Conmed Healthcare Management, Inc. - FORM 10-Q - November 12, 2009

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EX-31.1 - Conmed Healthcare Management, Inc.v165739_ex31-1.htm
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EX-32.2 - Conmed Healthcare Management, Inc.v165739_ex32-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2009

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the transition period from                  to

Commission File Number:
0-27554
 
Conmed Healthcare Management, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
  
42-1297992
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
7250 Parkway Dr., Suite 400
Hanover, MD
  
21076
(Address of principal executive offices)
  
(Zip Code)

(410) 567-5520
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x     NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES o     NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o
Accelerated filer o
   
Non-Accelerated filer o
Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o     NO x
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
 
 
Number of Shares Outstanding
Class
November 12, 2009
Common Stock, $0.0001 par value per share
12,613,322
 
CONMED HEALTHCARE MANAGEMENT, INC.

TABLE OF CONTENTS

 
Page
PART I. FINANCIAL INFORMATION
  
   
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
  
   
Consolidated Balance Sheets
  
September 30, 2009 and December 31, 2008
1
   
Consolidated Statements of Operations
  
For the three and nine months ended September 30, 2009 and 2008
2
   
Consolidated Statements of Cash Flows
  
For the nine months ended September 30, 2009 and 2008
3
   
Consolidated Statements of Shareholders’ Equity
  
For the nine months ended September 30, 2009
5
   
Notes to Consolidated Financial Statements
6
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
23
   
ITEM 4(T). CONTROLS AND PROCEDURES
23
   
PART II. OTHER INFORMATION
  
   
ITEM 1. LEGAL PROCEEDINGS
24
   
ITEM 1A. RISK FACTORS
24
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
24
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
24
   
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
24
   
ITEM 5. OTHER INFORMATION
24
   
ITEM 6. EXHIBITS
24
   
SIGNATURES
25
 
i
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
CONMED HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS

   
September 30,
2009 (unaudited)
    
December 31,
2008
  
ASSETS
            
CURRENT ASSETS
            
Cash and cash equivalents
   $ 10,119,183     $ 7,472,140  
Accounts receivable
     2,837,599       2,375,583  
Prepaid expenses
     176,779       291,599  
    Total current assets
     13,133,561       10,139,322  
                 
PROPERTY AND EQUIPMENT, NET
     650,531       529,304  
                 
DEFERRED TAXES
     1,022,000       645,000  
                 
OTHER ASSETS
                
Service contracts acquired, net
     817,000       2,004,000  
Non-compete agreements, net
     532,667       821,667  
Goodwill
     6,263,705       6,254,544  
Deposits
     15,683       15,408  
Total other assets
     7,629,055       9,095,619  
    $ 22,435,147     $ 20,409,245  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
CURRENT LIABILITIES
                
Accounts payable
   $ 1,201,145     $ 1,080,259  
Accrued expenses
     3,977,339       3,210,749  
Taxes payable
     653,240       432,380  
Deferred revenue
     936,622       561,734  
Notes payable, current portion
     11,446       170,228  
Total current liabilities
     6,779,792       5,455,350  
NOTES PAYABLE, LONG-TERM
     —       35,000  
DERIVATIVE FINANCIAL INSTRUMENTS
     3,720,867       —  
SHAREHOLDERS’ EQUITY
                
Preferred stock, no par value; authorized 5,000,000 shares; issued and outstanding zero shares as of September 30, 2009 and December 31, 2008
     —       —  
Common stock, $0.0001 par value, authorized 40,000,000 shares; issued and outstanding 12,613,322 and 12,457,539 shares as of September 30, 2009 and December 31, 2008, respectively
     1,261       1,246  
Additional paid-in capital
     35,697,560       36,875,610  
Retained (deficit)
     (23,764,333 )     (21,957,961 )
Total shareholders' equity
     11,934,488       14,918,895  
    $ 22,435,147     $ 20,409,245  
See Notes to unaudited Financial Statements
 
Page - 1 -
 
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

   
For the Nine
Months Ended
September 30,
2009
    
For the Nine
Months Ended
September 30,
2008
    
For the Three
Months Ended
September 30,
2009
    
For the Three
Months Ended
September 30,
2008
  
                         
Service contract revenue
   $ 38,775,309     $ 28,362,281     $ 13,643,317     $ 11,531,168  
                                 
HEALTHCARE EXPENSES:
                                
Salaries, wages and employee benefits
     22,138,330       14,695,467       7,900,235       5,975,707  
Medical expenses
     7,248,420       7,702,791       2,485,024       3,042,867  
Other operating expenses
     1,388,780       933,932       524,950       446,228  
Total healthcare expenses
     30,775,530       23,332,190       10,910,209       9,464,802  
                                 
Gross profit
     7,999,779       5,030,091       2,733,108       2,066,366  
                                 
Selling and administrative expenses
     5,774,101       4,574,429       2,014,378       1,490,008  
Depreciation and amortization
     1,627,951       1,533,870       387,392       504,295  
Total operating expenses
     7,402,052       6,108,299       2,401,770       1,994,303  
                                 
Operating income (loss)
     597,727       (1,078,208 )     331,338       72,063  
                                 
OTHER INCOME (EXPENSE)
                                
Interest income
     61,127       145,085       16,547       37,934  
Interest (expense)
     (7,991 )     (4,721 )     (819 )     (1,527 )
Change in fair value of derivatives
     (1,688,623 )     —       755,650       —  
Total other income (expense)
     (1,635,487 )     140,364       771,378       36,407  
                                 
Income (loss) before income taxes
     (1,037,760 )     (937,844 )     1,102,716       108,470  
Income tax (expense)
     (402,000 )     —       (249,000 )     —  
Net income (loss)
   $ (1,439,760 )   $ (937,844 )   $ 853,716     $ 108,470  
                                 
EARNINGS (LOSS) PER COMMON SHARE
                                
Basic
   $ (0.11 )   $ (0.08 )   $ 0.07     $ 0.01  
Diluted
   $ (0.11 )   $ (0.08 )   $ 0.01     $ 0.01  
                                 
