

**Item            1. Financial Statements**

QMED,            INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

|                                                                                                                  |   | **February 29, 2008** |           | **November 30, 2007** |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------|----------------|-----------------------|
| ASSETS                                                                                                                |   | **(unaudited)**       |           |                  |   |
| Current assets                                                                                                        |   |                  |           |                  |   |   |
| Cash and cash equivalents                                                                                             |   | $                     | 403,546        |                  | $ | 1,196,030 |
| Accounts receivable, net of allowances for                            doubtful                                        |   |                  |           |                  |   |   |
| accounts of $75,100 and $58,980, respectively                                                                         |   |                  | 399,639        |                  |   | 535,810 |
| Prepaid professional fees                                                                                             |   |                  | 203,000        |                  |   | 228,000 |
| Prepaid expenses and other current assets                                                                             |   |                  | 393,595        |                  |   | 189,654 |
| Assets related to discontinued operations                                                                             |   |                  | 4,644,835      |                  |   | 6,126,492 |
|                                                                                                                  |   |                  | 6,044,615      |                  |   | 8,275,986 |
|                                                                                                                  |   |                  |           |                  |   |   |
| Property and equipment, net                                                                                           |   |                  | 632,239        |                  |   | 717,229 |
| Product software development costs, net                                                                               |   |                  | 1,615,865      |                  |   | 1,769,931 |
| Acquired intangibles, net                                                                                             |   |                  | 379,773        |                  |   | 421,224 |
| Other assets                                                                                                          |   |                  | 135,123        |                  |   | 137,190 |
|                                                                                                                  |   | $                     | 8,807,615      |                  | $ | 11,321,560 |
|                                                                                                                  |   |                  |           |                  |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                            |   |                  |           |                  |   |   |
| Current liabilities                                                                                                   |   |                  |           |                  |   |   |
| Accounts payable and accrued liabilities                                                                              |   | $                     | 2,063,790      |                  | $ | 1,607,840 |
| Leases payable, current portion                                                                                       |   |                  | 26,700         |                  |   | 41,116 |
| Accrued salaries and commissions                                                                                      |   |                  | 191,025        |                  |   | 245,888 |
| Fees reimbursable to health plans                                                                                     |   |                  | 20,050         |                  |   | 12,900 |
| Contract billings in excess of revenues                                                                               |   |                  | 197,380        |                  |   | 197,380 |
| Income taxes payable                                                                                                  |   |                  | 11,353         |                  |   | 12,786 |
| Liabilities related to discontinued                            operations                                             |   |                  | 1,964,443      |                  |   | 3,952,421 |
|                                                                                                                  |   |                  | 4,474,741      |                  |   | 6,070,331 |
|                                                                                                                  |   |                  |           |                  |   |   |
| Leases payable – long term                                                                                      |   |                  | 50,206         |                  |   | 49,134 |
| Accrued severance payable, long term                                                                                  |   |                  | 12,410         |                  |   | 309,258 |
|                                                                                                                  |   |                  | 4,537,357      |                  |   | 6,428,723 |
|                                                                                                                  |   |                  |           |                  |   |   |
| Commitments and Contingencies                                                                                         |   |                  |           |                  |   |   |
|                                                                                                                  |   |                  |           |                  |   |   |
| Stockholders’ equity                                                                                            |   |                  |           |                  |   |   |
| Common stock $.001 par value; 40,000,000                            shares                                            |   |                  |           |                  |   |   |
| authorized; 17,042,959 shares issued and 17,020,959                               outstanding, respectively |   |                  |  

17,043 |                  |   |  

17,043 |
| Paid-in capital                                                                                                       |   |                  | 54,935,081     |                  |   | 54,558,476 |
| Accumulated deficit                                                                                                   |   |                  | (50,606,241)   |                  |   | (49,607,057) |
|                                                                                                                  |   |                  | 4,345,883      |                  |   | 4,968,462 |
|                                                                                                                  |   |                  |           |                  |   |   |
| Less treasury stock at cost, 22,000 common                            shares                                          |   |                  | (75,625)       |                  |   | (75,625) |
| Total stockholders’ equity                                                                                      |   |                  | 4,270,258      |                  |   | 4,892,837 |
|                                                                                                                  |   | $                     | 8,807,615      |                  | $ | 11,321,560 |
|                                                                                                                  |   |                  |           |                  |   |   |

 

 

See            Accompanying Notes to Condensed Consolidated Financial Statements

 

1

 

----

QMED,            INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

|                                                                                                                                                            |   | **For the Three****Months Ended****February 29, 2008** |             | **Restated**

**For the Three Months Ended February 28,                            2007** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------------|-------------------------------------------------------------------------------------------|
| Revenue                                                                                                                                                         |   |  

$                                              | 751,788     |                                                                                      |  

$ | 1,728,676  |
| Cost of revenue                                                                                                                                                 |   |                                                   | 330,741     |                                                                                      |   | 731,099  |
| Gross profit                                                                                                                                                    |   |                                                   | 421,047     |                                                                                      |   | 997,577  |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |
| Selling, general and administrative expenses                                                                                                                    |   |                                                   | 1,844,056   |                                                                                      |   | 2,224,207  |
| Research and development expenses                                                                                                                               |   |                                                   | 60,203      |                                                                                      |   | 427,795  |
| Loss from continuing operations                                                                                                                                 |   |                                                   | (1,483,212)      |                                                                                      |   | (1,654,425) |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |
| Interest expense                                                                                                                                                |   |                                                   | (7,660)          |                                                                                      |   | (7,979) |
| Interest income                                                                                                                                                 |   |                                                   | 6,264       |                                                                                      |   | 100,902  |
| Loss from operations of joint venture                                                                                                                           |   |                                                   | -           |                                                                                      |   | (18,146) |
| Other (expense) income                                                                                                                                          |   |                                                   | (44)             |                                                                                      |   | 1,975,400  |
| (Loss) income before income tax provision and                              discontinued operations                                                    |   |                                                   | (1,484,652)      |                                                                                      |   | 395,752  |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |
| Provision for income taxes                                                                                                                                      |   |                                                   | (1,717)          |                                                                                      |   | (5,733) |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |
| (Loss) income before discontinued                            operations                                                                                    |   |                                                   | (1,486,369)      |                                                                                      |   | 390,019  |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |
| Discontinued Operations:                                                                                                                                        |   |                                                   |             |                                                                                      |   |   |
| Income (loss) from operations                                                                                                                                   |   |                                                   | 487,185     |                                                                                      |   | (1,447,795) |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |
| Net loss                                                                                                                                                        |   | $                                                      | (999,184)        |                                                                                      | $ | (1,057,776)  |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |
| Basic (loss) income per share                                                                                                                                   |   |                                                   |             |                                                                                      |   |   |
| Weighted average shares outstanding                                                                                                                             |   |                                                   | 17,020,959  |                                                                                      |   | 16,892,163  |
| Basic (loss) income per share – continuing                            operations                                                                          |   | $                                                      | (.09)            |                                                                                      | $ | .02  |
| Basic income (loss) per share – discontinued                            operations                                                                   |   |                                                   | .03         |                                                                                      |   | (.08) |
| Basic (loss) income per share                                                                                                                                   |   | $                                                      | (.06)            |                                                                                      | $ | (.06) |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |
| Diluted (loss) income per share                                                                                                                                 |   |                                                   |             |                                                                                      |   |   |
| Weighted average shares outstanding                                                                                                                             |   |                                                   | 17,020,959  |                                                                                      |   | 17,997,358  |
| Diluted (loss) income per share – continuing                            operations                                                                        |   | $                                                      | (.09)            |                                                                                      | $ | .02  |
| Diluted income (loss) per share –                            discontinued                                   operations |   |                                                   | .03         |                                                                                      |   | (.08) |
| Diluted (loss) income per share                                                                                                                                 |   | $                                                      | (.06)            |                                                                                      | $ | (.06) |
|                                                                                                                                                            |   |                                                   |             |                                                                                      |   |   |