WEIGHTED-AVERAGE SHARES OUTSTANDING
                                
Basic
     12,546,754       12,012,681       12,606,699       12,024,222  
Diluted
     12,546,754       12,012,681       14,183,486       13,305,347  
See Notes to unaudited Financial Statements
 
Page - 2 -
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
   
For the Nine
Months Ended
September 30,
2009
    
For the Nine
Months Ended
September 30,
2008
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net (loss)
   $ (1,439,760 )   $ (937,844 )
Adjustments to reconcile net income to net cash provided by operating activities
                
Depreciation
     151,951       72,870  
Amortization
     1,476,000       1,461,000  
Stock-based compensation
     475,597       423,221  
Loss on disposal of property
     —       2,257  
Deferred income taxes
     (377,000 )      (300,000 )
Change in fair value of derivatives
     1,688,623       —  
Changes in working capital components
                
(Increase) in accounts receivable
     (462,016 )     (1,086,746 )
Decrease (increase) in prepaid expenses
     114,820       (277,580 )
Decrease (increase) in deposits
     (275 )     19,999  
Increase in accounts payable
     120,886       49,724  
Increase in accrued expenses
     766,590       2,254,553  
Increase in income taxes payable
     220,860     203,260  
Increase (decrease) in deferred revenue
     374,888       (133,923 )
Net cash provided by operating activities
     3,111,164       1,750,791  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Purchase of property and equipment
     (273,178 )     (357,918 )
Asset Purchase from EMDC, P.C.
     —       (245,853 )
Stock Purchase of CMHS, LLC
     (9,161 )     —  
Net cash (used in) investing activities
     (282,339 )     (603,771 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Payments on line of credit
     (100,000 )     —  
Payments on loans
     (93,782 )     (53,964 )
Proceeds from exercise of warrants
     12,000       —  
Net cash (used in) financing activities
     (181,782 )     (53,964 )
                 
Net increase in cash and cash equivalents
     2,647,043       1,093,056  
                 
CASH AND CASH EQUIVALENTS
                
Beginning
     7,472,140       7,136,720  
Ending
   $ 10,119,183     $ 8,229,776  
 
Page - 3 -
 
NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
            
Stock (81,081 Shares) for Asset Purchase from EMDC, P.C.
     —       150,000  
Promissory Note payable to EMDC, P.C. for Asset Purchase
     —       132,275  
Warrants (80,000 Shares) for Asset Purchase from EMDC, P.C.
     —       50,013  
    $ —     $ 332,288  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                
Cash payments for interest
   $ 7,991     $ 4,721  
Income taxes paid
     558,140       96,740  

See Notes to unaudited Financial Statements
 
Page - 4 -
CONMED HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
 
   
Preferred
Stock
    
Common
Stock
    
Additional Paid-
in Capital
    
Accumulated
Deficit
    
Total
  
Balance at December 31, 2008
   $ —     $ 1,246     $ 36,875,610     $ (21,957,961 )   $ 14,918,895  
Cumulative effect of change in accounting principle January 1, 2009 reclassification of embedded feature of equity-linked financial instrument to derivative liability
     —       —       (2,399,538 )     (366,612 )     (2,766,150 )
Net Income
     —       —       —       (1,439,760 )     (1,439,760 )
Stock option expense
     —       —       475,597       —       475,597  
Exercise of warrants
     —       15       454,922       —       454,937  
Amended warrants removing embedded feature of equity-linked financial instrument
     —       —       290,969       —       290,969  
Balance at September 30, 2009
   $ —     $ 1,261     $ 35,697,560     $ (23,764,333 )   $ 11,934,488  
See Notes to unaudited Financial Statements
 
Page - 5 -
 
CONMED HEALTHCARE MANAGEMENT, INC.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1.
Nature of Business
 
Prior to January 26, 2007, Conmed Healthcare Management, Inc. (together with its consolidated subsidiaries, “we”, “us”, “our” or the Company, unless otherwise specified or the context otherwise requires) was classified as a public shell, had no ongoing operations, minimal operating expenses, no employees and operated under the name Pace Health Management Systems, Inc. (“Pace”).

On January 26, 2007, the Company acquired Conmed, Inc. (“Conmed, Inc.”) a provider of correctional healthcare services (the “Acquisition”). Conmed, Inc. was formed as a corporation on June 10, 1987 in the State of Maryland for the purpose of providing healthcare services exclusively to county detention centers located in Maryland. As Conmed, Inc. developed, it accepted more contracts for additional services including mental health, pharmacy and out-of-facility healthcare expenses. In 2000, Conmed, Inc. served more than 50% of the county detention healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek contracts outside of Maryland.

As a result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the Company and the business of Conmed, Inc. is now our primary business. On March 13, 2007, the Company changed its name to Conmed Healthcare Management, Inc. As of September 30, 2009, we were in contract with, and currently providing medical services in thirty-six counties in the following seven states:  Arizona, Kansas, Maryland, Oklahoma, Oregon, Virginia and Washington.
 
NOTE 2.
Significant Accounting Policies
 
The accompanying unaudited consolidated financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, the financial information and disclosures normally included in the financial statements prepared annually in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. Readers of this report should, therefore, refer to the consolidated financial statements and notes included in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2008, filed with the SEC on July 14, 2009.

In the opinion of management, all adjustments (consisting of normal and recurring adjustments) which are considered necessary to fairly present our financial position and our results of operations as of and for these periods have been made.

Our interim results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results of operations to be expected for a full year.

A summary of the Company's significant accounting policies is as follows:

Acquisitions
Acquisitions are recorded as required by business combination accounting standards using the purchase method. Under purchase accounting, assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree should be stated on the financial statements at “fair value” (see definition in Fair Value of Financial Instruments section below), with limited exceptions, as of the acquisition date.  This standard requires that intangible assets be recognized as assets apart from goodwill if they meet one of two criteria, (1) the contractual-legal criterion, or (2) the separability criterion.  This standard also requires disclosure of the primary reasons for business combination and the allocation of the purchase price paid to the assets acquired and the liabilities assumed by major balance sheet caption. Goodwill is to be recognized as a residual. If the acquisition-date fair value exceeds the consideration transferred, a gain is to be recognized. The statement generally requires that acquisition costs be expensed as incurred. This standard is effective for business combinations for which the acquisition date is on or after January 1, 2009.
 
Page - 6 -
 
Service Contracts Acquired
There are material costs in obtaining a customer list, especially customers with recurring revenue streams. The value of service contracts acquired is represented by the future revenue streams, therefore, the income approach is the most applicable fair value measurement approach to value these assets. The operating income streams of service contracts acquired are calculated based on the net present value of estimated earnings. Operating income streams are estimated on a contract by contract basis and an overall cost factor is used to estimate management expenses.  Service contracts acquired are amortized over the life of each individual contract.

Non-Compete Agreements
Non-compete agreements are generally acquired as part of our acquisition agreements.  Key considerations in estimating the value of non-compete agreements include consideration of the potential losses resulting from such competition, the enforceability of the terms of the agreement, and the likelihood of competition in the absence of the agreement. Non-compete agreements are amortized over the lives of the agreements.

Goodwill
We record as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired.  Annually, as well as when an event triggering impairment may have occurred, the Company is required to perform a two-step impairment test on goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment. There have been no indicators of impairment for any of the goodwill. We have elected to perform our annual analysis during the fourth quarter of each fiscal year.

Fair Value of Financial Instruments
Financial instruments include cash, receivables, accounts payable, accrued expenses, deferred revenue and long-term debt. We believe the fair value of each of these instruments approximates their carrying value in the balance sheet as of the balance sheet date. The fair value of current assets and current liabilities is estimated to approximate carrying value due to the short-term nature of these instruments. The fair value of the long-term debt is estimated based on anticipated interest rates which we believe would currently be available to us for similar issues of debt, taking into account our current credit risk and other market factors.  The same assumptions are used to record financial instruments acquired through acquisition at fair value.

Effective January 1, 2008, we adopted the new accounting guidance on fair value measurements. In February 2008, the Financial Accounting Standards Board (“FASB”) issued a one year deferral of the effective date of fair value measurement guidance for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the fair value measurement guidance with respect to its financial assets and liabilities only. The fair value measurement guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under the fair value measurement guidance as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under the fair value measurement guidance must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:
 
 
·
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
 
·
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
·
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of the fair value measurement guidance did not have a material impact on our financial statements.  Details related to our adoption of this standard are discussed in Note 6, “Fair Value Measurements”.
 
Page - 7 -
 
Revenue Recognition
Our principal source of revenue is contracts to provide medical assistance to county and municipal correctional facilities. Deferred revenue represents amounts that may be paid in advance of delivery under these contracts.

Most of our contracts call for a fixed monthly fee. In addition, most contracts have incremental charges based on the average daily population (“ADP”) of the correctional facility or a contractual fee adjustment based on the ADP. Revenues from contracts are recognized ratably for fixed fees, or monthly for contracts with variable charges based on ADP. We have one contract that partially operates on a cost plus basis. The timing of each payment varies per contract. Credit terms are not more than 30 days from the date of invoice.

Certain contracts provide for monthly fee adjustments to reflect any missed hours of work required under terms of the contract. In addition, we may incur liquidated damages related to specific performance measurements required under the contract that we have failed to meet. Reductions in monthly fees resulting from staffing adjustments and liquidated damages are recorded by us as reductions to revenue.

Certain contracts include “stop/loss” limits, which create a ceiling to our financial responsibility for an individual inmate's care or a maximum amount in the aggregate for certain categories of medical expenses, whereby we are protected from catastrophic medical losses. In circumstances where a stop/loss is reached, we are reimbursed for any costs incurred over the predetermined stop/loss amount. Any reimbursement received by us is recorded as revenue.

Accrued Medical Claims Liability
Medical expenses include the costs associated with medical services provided by off-site medical providers; pharmacy, laboratory and radiology fees; professional and general liability insurance as well as other generally related medical expenses. The cost of medical services provided, administered or contracted for are recognized in the period in which they are provided based in part on estimates for unbilled medical services rendered through the balance sheet date. The Company estimates an accrual for unbilled medical services using available utilization data including hospitalization, one-day surgeries, physician visits and emergency room and ambulance visits and other related costs, which are estimated. Additionally, Company personnel review certain inpatient hospital stays and other high cost medical procedures and expenses in order to attempt to identify costs in excess of the historical average rates. Once identified, reserves are determined which take into consideration the specific facts available at that time.

Actual payments and future reserve requirements will differ from the Company’s current estimates. The differences could be material if significant adverse fluctuations occur in the healthcare cost structure or the Company’s future claims experience. Changes in estimates of claims resulting from such fluctuations and differences between estimates and actual claims payments are recognized in the period in which the estimates are changed or the payments are made.

Stock Compensation
Compensation expense for stock-based awards is recorded over the vesting period at the fair value of the award at the time of grant. The recording of such compensation began on January 1, 2006 for shares not yet vested as of that date and for all new grants subsequent to that date. The exercise price of options granted under our incentive plans is equal to the fair market value of the underlying stock at the grant date. We assume no projected forfeitures on stock-based compensation, since actual historical forfeiture rates on our stock-based incentive awards have been negligible.

Fair Value of Derivative Financial Instruments
Effective January 1, 2009, we adopted derivative accounting on warrants that are indexed to an entity’s own stock. Details related to our adoption of this standard and its impact on our financial position and results of operations are discussed in Note 5, “Fair Value of Warrants”.

Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
Page - 8 -
 
Recently Adopted Accounting Standards
Effective January 1, 2009, we adopted guidance on noncontrolling interests and it did not have a material impact on our financial position or results of operations. Companies are required to report ownership interest in subsidiaries held by other parties (minority interest) to be clearly identified, labeled and presented in the consolidated statement of financial condition separately within the equity section. The amount of consolidated net income attributable to the parent company and to the noncontrolling interest is to be clearly identified and presented on the face of the consolidated statement of income.

Effective with the quarter ended June 30, 2009, we adopted guidance on interim disclosures about fair value of financial instruments and it did not have a material impact on our financial position or results of operations.  This guidance requires disclosures about fair value of financial instruments in interim and annual financial statements.

Effective with the quarter ended June 30, 2009, we adopted guidance on subsequent events and it did not have a material impact on our financial position or results of operations.  This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.