 

 

See            Accompanying Notes to Condensed Consolidated Financial Statements

 

2

 

----

QMED,            INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)            INCOME

(Unaudited)

 

 

 

|                           |   |  

**For the Three**

**Months Ended**

**February 29, 2008** |      |   | **Restated**

**For the Three**

**Months Ended**

**February 28, 2007** |
|--------------------------------|--------|--------------------------------------------------------------------|-----------|--------|--------------------------------------------------------------------------|
|                           |   |                                                               |      |   |                                                                     |   |
| Net loss                       |   | $                                                                  | (999,184) |   | $                                                                        | (1,057,776) |
|                           |   |                                                               |      |   |                                                                     |   |
| Other comprehensive income     |   |                                                               |      |   |                                                                     |   |
| Unrealized gain on securities  |   |                                                               |      |   |                                                                     |   |
|   available for sale |   |                                                               | -         |   |                                                                     | 775  |
|                           |   |                                                               |      |   |                                                                     |   |
| Comprehensive loss             |   | $                                                                  | (999,184) |   | $                                                                        | (1,057,001) |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |
|                           |   |                                                               |      |   |                                                                     |   |

 

 

See            Accompanying Notes to Condensed Consolidated Financial Statements

3

 

----

QMED,            INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’            EQUITY

For            the Three Months Ended February 29, 2008

(Unaudited)

 

|                                                                      |  

                             

**Common Stock** |   |  

                             

**Paid-in** |  

                              |  

                             

**Accumulated** |               |  

**Common Stock Held in Treasury** |      |                 |
|---------------------------------------------------------------------------|--------------------------------------------------------------|--------|---------------------------------------------------------|--------------------------------------------|-------------------------------------------------------------|--------------------|-------------------------------------------|-----------|----------------------|
|                                                                      | **Shares**                                                   |   | **Amount**                                              |                                       | **Capital**                                                 |               | **Deficit**                               |      | **Shares**           |   | **Amount** |   | **Total** |
|                                                                      |                                                         |   |                                                    |                                       |                                                        |               |                                      |      |                 |   |   |   |   |   |   |   |
| Balance –                               November 30, 2007 |  

17,042,959                                           |   |  

$     17,043           |                                       |  

$                                                   |  

54,558,476 |                                      |  

$ |  

(49,607,057) |   |  

22,000 |   |  

$ (75,625) |   |  

$ |  

4,892,837  |
|                                                                      |                                                         |   |                                                    |                                       |                                                        |               |                                      |      |                 |   |   |   |   |   |   |   |
| Share-based employee                                                      |                                                         |   |                                                    |                                       |                                                        |               |                                      |      |                 |   |   |   |   |   |   |   |
| compensation expense                                                      |                                                         |   |                                                    |                                       |                                                        | 376,605            |                                      |      |                 |   |   |   |   |   |   | 376,605  |
|                                                                      |                                                         |   |                                                    |                                       |                                                        |               |                                      |      |                 |   |   |   |   |   |   |   |
| Net loss for the three months                                             |                                                         |   |                                                    |                                       |                                                        |               |                                      |      |                 |   |   |   |   |   |   |   |
|  ended February 29, 2008                                             |                                                         |   |                                                    |                                       |                                                        |               |                                      |      | (999,184)            |   |   |   |   |   |   | (999,184) |
|                                                                      |                                                         |   |                                                    |                                       |                                                        |               |                                      |      |                 |   |   |   |   |   |   |   |
| Balance – February 29, 2008                                         | 17,042,959                                                   |   | $      17,043             |                                       | $                                                           | 54,935,081         |                                      | $         | (50,606,241)         |   | 22,000 |   | $ (75,625) |   | $ | 4,270,258  |

 

 

See            Accompanying Notes to Condensed Consolidated Financial Statements

 

4

 

----

QMED,            INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

|                                                                                                                                                                                       |   |  

**For the Three**

**Months Ended**

**February 29, 2008** |            | **Restated**

**For the Three**

**Months Ended**

**February 28, 2007** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|-----------------|--------------------------------------------------------------------------|
| Cash flows from operating activities:                                                                                                                                                      |   |                                                               |            |                                                                     |   |   |
| Net loss                                                                                                                                                                                   |   | $                                                                  | (999,184)       |                                                                     | $ | (1,057,776) |
|                                                                                                                                                                                       |   |                                                               |            |                                                                     |   |   |
| Adjustments to reconcile net loss to net cash used                            in                                                                                                           |   |                                                               |            |                                                                     |   |   |
| operating activities:                                                                                                                                                                      |   |                                                               |            |                                                                     |   |   |
| (Income) loss from discontinued operations                                                                                                                                                 |   |                                                               | (487,185)       |                                                                     |   | 1,447,795  |
| Loss in operations of joint ventures                                                                                                                                                       |   |                                                               | -          |                                                                     |   | 18,146  |
| Depreciation and amortization                                                                                                                                                              |   |                                                               | 282,572    |                                                                     |   | 277,562  |
| Provision for loss on accounts receivable                                                                                                                                                  |   |                                                               | 15,457     |                                                                     |   | 4,146  |
| Stock compensation expense                                                                                                                                                                 |   |                                                               | -          |                                                                     |   | 27,155  |
| Share-based employee compensation expense                                                                                                                                                  |   |                                                               | 376,605    |                                                                     |   | 333,929  |
| Amortization of bond discounts and premiums                                                                                                                                                |   |                                                               | -          |                                                                     |   | 518  |
| (Increase) decrease in                                                                                                                                                                     |   |                                                               |            |                                                                     |   |   |
| Accounts Receivable                                                                                                                                                                        |   |                                                               | 120,714    |                                                                     |   | (453,858) |
| Prepaid expenses and other current assets                                                                                                                                                  |   |                                                               | (178,941)       |                                                                     |   | (49,842) |
| Increase (decrease) in                                                                                                                                                                     |   |                                                               |            |                                                                     |   |   |
| Accounts payable and accrued liabilities                                                                                                                                                   |   |                                                               | 111,392    |                                                                     |   | (1,187,861) |
| Contract billings in excess of revenues and                                        deferred                            revenue |   |                                                               |  