Effective with the quarter ended September 30, 2009, we adopted The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.  The FASB Accounting Standards Codification (“Codification”) will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  In the FASB’s view, the issuance of the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition”, paragraphs 38-76.
 
NOTE 3.
Common Stock Options
 
The Board of Directors has adopted, and our stockholders have approved, the 2007 Stock Option Plan, as amended (the “2007 Plan”). The 2007 Plan provides for the grant of up to 2,350,000 incentive stock options, nonqualified stock options, restricted stock, stock bonuses and stock appreciation rights. The 2007 Plan is administered by the independent members of the Board of Directors, which has the authority and discretion to determine: the persons to whom the options will be granted; when the options will be granted; the number of shares subject to each option; the price at which the shares subject to each option may be purchased; and when each option will become exercisable. The options generally vest over three to four years and expire no later than ten years from the date of grant.

During the nine months ended September 30, 2009 and 2008, we recorded stock-based compensation expense net of reversals for forfeited options totaling $475,597 and $423,221, respectively and during the three months ended September 30, 2009 and 2008 we recorded stock-based compensation expense net of reversals for forfeited options totaling $151,328 and $159,974, respectively.

During the nine months ended September 30, 2009, options were granted to purchase 89,000 shares of common stock at an average exercise price of $3.00 per share.  Additionally, during the nine months ended September 30, 2009, options to purchase 66,896 shares of common stock were forfeited and as of September 30, 2009, 314,729 shares remain available for grant.
 
Page - 9 -
 
NOTE 4.
Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings (loss) per-share:

   
For the Nine
Months Ended
September 30,
2009
    
For the Nine
Months Ended
September 30,
2008
    
For the Three
Months Ended
September 30,
2009
    
For the Three
Months Ended
September 30,
2008
  
Numerator
                       
Net income (loss) for basic earnings per share:
   $ (1,439,760 )   $ (937,844 )   $ 853,716     $ 108,470  
Subtractions:                                
Change in fair value of derivatives
     —       —       755,650       —  
Net income (loss) for diluted earnings per share:
   $ (1,439,760 )   $ (937,844 )   $ 98,066     $ 108,470  
                                 
Denominator:
                                
Weighted-average basic shares outstanding
     12,546,754       12,012,681       12,606,699       12,024,222  
Assumed conversion of dilutive securities
                                
Stock options
     —       —       418,134       67,145  
Warrants
     —       —       1,158,653       1,213,980  
Potentially dilutive common shares
     —       —       14,183,486       1,281,125  
                                 
Denominator for diluted earnings per share – Adjusted weighted average shares
     12,546,754       12,012,681       14,183,486     13,305,347  
                                 
Earnings (loss) per common share:
                                
Basic
   $ (0.11 )   $ (0.08 )   $ 0.07     $ 0.01  
Diluted
   $ (0.11 )   $ (0.08 )   $ 0.01     $ 0.01  

Common stock warrants and options outstanding totaling 3,947,938 and 4,354,667 shares, respectively, are not included in diluted earnings per common share for the nine months ended September 30, 2009 and 2008, respectively, as they would have an antidilutive effect upon earnings per common share.
 
NOTE 5.
Fair Value of Warrants
 
As a result of adopting derivative accounting for warrants, effective January 1, 2009, 1,705,000 of our issued and outstanding common stock purchase warrants previously treated as equity were no longer afforded equity treatment as follows.  These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model and all changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised, amended or expire.

Pre-Acquisition Warrants @ $0.30 per share
On October 24, 2005, Pace issued 37,500 warrants to purchase common stock, as adjusted for the 1 for 20 reverse stock split. Of these warrants, 30,000 were issued to John Pappajohn, Pace's sole director and acting chairman, and the remaining 7,500 warrants were issued to his designees. The warrants were issued as compensation for past services rendered and all warrants were immediately vested. The warrants had an exercise price of $10.00, which exceeded the market price of Pace's common stock at the time of issuance. The value of the warrants was separately estimated at $0.20 per share or $10,000 based on the Black-Scholes valuation of the call option associated with a five-year warrant. As part of the negotiations for the private placement of $15,000,000 of units of Series B Convertible Preferred Stock and warrants completed on January 26, 2007 (the “Private Placement), Mr. Pappajohn relinquished the 30,000 warrants that were issued to him, and the remaining 7,500 warrants issued to his designees were adjusted to 250,000 warrants to purchase common stock exercisable at $0.30 per share, expiring October 23, 2010.

Black-Scholes assumptions
  
September 30, 2009
    
January 1, 2009
  
Expected life (years)
     0.5       0.9  
Expected volatility
     82.64 %     82.51 %
Risk-free interest rate
     1.0 %     0.8 %
Expected dividend yield
     0.0 %     0.0 %
 
Page - 10 -
 
As of January 1, 2009, we had outstanding warrants to purchase an aggregate of 225,000 shares of common stock.  During the nine months ended September 30, 2009, warrants to purchase 2,000 shares of common stock were exercised by cashless exercise and as a result, a total of 1,854 shares of common stock were issued.  As of September 30, 2009, we had outstanding warrants to purchase an aggregate of 223,000 shares of common stock.

Investor Warrants @ $0.30 per share
In connection with the Private Placement, each investor received a warrant to purchase up to a number of shares of common stock equal to 25% of such investor's subscription amount, divided by the conversion price of the Series B Convertible Preferred Stock, with an exercise price equal to $0.30. As a result, we issued to investors warrants to purchase an aggregate of 1,500,000 shares of common stock, exercisable at $0.30 per share, expiring March 13, 2012.

Black-Scholes assumptions
  
September 30, 2009
    
January 1, 2009
  
Expected life (years)
     1.7       2.0  
Expected volatility
     82.64 %     82.51 %
Risk-free interest rate
     1.5 %     1.1 %
Expected dividend yield
     0.0 %     0.0 %

As of January 1, 2009, we had outstanding warrants to purchase an aggregate of 980,000 shares of common stock.  During the nine months ended September 30, 2009, warrants to purchase 40,000 shares of common stock were exercised for cash and warrants to purchase 127,000 shares of common stock were exercised by cashless exercise and as a result, a total of 153,018 shares of common stock were issued.  During the nine months ended September 30, 2009, warrants to purchase 91,570 shares of common stock were amended and are now treated as equity.  As of September 30, 2009, we had outstanding warrants to purchase an aggregate of 721,430 shares of common stock.

Investor Warrants @ $2.50 per share
In connection with the Private Placement, each investor received a warrant to purchase up to a number of shares of common stock equal to 8.3% of such investor's subscription amount, divided by the conversion price of the Series B Convertible Preferred Stock, with an exercise price equal to $2.50 per share. As a result, we issued to investors warrants to purchase an aggregate of 500,000 shares of common stock, exercisable at $2.50 per share, expiring March 13, 2012.

Black-Scholes assumptions
  
September 30, 2009
    
January 1, 2009
  
Expected life (years)
     1.7       2.0  
Expected volatility
     82.64 %     82.51 %
Risk-free interest rate
     1.5 %     1.1 %
Expected dividend yield
     0.0 %     0.0 %

As of January 1, 2009, we had outstanding warrants to purchase an aggregate of 500,000 shares of common stock.  During the nine months ended September 30, 2009, warrants to purchase 3,333 shares of common stock were exercised by cashless exercise and as a result, a total of 911 shares of common stock were issued.  As of September 30, 2009, we had outstanding warrants to purchase an aggregate of 496,667 shares of common stock.

Summary
On January 1, 2009, in connection with our adoption of EITF 07-5, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $366,612 to beginning retained earnings and $2,399,538 to a long-term warrant liability to recognize the fair value of such warrants on such date.
 
Page - 11 -
 
The following table summarizes the warrant activity for the nine months ended September 30, 2009:

   
Pre-
Acquisition
Warrants
    
Investor
Warrants @
$0.30 per
share
    
Investor
Warrants @
$2.50 per
share
    
Total
  
Shares outstanding as of January 1, 2009
     225,000       980,000       500,000       1,705,000  
                                 
Shares exercised
     2,000       167,000       3,333       172,333  
Fair value of shares exercised
   $ 7,584     $ 424,846     $ 10,507     $ 442,937  
Realized (loss) on shares exercised
   $ (479 )   $ (87,536 )   $ (3,276 )   $ (91,291 )
                                 
Shares amended
     -       91,570       -       91,570  
Fair value of shares amended
   $ -     $ 290,968     $ -     $ 290,968  
Realized gain on shares amended
   $ -     $ 35,363     $ -     $ 35,363  
                                 
Shares outstanding as of September 30, 2009
     223,000       721,430       496,667       1,441,097  
                                 
Unrealized (loss) on shares outstanding as of September 30, 2009
   $ (259,373 )   $ (989,097 )   $ (384,225 )   $ (1,632,695 )
Fair value of shares outstanding as of September 30, 2009
   $ 680,490     $ 2,208,156     $ 832,221     $ 3,720,867  

The following table summarizes the warrant activity for the three months ended September 30, 2009:

   
Pre-
Acquisition
Warrants
    
Investor
Warrants @
$0.30 per
share
    
Investor
Warrants @
$2.50 per
share
    
Total
  
Shares outstanding as of June 30, 2009
     225,000       823,000       500,000       1,548,000  
                                 
Shares exercised
     2,000       10,000       3,333       15,333  
Fair value of shares exercised
   $ 7,584     $ 31,525     $ 10,507     $ 49,616  
Realized gain (loss) on shares exercised
   $ (479 )   $ 4,112     $ (3,276 )   $ 357  
                                 
Shares amended
     -       91,570       -       91,570  
Fair value of shares amended
   $ -     $ 290,968     $ -     $ 290,968  
Realized gain on shares amended
   $ -     $ 35,363     $ -     $ 35,363  
                                 
Shares outstanding as of September 30, 2009
     223,000       721,430       496,667       1,441,097  
                                 
Unrealized gain on shares outstanding as of September 30, 2009
   $ 111,682     $ 362,830     $ 245,418     $ 719,930  
Fair value of shares outstanding as of September 30, 2009
   $ 680,490     $ 2,208,156     $ 832,221     $ 3,720,867  

As of September 30, 2009, we had outstanding warrants to purchase an aggregate of 1,912,667 shares of common stock, of which warrants to purchase 1,441,097 shares of common stock were subject to derivative accounting for warrants, at an average exercise price of $1.32 and have reserved shares of our common stock for issuance in connection with the potential exercise thereof.
 
NOTE 6.
Fair Value Measurements
 
As a result of the adoption of derivative accounting for warrants, the Company is also required to disclose the fair value measurements required by the fair value measurement guidance.  The derivative financial instruments recorded at fair value in the balance sheet as of September 30, 2009 are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
 
Page - 12 -
 
The following table summarizes the financial liabilities measured at fair value on a recurring basis as of September 30, 2009, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

   
Total
    
Quoted prices in
active markets for
identical assets
(Level 1)
    
Significant other
observable inputs
(Level 2)
    
Significant
unobservable
inputs
(Level 3)
  
Derivative financial instruments
   $ 3,720,867     $ —     $ —     $ 3,720,867  

Equity-linked financial instruments consist of stock warrants issued by the Company that contain a strike price adjustment feature.  In accordance with derivative accounting for warrants, we calculated the fair value of warrants using the Black-Scholes option pricing model and the assumptions used are described in Note 5, “Fair Value of Warrants”.  During the nine months ended September 30, 2009, we recognized a $1,632,695 unrealized loss and a $55,928 realized loss related to the change in fair value of the financial instruments which is included in Other Income on the Statement of Operations.