-  |                                                                     |   |  

121,670  |
| Other, net                                                                                                                                                                                 |   |                                                               | (1,433)         |                                                                     |   | -  |
| Discontinued operations                                                                                                                                                                    |   |                                                               | (19,485)        |                                                                     |   | (1,649,040) |
| Total adjustments                                                                                                                                                                          |   |                                                               | 219,696    |                                                                     |   | (1,109,680) |
| Net cash used in operating activities                                                                                                                                                      |   |                                                               | (779,488)       |                                                                     |   | (2,167,456) |
|                                                                                                                                                                                       |   |                                                               |            |                                                                     |   |   |
| Cash flows from investing activities:                                                                                                                                                      |   |                                                               |            |                                                                     |   |   |
| Proceeds from sale of securities available for                            sale                                                                                                             |   |                                                               | -          |                                                                     |   | 4,338,988  |
| Purchases of securities available for sale                                                                                                                                                 |   |                                                               | -          |                                                                     |   | (70,742) |
| Capital expenditures                                                                                                                                                                       |   |                                                               | -          |                                                                     |   | (27,477) |
| Product software development expenditures                                                                                                                                                  |   |                                                               | -          |                                                                     |   | (221,298) |
| Investment in joint venture                                                                                                                                                                |   |                                                               | -          |                                                                     |   | (14,656) |
| Discontinued operations                                                                                                                                                                    |   |                                                               | 348        |                                                                     |   | (2,518,159) |
| Net cash provided by investing activities                                                                                                                                                  |   |                                                               | 348        |                                                                     |   | 1,486,656  |
|                                                                                                                                                                                       |   |                                                               |            |                                                                     |   |   |
| Cash flows from financing activities:                                                                                                                                                      |   |                                                               |            |                                                                     |   |   |
| Payments for capital leases                                                                                                                                                                |   |                                                               | (13,344)        |                                                                     |   | (31,212) |
| Proceeds from exercise of stock options                                                                                                                                                    |   |                                                               | -          |                                                                     |   | 350,004  |
| Net cash (used in) provided by financing                            activities                                                                                                             |   |                                                               | (13,344)        |                                                                     |   | 318,792  |
|                                                                                                                                                                                       |   |                                                               |            |                                                                     |   |   |
| Net decrease in cash and cash equivalents                                                                                                                                                  |   |                                                               | (792,484)       |                                                                     |   | (362,008) |
| Cash and cash equivalents at beginning of                            period                                                                                                                |   |                                                               | 1,196,030  |                                                                     |   | 2,313,261  |
|                                                                                                                                                                                       |   |                                                               |            |                                                                     |   |   |
| Cash and cash equivalents at end of period                                                                                                                                                 |   | $                                                                  | 403,546    |                                                                     | $ | 1,951,253  |
|                                                                                                                                                                                       |   |                                                               |            |                                                                     |   |   |
| Supplemental disclosure of cash flow                            information:                                                                                                               |   |                                                               |            |                                                                     |   |   |
| Cash paid during the period for:                                                                                                                                                           |   |                                                               |            |                                                                     |   |   |
| Interest                                                                                                                                                                                   |   | $                                                                  | 2,912      |                                                                     | $ | 3,230  |
| Income taxes                                                                                                                                                                               |   |                                                               | 3,690      |                                                                     |   | 11,589  |
|                                                                                                                                                                                       |   |                                                               |            |                                                                     |   |   |
|                                                                                                                                                                                       |   |                                                               |            |                                                                     |   |   |

 

 

See            Accompanying Notes to Condensed Consolidated Financial Statements

 

5

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**Note            1 –****Interim Financial            Reporting**

 

The            accompanying unaudited condensed consolidated financial statements of QMed, Inc. and            its subsidiaries (the “Company”) have been prepared in accordance with            generally accepted accounting principles for interim financial information.            Accordingly, these financial statements do not include all of the information and            footnotes required by generally accepted accounting principles. In the opinion of            management, all adjustments (consisting of normal recurring accruals) considered            necessary for a fair presentation have been included. Operating results for the three            month period ended February 29, 2008 are not necessarily indicative of the results that            may be expected for the current fiscal year ending November 30, 2008. These condensed            consolidated financials statements include the accounts of QMed, Inc., its wholly owned            subsidiaries; Interactive Heart Management Corp. (“IHMC”); QMedCare of New            Jersey, Inc.; Positive Directions, Inc. (formerly Forward Health, Inc.); and QMedCare,            Inc., its wholly owned subsidiaries; QMedCare Dakota, LLC and Lakeshore Captive            Insurance Company. These condensed consolidated financial statements should be read in            conjunction with the financial statements and footnotes thereto included in the            Company’s Annual Report on Form 10-K for the year ended November 30,            2007.

 

**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            included 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 technology. 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, in 2007, 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 was 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. As a result, our financial statements for the three months ended February            28, 2007 have been restated to reflect the equipment and Special Needs Plans as            discontinued operations in our 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.

 

 

6

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            1 –****Interim Financial            Reporting**

**Discontinued Operations (continued)**

 

The            following is a summary of financial information of our discontinued and continuing            operations:

 

|                                         | Three Months Ended                            February 29, 2008 |
|----------------------------------------------|-----------------------------------------------------------------|
|                                         | Discontinued                                                    |
| Revenue                                      | $                                                               | 632,064  |
| Cost of revenue                              |                                                            | 78,835  |
| Gross profit                                 |                                                            | 553,229  |
|                                         |                                                            |   |
| Selling, general and administrative expenses |                                                            | 103,509  |
|                                         |                                                            |   |
| Income from operations                  |                                                            | 449,720  |
| Interest expense                             |                                                            | 49  |
| Interest income                              |                                                            | 37,836  |
|                                         |                                                            |   |
| Income before income tax provision      |                                                            | 487,605  |
| Provision for income taxes                   |                                                            | (420) |
|                                         |                                                            |   |
| Income from discontinued operations          | $                                                               | 487,185  |

 

 

 

|                                                                           |   | Three Months Ended February 28, 2007   |
|--------------------------------------------------------------------------------|--------|----------------------------------------|
|                                                                           |   | Consolidated