The following table reflects the activity for liabilities measured at fair value using Level 3 inputs for the nine months ended September 30, 2009:

Initial recognition of equity-linked financial instruments as of January 1, 2009
   $ 2,766,150  
Transfers into level 3
     —  
Transfers out of level 3
     (290,968 )
Sales of equity-linked financial instruments
     (442,937 )
Realized loss related to the change in fair value
     55,927  
Unrealized loss related to the change in fair value
     1,632,695  
Balance as of September 30, 2009
   $ 3,720,867  
 
NOTE 7.
Income Tax Matters
 
Our effective tax rate differs from the expected tax rate primarily due to permanent differences related to stock-based compensation and derivatives related to warrants.  The change in our effective tax rate from prior periods is primarily due to the relation of our taxable income relative to pre-tax income and the ability to effectively determine our annualized effective tax rate.  For the nine months ended September 30, 2009, we recorded income tax expense of $402,000 and for the three months ended September 30, 2009, we recorded income tax expense of $249,000.  Management continues to apply a valuation allowance against certain deferred tax assets because of a limited history of taxable income, the long-term nature of the deferred tax asset and certain limitations regarding the utilization of the net operating loss carryforwards. The Company’s ability to utilize its net operating loss carryforwards and research and development credit is currently limited due to limitations on change of control under Section 382 of the Internal Revenue Code. Accordingly, we have fully reserved for the net operating loss carryforwards and research and development credit as we do not expect to derive any future benefit from them.
 
NOTE 8.
Subsequent Events
 
Subsequent events have been evaluated through November 12, 2009, the date financial statements are filed with the SEC.  Through that date, there were no events requiring disclosure.
 
Page - 13 -
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Information included in this section and elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements regarding the business, operations and financial condition of Conmed Healthcare Management, Inc. (together with its consolidated subsidiaries, the “Company”, “we”, “us”, or “our” unless otherwise specified or the context otherwise requires) within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from our future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, and other statements that are not historical facts, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," “plan,” “potential” or "project" or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. We caution you not to place undue reliance on these forward-looking statements. Such forward-looking statements relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future changes make it clear that any projected results or events expressed or implied therein will not be realized. You are advised, however, to consult any further disclosures we make in future public statements and press releases.  More detailed information about us and the risk factors that may affect the realization of forward-looking statements is set forth in our filings with the Securities and Exchange Commission (the “SEC”), including Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2008, filed with the SEC on July 14, 2009. Investors and security holders are urged to read this document free of charge on the SEC's web site at www.sec.gov.
 
General
 
Prior to January 26, 2007, the Company was classified as a shell company and had no ongoing operations, minimal operating expenses, no employees and operated under the name Pace Healthcare Management Systems, Inc.

On January 26, 2007, we acquired Conmed, Inc., a provider of correctional healthcare services since 1984 (the “Acquisition”). Conmed, Inc. was formed as a corporation on June 10, 1987 in the State of Maryland for the purpose of providing healthcare services exclusively to county detention centers located in Maryland. As Conmed, Inc. developed, it accepted more contracts for additional services including pharmacy and out-of-facility healthcare expenses. In 2000, Conmed, Inc. served more than 50% of the county detention healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek contracts outside of Maryland and by December 2006, it had secured contracts in four states. In January 2007, Conmed, Inc. was in contract with and serviced 18 detention centers and facilities at the county level in the United States. As a result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the Company and the business of Conmed, Inc. is now our primary business. As of September 30, 2009 the Company was servicing detention facilities in thirty-six counties and seven states. Our services also include the mental health offerings provided by our wholly-owned subsidiary Correctional Mental Health Services, LLC (“CMHS”).
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations are based upon our condensed financial statements. These condensed financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and related medical expense accruals and amortization and potential impairment of intangible assets and goodwill and stock-based compensation expense. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2008, filed with the SEC on July 14, 2009. There have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K/A for the year ended December 31, 2008.
 
Page - 14 -
 
Recently Adopted Accounting Standards
 
Effective January 1, 2009, we adopted the revised business combination accounting standards and it did not have a material impact on our financial position or results of operations. This standard applies to all transactions in which an entity obtains control of one or more businesses. This standard requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values, with limited exceptions, as of the acquisition date. Goodwill is to be recognized as a residual. If the acquisition-date fair value exceeds the consideration transferred, a gain is to be recognized. This standard generally requires that acquisition costs be expensed. This standard became effective for business combinations for which the acquisition date is on or after January 1, 2009.

Effective January 1, 2009, we adopted guidance on noncontrolling interests and it did not have a material impact on our financial position or results of operations. Companies are required to report ownership interest in subsidiaries held by other parties (minority interest) to be clearly identified, labeled and presented in the consolidated statement of financial condition separately within the equity section. The amount of consolidated net income attributable to the parent company and to the noncontrolling interest is to be clearly identified and presented on the face of the consolidated statement of income.

Effective January 1, 2009, we adopted derivative accounting on warrants that are indexed to an entity’s own stock.  Details related to our adoption of this standard and its impact on our financial position and results of operations are discussed in more detail elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Effective with the quarter ended June 30, 2009, we adopted guidance on interim disclosures about fair value of financial instruments and it did not have a material impact on our financial position or results of operations.  This guidance requires disclosures about fair value of financial instruments in interim and annual financial statements.

Effective with the quarter ended June 30, 2009, we adopted guidance on subsequent events and it did not have a material impact on our financial position or results of operations.  This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.

Effective with the quarter ended September 30, 2009, we adopted The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.  The FASB Accounting Standards Codification (“Codification”) will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  In the FASB’s view, the issuance of the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition”, paragraphs 38-76.
 
New Accounting Pronouncements
 
None.
 
Page - 15 -
 
Results of Operations
 
Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008
The following discussion of financial results below is derived from unaudited financial statements for the three months ended September 30, 2009 and 2008.

   
Three Months Ended
September 30, 2009
    
Three Months Ended
September 30, 2008
  
   
Amount
    
% of
Revenue
    
Amount
    
% of
Revenue
  
Service contract revenue
   $ 13,643,317       100.0 %   $ 11,531,168       100.0 %
                                 
HEALTHCARE EXPENSES:
                                
Salaries, wages and employee benefits
     7,900,235       57.9 %     5,975,707       51.8 %
Medical expenses
     2,485,024       18.2 %     3,042,867       26.4 %
Other operating expenses
     524,950       3.8 %     446,228       3.9 %
Total healthcare expenses
     10,910,209       80.0 %     9,464,802       82.1 %
                                 
Gross profit
     2,733,108       20.0 %     2,066,366       17.9 %
                                 
OPERATING EXPENSES:
                                
Selling, general & administrative expenses
     2,014,378       14.8 %     1,490,008       12.9 %
Depreciation and amortization
     387,392       2.8 %     504,295       4.4 %
Total operating expenses
     2,401,770       17.6       1,994,303       17.3 %
                                 