(As Originally Reported) |   |  

                             

Discontinued |   |  

                             

Continuing |
| Revenue                                                                        |   | $                                      | 6,341,798  |   | $ | 4,613,122  |   | $ | 1,728,676  |
| Cost of revenue                                                                |   |                                   | 5,070,216  |   |   | 4,339,117  |   |   | 731,099  |
| Gross profit                                                                   |   |                                   | 1,271,582  |   |   | 274,005  |   |   | 997,577  |
|                                                                           |   |                                   |   |   |   |   |   |   |   |
| Selling, general and                                                           |   |                                   |   |   |   |   |   |   |   |
| administrative expenses                                                        |   |                                   | 4,434,649  |   |   | 1,782,647  |   |   | 2,652,002  |
|                                                                           |   |                                   |   |   |   |   |   |   |   |
| Loss from operations                                                           |   |                                   | (3,163,067) |   |   | (1,508,642) |   |   | (1,654,425) |
|                                                                           |   |                                   |   |   |   |   |   |   |   |
| Interest expense                                                               |   |                                   | (7,979) |   |   | -  |   |   | (7,979) |
| Interest income                                                                |   |                                   | 161,894  |   |   | 60,992  |   |   | 100,902  |
| Loss in operations of joint                              ventures    |   |                                   | (18,146) |   |   | -  |   |   | (18,146) |
| Other income                                                                   |   |                                   | 1,975,400  |   |   | -  |   |   | 1,975,400  |
|                                                                           |   |                                   |   |   |   |   |   |   |   |
| (Loss) income before income                              tax benefit |   |                                   | (1,051,898) |   |   | (1,447,650) |   |   | 395,752  |
|                                                                           |   |                                   |   |   |   |   |   |   |   |
| Provision for income taxes                                                     |   |                                   | (5,878) |   |   | (145) |   |   | (5,733) |
|                                                                           |   |                                   |   |   |   |   |   |   |   |
| Net (loss) income                                                              |   | $                                      | (1,057,776) |   | $ | (1,447,795) |   | $ | 390,019  |

 

 

7

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            1 –****Interim Financial            Reporting**

**Discontinued Operations (continued)**

 

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

 

|                                                                             |   | **February 29, 2008** |          | **November 30, 2007** |
|----------------------------------------------------------------------------------|--------|-----------------------|---------------|-----------------------|
| **Assets**                                                                       |   |                  |          |                  |   |   |
| Cash and cash equivalents                                                        |   | $                     | 1,937,169     |                  | $ | 2,773,895 |
| Restricted cash                                                                  |   |                  | 2,598,550     |                  |   | 2,975,093 |
| Accounts receivable, net                                                         |   |                  | 43,761        |                  |   | 79,372 |
| Prepaid expenses and other current assets                                        |   |                  | 58,832        |                  |   | 291,071 |
| Property and equipment, net                                                      |   |                  | 6,523         |                  |   | 7,061 |
| **Total assets – discontinued                            operations**      |   | $                     | **4,644,835** |                  | $ | **6,126,492** |
|                                                                             |   |                  |          |                  |   |   |
| *Liabilities*                                                                    |   |                  |          |                  |   |   |
| Accounts payable and accrued liabilities                                         |   | $                     | 224,332       |                  | $ | 629,486 |
| Medical claims payable                                                           |   |                  | 1,150,000     |                  |   | 2,667,736 |
| Accrued salaries and commissions                                                 |   |                  | 22,671        |                  |   | 62,123 |
| Deferred revenue                                                                 |   |                  | 567,310       |                  |   | 592,826 |
| Income taxes payable                                                             |   |                  | 130           |                  |   | 250 |
| **Total liabilities – discontinued                            operations** |   | $                     | **1,964,443** |                  | $ | **3,952,421** |
|                                                                             |   |                  |          |                  |   |   |

 

**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.

 

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. The            Company continued to incur losses of $999,184 during the three months ended February            29, 2008 and utilized cash in operating activities of $779,488. 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            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.

 

8

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            1 –****Interim Financial Reporting –            (continued)**

**New Accounting Pronouncements**

 

*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 assets and liabilities in financial statements            issued for fiscal years beginning after November 15, 2007.  It is effective for            non-financial assets and liabilities in financial statements issued for fiscal years            beginning after November 15, 2008. Accordingly, the adoption of SFAS No. 157 on            December 1, 2007 is limited to financial assets and liabilities. The initial adoption            did not have a material impact on our financial position or results of operations.            However, we are still in the process of evaluating this standard with respect to its            effect on non-financial assets and liabilities and therefore we have not yet determined            the impact that it will have on our financial statements upon full adoption.

 

**Note            2 –****Revenue Recognition**

**Disease Management**

 

The            Company enters into contractual arrangements with health plans to provide disease            management services. Fees under the Company’s health plan contracts are generally            determined by multiplying a contractually negotiated rate per health plan member per            month (“PMPM”) by the number of health plan members covered by the            Company’s services during the month. The PMPM rates usually differ between            contracts due to the various types of health plan product groups (e.g. PPO, HMO,            Medicare Advantage). These contracts are generally for terms of one to three years with            provisions for subsequent renewal, and have typically provided that a portion of the            Company’s fees may be “performance-based”. As of February 29, 2008,            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 measures. 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

 

9

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            2 –****Revenue Recognition**

**Disease Management (continued)**

 

measurement is indicative of performance objectives, actual results            could differ from those estimates. As of February 29, 2008 and November 30, 2007, based            on information and data available, the Company has deferred approximately$197,000 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 three months ended February 29, 2008, approximately 98% of            disease management services were derived from four health plans that each comprised            more than 10% of the Company’s revenues. During the three months ended February            28, 2007, approximately 71% of disease management services were derived from two health            plans that each comprised more than 10% of the Company’s revenues.

 

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.

 

**Note            3 –****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            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 net cash flows expected to result from            that asset, including eventual disposition.  During the three  months ended            February 29, 2008, the Company did not record an impairment charge related to these            assets.

 

**Note 4 –****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 revenue and expenses during the reporting period. Actual            results could differ from those estimates.

 

**Note 5 –****Accounts            Receivable**

 

Accounts receivable primarily represent fees and insurance premiums            receivable that are contractually due in the ordinary course of providing a service,            net of contractual adjustments and the allowance for doubtful accounts.

 

10

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            6 –****Product Software Development            Costs**

 

During the three months ended February 29, 2008 and February 28, 2007,            the Company capitalized approximately $0 and $225,000, respectively, in product            software development costs. These costs are being amortized over a two to five-year            useful life.

 

During the three months ended February 29, 2008 and February 28, 2007            amortization expense related to product software development costs was approximately            $154,000 and $138,000, respectively. Accumulated amortization was $1,666,582 and            $1,508,266 at February 29, 2008 and November 30, 2007, respectively. Estimated            amortization expense is $384,000 for the remainder of fiscal year 2008, $592,000 for            fiscal year 2009, $351,000 for fiscal year 2010, $260,000 for fiscal year 2011 and            $28,000 for fiscal year 2012.

 

**Note            7 –****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. The            Company did not record any contingent consideration with respect to these            assets.

 

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. The Company did not record any contingent consideration with respect to            these assets.

 

11

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            7 –****Acquired            Intangibles****(continued)**

 

The            following table summarizes the estimated fair value of the assets acquired and their            balances as of February 29, 2008 and November 30, 2007:

 

| **2008**                | Original Fair                            Value |    | Accumulated Amortization |   | Net Book

Value |   | Useful Lifein Years |
|-------------------------|------------------------------------------------|---------|--------------------------|--------|-----------------|--------|---------------------|
| Positive Directions:    |                                           |    |                     |   |            |   |                |   |   |
| Covenant not to compete | $                                              | 483,363 |                     | $      | (277,934)       |   | $                   | 205,429 | 5 |
| Acquired technology     |                                           | 46,307  |                     |   | (26,626)        |   |                | 19,681 | 5 |
|                    |                                           |    |                     |   |            |   |                |   |   |
| DMT:                    |                                           |    |                     |   |            |   |                |   |   |
| Software and contents   |                                           | 299,348 |                     |   | (144,685)       |   |                | 154,663 | 5 |
| Assembled workforce     |                                           | 45,117  |                     |   | (45,117)        |   |                | - | - |
|                    | $                                              | 874,135 |                     | $      | (494,362)       |   | $                   | 379,773 |   |

 

 

| **2007**                | Original Fair                            Value |    | Accumulated Amortization |   | Net Book

Value |   | Useful Lifein Years |
|-------------------------|------------------------------------------------|---------|--------------------------|--------|-----------------|--------|---------------------|
| Positive Directions:    |                                           |    |                     |   |            |   |                |   |   |
| Covenant not to compete | $                                              | 483,363 |                     | $      | (253,766)       |   | $                   | 229,597 | 5 |
| Acquired technology     |                                           | 46,307  |                     |   | (24,311)        |   |                | 21,996 | 5 |
|                    |                                           |    |                     |   |            |   |                |   |   |
| DMT:                    |                                           |    |                     |   |            |   |                |   |   |
| Software and contents   |                                           | 299,348 |                     |   | (129,717)       |   |                | 169,631 | 5 |
| Assembled workforce     |                                           | 45,117  |                     |   | (45,117)        |   |                | - | - |
|                    | $                                              | 874,135 |                     | $      | (452,911)       |   | $                   | 421,224 |   |

 

During the three months ended February 29, 2008, amortization expense            related to the covenant not to compete, acquired technology, and software and contents            was $24,168, $2,315, and $14,967, respectively. During the three months ended February            28, 2007 amortization expense related to the covenant not to compete, acquired            technology, software and contents, and assembled workforce was $24,168, $2,315, $14,967            and $2,820, respectively. Estimated amortization expense is $124,000 for the remainder            of fiscal year 2008, $166,000 for fiscal years 2009 and $90,000 for the fiscal year            thereafter.

 

**Note            8 –****Accounts Payable and Accrued            Expenses**

 

Accounts payable and accrued expenses include the following:

 

|                                   |   | **February 29,                            2008** |      | **November 30,                            2007** |
|----------------------------------------|--------|--------------------------------------------------|-----------|--------------------------------------------------|
|                                   |   |                                             |      |                                             |   |   |
| Accounts payable trade                 |   | $                                                | 876,928   |                                             | $ | 730,165 |
| Insurance premiums payable             |   |                                             | 117,375   |                                             |   | 99,385 |
| Professional fees payable              |   |                                             | 341,570   |                                             |   | 330,615 |
| Accrued severance payable, current     |   |                                             | 629,086   |                                             |   | 332,002 |
| Other accrued expenses – none in |   |                                             |      |                                             |   |   |
| excess of 5% of current liabilities    |   |                                             | 98,831    |                                             |   | 115,673 |
|                                   |   | $                                                | 2,063,790 |                                             | $ | 1,607,840 |

 

 

12

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note 9 –****Fees Reimbursable to            Health Plans**

 

Health plans utilizing the disease management program of the Company pay            participating physicians fees for their services related to use of the program. Such            fees are additional costs to the health plan, which in some cases are deducted from            fees paid to the Company. As of February 29, 2008 and November 30, 2007 there were            $20,050 and $12,900 outstanding under these provisions, respectively.

 

**Note            10 –****Income Taxes**

 

The            Company adopted the provisions of FIN No. 48 effective December 1, 2007. FIN No. 48            prescribes a recognition threshold and measurement attribute for the financial            statement recognition and measurement of a tax position taken or expected to be taken            in a tax return. FIN No. 48 also provides guidance on derecognition, classification,            interest and penalties, accounting for interim periods, disclosure and transition. The            adoption of FIN No. 48 had no material impact on our financial statements.

 

The            Company files income tax returns in the U.S. Federal jurisdiction and in various state            jurisdictions. Tax years remaining subject to examination in these jurisdictions            include 2004 to present excluding New Jersey for which the Company was audited through            2006 with minimal additional assessment.

 

**Note            11 –****Accrued Severance Payable**

 

On            November 28, 2006, the Company incurred certain obligations under the terms of the            employment agreement related to separation of service of its former CEO. 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 February 29, 2008, the Company has a liability of $641,496 representing the present            value of these obligations using an interest rate of 4% of which $629,086 is included            within accounts payable and accrued expenses and $12,410 is classified as 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. See Note 14 - Subsequent Events.

 

**Note            12 –****Share-Based Compensation**

 

The            Company has shareholder-approved stock incentive plans for employees. 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 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 inaccordance 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.

 

For            the three months ended February 29, 2008, we recognized share-based compensation cost            of $376,605, which consisted of $44,783 in cost of services, $341,497 in selling,            general and administrative expenses and ($9,675) in research and development. For the            three months ended February 28, 2007, we recognized share-based compensation cost of            $333,929, which consisted of $22,930 in cost of services, $291,108 in selling, general            and administrative expenses and $19,891 in research and development. Included within            discontinued operations was $60,319 for the three months ended February 28,            2007.

 

13

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            12 –****Share-Based Compensation            (continued)**

 

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 three months ended February 29,            2008.         