Operating income
     331,338       2.4 %     72,062       0.6 %
                                 
OTHER INCOME (EXPENSE)
                                
Interest income
     16,547       0.1 %     37,934       0.3 %
Interest expense
     (819 )     0.0 %     (1,527 )     0.0 %
Change in fair value of derivatives
     755,650       5.5 %     —       0.0 %
Total other income (expense)
     771,378       5.7 %     36,407       0.3 %
                                 
Income before income taxes
     1,102,716       8.1 %     108,470       0.9 %
                                 
Income tax expense
     249,000       1.8 %     —       0.0 %
                                 
Net income
   $ 853,716       6.3 %   $ 108,470       0.9 %

Revenues
Net revenue from medical services provided primarily to correctional institutions for the three months ended September 30, 2009 and 2008, was $13,643,317 and $11,531,168, respectively, which represents an increase of $2,112,149 or 18.3%. Net income was $853,716 or 6.3% of revenue compared to a net income of $108,470 or 0.9% of revenue for the three months ended September 30, 2009 and 2008, respectively, which represented increased income of $745,246.

Approximately $1,990,569 or 94.2% of the increase in revenue for the three months ended September 30, 2009 compared to the same period for the prior year resulted from the addition of contracts signed with new jurisdictions since June 30, 2008: Caroline County, MD; Coos County, OR; Creek County, OK; Pima County, AZ; Washington County, MD; and Western Virginia Regional Jail, VA.  Revenues also increased as a result of the acquisition of CMHS on November 4, 2008. Revenue improvement totaling approximately $345,887, or 16.4% of the increase, resulted primarily from expansion of the services provided under a number of our existing contracts in which we were providing services prior to 2008. Price increases related to existing service requirements totaled approximately $345,347 or 16.4% of the revenue increase. Partially offsetting the above were decreases in other volume related activities totaling $569,654, or 27.0% of revenue, primarily associated with a decrease in stop/loss reimbursements due to reduced out of facility medical expenditures in excess of stop/loss limits billed back to counties.
 
Page - 16 -
 
Healthcare Expenses
Salaries and employee benefits
Salaries and employee benefits for healthcare employees were $7,900,235 or 57.9% of revenue for the three months ended September 30, 2009, compared to $5,975,707 or 51.8% of revenue for the three months ended September 30, 2008. The increase in spending for salaries and employee benefits of $1,924,528 or 32.2% is due primarily to the addition of new healthcare employees resulting from new business. Approximately 59% of the increase related to new healthcare employees required to support the staffing requirements for our new medical service contracts as detailed above and approximately 19% in the increase relates to the salaries and employee benefits for the new mental health employees related to the CMHS acquisition in November 2008.  Additional services related to previously existing medical service contracts plus cost-of-living and wage and benefit adjustments for existing employees accounted for the remainder of the increase. The increase in salaries and employee benefits as a percentage of revenue is due to a change in the mix of expense for salaries and benefits. Several of our new medical service contracts plus the mental health contracts related to the CMHS acquisition have a higher proportion of staffing services compared to our previously existing contracts and as a result these new contracts increased the mix of salaries and employee benefits as a percentage of total revenue.

Medical expenses
Medical expenses for the three months ended September 30, 2009 and 2008 were $2,485,024 or 18.2% of revenue and $3,042,867 or 26.4% of revenue, respectively, which represented a decrease of $557,843 or 18.3%. The decrease in spending for medical expenses in absolute dollars despite the increase in revenue reflects decreases for reimbursable expenditures for hospitalization and pharmacy costs. Additionally, the mental health services provided by CMHS, as a subcontractor, to Conmed prior to the acquisition of CMHS on November 4, 2008 were being recorded as independent contractor medical expenses totaling approximately $223,000.  Following the acquisition, those expenses are primarily recorded as salaries and employee benefits. The reduction in spending as a percentage of revenue results from the favorable mix factor generated from the new staffing services and the CMHS acquisition as detailed above. Finally, the new contracts entered into since June 30, 2008 have a lower ratio of medical expenses compared to our previously existing contracts, which reduced the mix of medical expenses as a percentage of total revenue.

Other operating expenses
Other operating expenses were $524,950, or 3.8% of revenue, for the three months ended September 30, 2009, compared to $446,228, or 3.9% of revenue, for the three months ended September 30, 2008. The increase of $78,722 in spending is primarily related to the increase in the number of inmates served as a result of the new service contracts and reflects increased spending for employment advertising and recruiting, professional liability insurance, legal expenses, office supplies and travel expenses.

Operating Expenses
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended September 30, 2009 and 2008 were $2,014,378 or 14.8% of revenue and $1,490,008 or 12.9% of revenue, respectively. The increased expenditures of $524,370 primarily reflects an increased investment in additional management and administrative personnel required to support new contracts and services added in 2008 and 2009 plus higher travel, legal and accounting expenses. Stock based compensation for the three months ended September 30, 2009 and 2008 was $151,328 and $159,974, respectively.

Depreciation and amortization
Depreciation and amortization primarily reflects the amortization of intangible assets related to the acquisition of Conmed, Inc. in January 2007, the purchase of medical service contracts from Emergency Medicine Documentation Consultants, P.C. (“EMDC”) in February 2008 and the acquisition of CMHS in November 2008. Amortization of service contracts acquired was $230,000, or 1.7% of revenue, for the three months ended September 30, 2009, compared to $389,000, or 3.4% of revenue, for the three months ended September 30, 2008. The decrease primarily reflects a decrease in amortization expense related to the Conmed, Inc. acquisition and EMDC asset purchase as certain individual contracts acquired have become fully amortized, which was partially offset by amortization expense for mental health service contracts acquired in the CMHS acquisition in November 2008 partially offsetting the above.  Amortization of non-compete agreements was $96,000, or 0.7% of revenue, for the three months ended September 30, 2009, compared to $82,000, or 0.7% of revenue, for the three months ended September 30, 2008. The increase reflects an additional non-compete agreement related to the acquisition of CMHS. Depreciation expense increased to $61,392 for the three months ended September 30, 2009 compared to $33,295 for the prior year period due primarily to capital expenditures associated with vehicle purchases, a new corporate accounting system and computer equipment in our Pima County, AZ facility.
 