 

There            were no potentially dilutive options and warrants to purchase shares of common stock            outstanding for the three months ending February 29, 2008 that were not included in the            computation of diluted loss per share because the effect of their inclusion would have            been anti-dilutive. Potentially dilutive options and warrants to purchase 1,105,196            shares of the common stock were outstanding for the three months ending February 28,            2007, 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 1,108,845 and 1,089,903 shares of common stock were outstanding as            of February 29, 2008 and February 28, 2007, respectively, but were also not included in            the computation of diluted (loss) earnings per share for the three months ended            February 29, 2008 and February 28, 2007 because the option exercise price was greater            than the average market price of the common shares.

 

As            noted above, the Company has shareholder-approved stock incentive plans for employees            under which we have granted non-qualified and incentive stock options. Options granted            under these 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 options generally vest            over a three-year period and expire ten years from the date of grant. Certain option            and share awards provide for accelerated vesting upon a change in control or normal or            early retirement (as defined in the plans). 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 Section409A of the Internal            Revenue Code was approved. At February 29, 2008, we have reserved approximately 967,000            shares for future equity grants.

 

As            of February 29, 2008, there was $812,506 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            of 1.6 years.

 

Stock Options 

 

For            the three months ended February 29, 2008 and February 28, 2007, 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

 

14

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            12 –****Share-Based Compensation            (continued)**

Stock Options(continued)

 

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.

 

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 three months ended February 29, 2008 and February 28,            2007:

 

|                       | **Three Months Ended** |
|----------------------------|------------------------|
|                       | **February 29, 2008**  |   | **February 28, 2007** |
|                       |                   |   |   |
| Weighted average grant -   |                   |   |   |
| date fair value of options | $   -   |   | $2.56 |
|                       |                   |   |   |
| Assumptions:               |                   |   |   |
| Expected volatility        | -                      |   | 66.9% |
| Expected dividends         | -                      |   | - |
| Expected term (in years)   | -                      |   | 4.0 |
| Risk-free rate             | -                      |   | 4.7% |

 

A            summary of option activity as of February 29, 2008 and changes during the three months            then ended is presented below:

 

|  

                             

Options |  

                             

Shares |  

Weighted Average

Exercise Price | Weighted Average Remaining Contractual Term |  

Aggregate Intrinsic Value ($000s) |
|-----------------------------------------------------|----------------------------------------------------|------------------------------------------|---------------------------------------------|-------------------------------------------|
|                                                |                                               |                                     |                                        |                                      |
| Outstanding at December 1, 2007                     | 1,644,328                                     | $7.07                                    |                                        |                                      |
| Granted                                             | -                                             | -                                        |                                        |                                      |
| Exercised                                           | -                                             | -                                        |                                        |                                      |
| Forfeited or expired                                | (535,483)                                          | 6.37                                     |                                        |                                      |
|                                                |                                               |                                     |                                        |                                      |
| Outstanding at February 29, 2008                    | 1,108,845                                     | 7.33                                     |                                        |                                      |
| Exercisable at February 29, 2008                    | 783,585                                       | 7.96                                     | 6.81                                        | $ -                                       |
|                                                |                                               |                                     |                                        |                                      |

 

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 three months ended February 29, 2008 and February 28, 2007 was $0 and            $249,894, respectively. The total fair value of options vested during the three months            ended February 29, 2008 and February 28, 2007 was $689,953 and $953,499,            respectively.

 

Cash            received from option and warrant exercises under all share-based payment arrangements            for the three months ended February 29, 2008 and February 28, 2007 was $0 and $350,004            respectively. No tax benefit was realized from option exercises of the share-based            payment arrangements for the three months ended February 29, 2008 and February 28,            2007.

 

15

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note            13 –****Commitments and            Contingencies**

**Litigation**

 

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 essentially 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 three months ended February 29, 2008.

 

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

During the three months ended February 29, 2008, approximately 98% of            revenue was derived from four major customers. During the three months ended February            28, 2007, approximately 71% of revenue was derived from two contracts. Major customers            were considered to be those who account for more than 10% of total revenue.

 

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.

 

16

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note 14 –****Subsequent            Events**

 

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. Upon            obtaining the financing as disclosed below, the payment of approximately $245,000 was            made in March 2008, which settled this outstanding obligation and approximately            $300,000 will be recognized in income in the second quarter of 2008.

 

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.

 

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)(2), respectively. Consistent with Marketplace Rules 4350(c)(1) and 4350(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 issued 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.

17

 

----

QMED,            INC. AND SUBSIDIARIES

NOTES            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

**Note 14 –****Subsequent Events            (continued)**

 

The            staff at Nasdaq had informed the Company verbally that they were 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.

On            April 14, 2008, the Company received a Nasdaq Staff Determination Letter indicating            that the Company is being delisted for: (i) failure to comply with the shareholder            approval requirements in connection with the recent financing transaction discussed            above and (ii) the Company remains non-compliant with Marketplace Rules 4350(c)(1) and            (d)(2) as the resignation of a director on March 18, 2008 from the Company's Board of            Directors and audit committee resulted in the Company having only one independent            director and two non-independent directors on its Board and only one independent            director on its audit committee. The Company may appeal the delisting determination to            a Listings Qualifications Panel.

18

 

----

**Item 2. Management’s Discussion and Analysis of Financial            Condition and Results of Operations**

 

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 Company is facing risk factors in connection with the            operations of its business. These risk factors may include, but not be limited, to the            following:

 

|   | **•** | our ability to raise additional capital or obtain other                            sources of financing necessary to continue as a going                            concern; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to meet the continued listing qualifications                            of Nasdaq; |
|--------|------------|------------------------------------------------------------------------------------------------|

|   | **•** | our ability to renew and/or maintain contracts with our                            customers under existing terms or restructure these contracts on terms                            that would not have a material negative impact on our results of                            operations; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to execute new contracts for health plan                            disease management services; |
|--------|------------|--------------------------------------------------------------------------------------------------------------|

|   | **•** | the risks associated with a significant concentration of                            our revenues with a limited number of health plan customers; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the timing and costs of implementation, and the effect                            of regulatory rules and interpretations relating to the Medicare                            Prescription Drug, Improvement, and Modernization Act 2003; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to effect estimated cost savings and                            clinical outcome improvements under health plan disease management                            contracts and reach mutual agreement with customers with respect to                            cost savings, or to effect such savings and improvements within the                            timeframes contemplated by us; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the ability of our health plan customers to provide                            timely, complete and accurate data that is essential to the operation                            and measurement of our performance under the terms of our health plan                            contracts, and our accurate analysis of such data; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to resolve favorably contract billing and                            interpretation issues with our health plan customers; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to effectively integrate new technologies                            into our care management information technology platform; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to obtain adequate financing to provide the                            capital that may be needed to support the growth of our current and                            future operations and financing or insurance to support our performance                            in these operations; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | unusual and unforeseen patterns of healthcare                            utilization by individuals within the health plans with chronic                            conditions, including coronary artery disease (“CAD”),                            stroke, heart failure (“HF”), hypertension, hyperlipidemia                            and the cardiovascular complications of diabetes with which we have                            executed disease management contracts; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the impact of the introduction of new                            technologies; |
|--------|------------|--------------------------------------------------------------------------------|

|   | **•** | the ability of the health plans to maintain the number                            of covered lives enrolled in the plans during the terms of the                            agreements between the health plans and us; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to attract and/or retain and effectively                            manage the employees required to implement our agreements with health                            plan organizations; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the impact of future state and federal healthcare                            legislation and regulations on our business; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the financial health of our customers and their                            willingness to purchase our services; |
|--------|------------|------------------------------------------------------------------------------------------------------------------|

|   | **•** | the impact of litigation or arbitration; |
|--------|------------|------------------------------------------|

|   | **•** | our ability to accurately estimate our performance and                            revenue recognition under the terms of our contracts; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to develop new products and deliver outcomes                            on those products; |
|--------|------------|--------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to implement our strategy within expected                            cost estimates; |
|--------|------------|--------------------------------------------------------------------------------------------------|

|   | **•** | general economic conditions our ability to accurately                            estimate our performance and revenue recognition under the terms of our                            contracts; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to develop new products and deliver outcomes                            on those products; |
|--------|------------|--------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to implement our strategy within expected                            cost estimates; |
|--------|------------|--------------------------------------------------------------------------------------------------|

|   | **•** | general economic conditions |
|--------|------------|-----------------------------|

 

19

 

----

**Overview**

 

We            provide disease management services to health plans and to the federal government            through its Medicare program. Our services provide Care Management Solutions to assist            health plans and government organizations in managing the cost and care of diabetes,            cardiovascular disease, coronary artery disease (“CAD”), congestive heart            failure (“CHF”), chronic obstructive pulmonary disease (COPD), weight and            obesity and all associated co-morbid conditions. By leveraging our innovative clinical            practices and proprietary analytical technology, our model improves patient outcomes,            reduces practice variation, and measures quality.

 

**Recent Developments**

 

*Positive Directions (formerly Health e Monitoring,            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.

 

Its            program focuses on the role of wellness and prevention to establish healthy lifestyle            habits, dietary and nutrition education, exercise regimens and behavioral modifications            and is incorporated into our disease management offerings.

 

**Critical Accounting Policies and Estimates**

 

Our            accounting policies are described in Note 2 of the condensed consolidated financial            statements included in this Report on Form 10-Q for the three months ended February 29,            2008. The condensed 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**

 

Disease Management Services

 

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 February  29, 2008, 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

 

20

 

----

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 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 three months ended February 29, 2008, approximately 98% of disease management            services were derived from four health plans that each comprised more than 10% of the            Company’s revenues. During the three months ended February 28, 2007,            approximately 71% of disease management services were derived from two 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.

 

**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.

 

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. During            the three months ended February 29, 2008, the Company did not record an impairment            charge related to these assets.

 

21

 

----

**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.

 

**Results of Operations**

 

The            following table presents the percentage of total revenues for the periods indicated and            changes from period to period of certain items included in our Condensed Consolidated            Statements of Operations.

 

|                                          | **For the Three****Months Ended****February 29****and 28,** |   | **For the Three Months Ended February 29 and                            28,** |
|-----------------------------------------------|-------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
|                                          |  

**2008**                                            |   |  

**2007**                                                              |   | **2008 vs.****2007** |
|                                          |                                                        |   |                                                                          |   |   |   |   |
| Revenue                                       | 100.0                                                  | %      |                                                                          | 100.0  | % | (56.5) | % |
| Cost of revenue                               | 44.0                                                   |   |                                                                          | 42.3  |   | (54.8) |   |
| Gross Profit                                  | 56.0                                                   |   |                                                                          | 57.7  |   | (57.8) |   |
| Selling general and administrative            | 245.3                                                  |   |                                                                          | 128.7  |   | (17.1) |   |
| Research and development                      | 8.0                                                    |   |                                                                          | 24.7  |   | (85.9) |   |
| Loss from operations                          | (197.3)                                                     |   |                                                                          | (95.7) |   | (10.3) |   |
| Interest expense                              | (1.0)                                                       |   |                                                                          | (0.5) |   | (4.0) |   |
| Interest income, net                          | 0.8                                                    |   |                                                                          | 5.8  |   | (93.8) |   |
| Loss on operations of joint venture           | (0.0)                                                       |   |                                                                          | (1.0) |   | (100.0) |   |
| Proceeds from settlement agreement            | 0.0                                                    |   |                                                                          | 114.3  |   | (100.0) |   |
| (Loss) income before tax  provision | (197.5)                                                     |   |                                                                          | 22.9  |   | (475.1) |   |
| Income tax provision                          | (0.2)                                                       |   |                                                                          | (0.3) |   | *    |   |
| (Loss) income before discontinued operations  |  

(197.7)                                             |   |                                                                          |  

22.6  |   |  

(481.1) |   |
| Income (loss) from discontinued operations    |  

64.8                                           |   |                                                                          |  

(83.8) |   |  

(133.7) |   |
| Net loss                                      | (132.9)                                                     |   |                                                                          | (61.2) |   | (5.5)  |   |
|                                               |                                                             |        |                                                                               |  |  |  |  |  |

 

***            Not meaningful**

 

**Three Months Ended February 29, 2008 Compared to Three Months Ended            February 28, 2007**

 

Revenue for the three months ended February 29, 2008 decreased            approximately $977,000 or 56.5% as compared to the three months ended February 28,            2007. This decrease is primarily attributable to a decrease of approximately $967,000            in revenue related to the expiration of two contracts.

 

Gross profit margins for the three months ended February 29, 2008            decreased to 56.0% from 57.7% for the three months ended February 28, 2007. This            decrease in gross profit margins is related to a decrease in disease management            services revenue of approximately $967,000 primarily attributable to the expiration of            three contracts that were not renewed. This decrease in gross profit margins was offset            by a decrease of approximately $72,000 related to the outsourcing of certain call            center services for our disease management programs and a decrease of approximately            $335,000 of labor costs associated with the reduction in workforce and operating costs            related to the expired contracts.

 

Selling, general and administrative expenses for the three months ended            February 29, 2008 decreased by approximately $380,000 over the three months ended            February 29, 2007. The decrease was primarily attributable to (i) a decrease of            approximately $344,000 in salaries and related costs due to the reduction in headcount;            (ii) a

 

22

 

----

decrease of approximately $44,000 in accounting and consulting services            rendered; (iii) a decrease in director fees of approximately $37,000 related to the            resignation of certain directors. This decrease was offset by (i) an increase of            approximately $58,000 in compensation costs associated with SFAS No. 123(R)            “Share Based Payment”; and (ii) an increase in legal fees of approximately            $28,000 related to the recent strategic alternatives being pursued by the Company for            additional financing.

 

Research and development expenses for the three months ended February            29, 2008 decreased approximately $368,000 or 85.9% over the three months ended February            28, 2007. The decrease in expenses is primarily attributable to (i) a decrease of            approximately $299,000 in labor costs primarily related to the reduction in headcount;            (ii) a decrease in consulting services of approximately $28,000 and (iii) a decrease of            approximately $30,000 in compensation costs associated with SFAS No. 123(R)            “Share Based Payment”. 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. During the three months ended February 29, 2008, there was no capitalization            of costs, which include salaries and consultant fees, incurred for development as            compared to $225,000 for the three months ended February 28, 2007. These programs            incorporate 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 are capitalized and amortized over a two to            five year useful life.

 

Interest income for the three months ended February 29, 2008 was            approximately $6,000 as compared to $101,000 for the three months ended February 28,            2007. This decrease is attributable to the reduction in funds available for            investment.

 

Other income of $1,975,000 for the three months ended February 28,            2007 represents the proceeds from the settlement agreement with Alere within the first            quarter of 2007. See Note 13 - Commitments and Contingencies.

 

Income from discontinued operations for the three months ended February            29, 2008 was approximately $487,000 as compared to a loss of approximately            $1,448,000 for the three months ended February 28, 2007. This increase in            income is primarily attributable to the operations of the South Dakota and            QMedCare of New Jersey SNP being discontinued in 2007 and a decrease in its IBNP            liability for the first quarter of 2008 of approximately $974,000.

 

**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 $1.6 million at February 29, 2008 as compared to            approximately $2.2 million of working capital at November 30, 2007 and ratios of            current assets to current liabilities of 1.3:1 as of February 29, 2008 and 1.3:1 as of            November 30, 2007. The working capital decrease of approximately $0.6 million was            primarily due to the net loss of approximately $1.0 million resulting in cash used in            operations of approximately $0.8 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. The            Company continued to incur losses of $999,184 during the three months ended February            29, 2008 and utilized cash in operating activities of $779,488. 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.

 

23

 

----

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 14 – Subsequent            Events.

 

**Material Commitments**

 

The            following schedule summarizes our contractual cost obligation as of February 29, 2008            in the periods indicated.

 

| ContractualObligations             | Payments Due by Period                                                                             |
|------------------------------------|----------------------------------------------------------------------------------------------------|
| Total                              | Less than 1 year                                                                                   | 1-3 years | 4-5 years | After 5 years |
| Long-Term Debt                     | $                - | $               - | $                - | $             - | $          - |
| Capital Lease Obligations          | 81,236                                                                                             | 29,059 | 52,177 | - | - |
| Operating Leases                   | 2,502,000                                                                                          | 594,000 | 1,557,000 | 351,000 | - |
| Unconditional Purchase Obligations | -                                                                                                  | -  | - | - | - |
| Other Long-Term Obligations        | 1,159,900                                                                                          | 1,159,900  | - | - | - |
| Total Contractual Cash Obligations | $  3,743,136                                                                             | $   1,782,959  | $  1,609,177 | $  351,000 | $          - |

 

**Item            3. Quantitative and Qualitative Disclosures About Market Risk**

 

Our            exposure to market risk for changes in interest rates relates primarily to the            market-driven increase or decrease in interest rates, and the impact of those changes            on the Company’s ability to realize a return on invested or available funds. We            ensure the safety and preservation of our invested principal funds by limiting default            risk, market risk and reinvestment risk. We mitigate default risk by investing in short            term high-credit investment grade securities.

 

**Item** **4.            Evaluation of Disclosure Controls and Procedure**

 

We            have established disclosure controls and procedures to ensure that material information            relating to the Company, including its consolidated subsidiaries, is made known to the            officers who certify the Company’s financial reports and to other members of            senior management and the Board of Directors.

 

Based on their evaluation as of February 29, 2008, the principal            executive officer and principal financial officer of the Company have concluded that            the Company’s disclosure controls and procedures (as defined in            Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are            effective to ensure that the information required to be disclosed by the Company in the            reports that it files or submits under the Securities Exchange Act of 1934 is recorded,            processed, summarized and reported within the time periods specified in SEC rules and            forms.

 

24

 

----

 

 

**Part            II. Other Information**

 

|   | Item 1. | Legal Proceedings |
|--------|---------|-------------------|

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            essentially 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.

             

|   | Item 1A. | Risk Factors |
|--------|----------|--------------|

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

             

|   | Item 2. | Unregistered Sales of Equity Securities and Use of                            Proceeds |
|--------|---------|----------------------------------------------------------------------------------------|

|   | (a) | Non applicable |
|--------|-----|----------------|

|   | (b) | Non applicable |
|--------|-----|----------------|

|   | (c) | None |
|--------|-----|------|

 

|   | Item 3. | Defaults upon Senior Securities |
|--------|---------|---------------------------------|

|   | None. |
|--------|-------|

 

|   | Item 4. | Submission of Matters to a Vote of Security                            Holders |
|--------|---------|--------------------------------------------------------------------------------|

None.

 

|   | Item 5. | Other Information |
|--------|---------|-------------------|

|   | (a) | None |
|--------|-----|------|

|   | (b) | There have been no material changes to the procedures by                            which security holders may recommend nominees to the Company's Board of                            Directors. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

25

 

----

 

 

|   | Item 6. | Exhibits |
|--------|---------|----------|

|   | (a) | The following exhibits are filed as part of this                            report: |
|--------|-----|-------------------------------------------------------------------------------------|

             

|   | 31.1 |         Certification                            of Chief Executive Officer of Periodic Report |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------|

pursuant to Rule 13a-14a and Rule 15d-14(a).

 

|   | 31.2 |         Certification                            of Chief Financial Officer of Periodic Report |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------|

pursuant to Rule 13a-14a and Rule 15d-14(a).

 

|   | 32.1 | Certification of Chief Executive Officer and Chief                            Financial Officer pursuant to 18 U.S.C.- Section                            1350. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|

 

26

 

----

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the            registrant has duly caused this report to be signed on its behalf by the undersigned,            thereunto duly authorized.

 

 

|           | QMed, Inc. |
|----------------|------------|
|           |       |   |
|           |       |   |
|           |       |   |
|           | By:        | /s/ Jane A. Murray |
|           |       | Jane A. Murray |
|           |       | Chief Executive Officer |
|           |       |   |
|           |       |   |
|           |       |   |
|           | By:        | /s/ William T. Schmitt, Jr. |
|           |       | Senior Vice President, Chief Financial |
|           |       | Officer and Treasurer |
|           |       |   |
| April 18, 2008 |       |   |

 

 

27

 

----