Page - 17 -

Interest income
Interest income was $16,547 for the three months ended September 30, 2009 compared to $37,934 for the same period in 2008. Average cash balances in the third quarter of 2009 were higher compared to the third quarter of 2008, however the lower interest income reflects reduced short-term interest rates during the period.

Interest expense
Interest expense for the third quarter decreased to $819 in 2009 compared to $1,527 in the same period in 2008.

Change in fair value of derivatives
As a result of adopting derivative accounting for warrants effective January 1, 2009, 1,705,000 of our issued and outstanding common stock purchase warrants previously treated as equity were no longer afforded equity treatment and as a result they are now being recorded as a liability based on fair value estimates.  These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model and all changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised, amended or expire.  As such, on January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $366,612 to beginning retained earnings and $2,399,538 to a long-term warrant liability to recognize the fair value of such warrants on such date.

During the three months ended September 30, 2009, warrants to purchase 15,333 shares of common stock were exercised by cashless exercise and as a result, a total of 11,893 shares of common stock were issued.  During the three months ended September 30, 2009, warrants to purchase 91,570 shares of common stock were amended and are now treated as equity.

The following table summarizes the warrant activity for the three months ended September 30, 2009:

   
Pre-
Acquisition
Warrants
    
Investor
Warrants @
$0.30 per
share
    
Investor
Warrants @
$2.50 per
share
    
Total
  
Shares outstanding as of June 30, 2009
     225,000       823,000       500,000       1,548,000  
                                 
Shares exercised
     2,000       10,000       3,333       15,333  
Fair value of shares exercised
   $ 7,584     $ 31,525     $ 10,507     $ 49,616  
Realized gain (loss) on shares exercised
   $ (479 )   $ 4,112     $ (3,276 )   $ 357  
                                 
Shares amended
     -       91,570       -       91,570  
Fair value of shares amended
   $ -     $ 290,968     $ -     $ 290,968  
Realized gain on shares amended
   $ -     $ 35,363     $ -     $ 35,363  
                                 
Shares outstanding as of September 30, 2009
     223,000       721,430       496,667       1,441,097  
                                 
Unrealized gain on shares outstanding as of September 30, 2009
   $ 111,682     $ 362,830     $ 245,418     $ 719,930  
Fair value of shares outstanding as of September 30, 2009
   $ 680,490     $ 2,208,156     $ 832,221     $ 3,720,867  

Income tax expense
Our effective tax rate differs from the expected tax rate primarily due to permanent differences related to stock-based compensation and derivatives related to warrants.  The change in our effective tax rate from prior periods is primarily due to the relation of our taxable income relative to pre-tax income and the ability to effectively determine our annualized effective tax rate.  For the three months ended September 30, 2009, we recorded income tax expense of $249,000.  Management continues to apply a valuation allowance against certain deferred tax assets because of a limited history of taxable income, the long-term nature of the deferred tax asset and certain limitations regarding the utilization of the net operating loss carryforwards. The Company’s ability to utilize its net operating loss carryforwards and research and development credit is currently limited due to limitations on change of control under Section 382 (“Section 382”) of the Internal Revenue Code (“IRC”). Accordingly, we have fully reserved for the net operating loss carryforwards and research and development credit as we do not expect to derive any future benefit from them.

 
Page - 18 -
 

Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008
The following discussion of financial results below is derived from unaudited financial statements for the nine months ended September 30, 2009 and 2008.

   
Nine Months Ended
September 30, 2009
    
Nine Months Ended
September 30, 2008
  
   
Amount
    
% of
Revenue
    
Amount
    
% of
Revenue
  
Service contract revenue
   $ 38,775,309       100.0 %   $ 28,362,281       100.0 %
                                 
HEALTHCARE EXPENSES:
                                
Salaries, wages and employee benefits
     22,138,330       57.1 %     14,695,467       51.8 %
Medical expenses
     7,248,420       18.7 %     7,702,791       27.2 %
Other operating expenses
     1,388,780       3.6 %     933,932       3.3 %
Total healthcare expenses
     30,775,530       79.4 %     23,332,190       82.3 %
                                 
Gross profit
     7,999,779       20.6 %     5,030,091       17.7 %
                                 
OPERATING EXPENSES:
                                
Selling, general & administrative expenses
     5,774,101       14.9 %     4,574,429       16.1 %
Depreciation and amortization
     1,627,951       4.2 %     1,533,870       5.4 %
Total operating expenses
     7,402,052       19.1 %     6,108,299       21.5 %
                                 
Operating income (loss)
     597,727       1.5 %     (1,078,208 )     (3.8 )%
                                 
OTHER INCOME (EXPENSE)
                                
Interest income
     61,127       0.2 %     145,085       0.5 %
Interest expense
     (7,991 )     0.0 %     (4,721 )     0.0 %
Change in fair value of derivatives
     (1,688,623 )     (4.4 )%     —       0.0 %
Total other income (expense)
     (1,635,487 )     (4.2 )%     140,364       0.5 %
                                 
(Loss) before income taxes
     (1,037,760 )     (2.7 )%     (937,844 )     (3.3 )%
                                 
Income tax expense
     402,000       1.0 %     —       0.0 %
                                 
Net (loss)
   $ (1,439,760 )     (3.7 )%   $ (937,844 )     (3.3 )%

Revenues
Net revenue from medical services provided primarily to correctional institutions for the nine months ended September 30, 2009 and 2008, was $38,775,309 and $28,362,281, respectively, which represents an increase of $10,413,028 or 36.7%. Net loss was $1,439,760 or 3.7% of revenue compared to a net loss of $937,844 or 3.3% of revenue for the nine months ended September 30, 2009 and 2008, respectively.

Approximately $9,736,502 or 93.5% of the increase in revenue for the nine months ended September 30, 2009 compared to the same period for the prior year resulted from the addition of the following new medical service contracts since December 31, 2007: Caroline County, MD; Chesapeake City, VA; Coos County, OR; Creek County, OK; Douglas County, OR; Pima County, AZ; Washington County, MD; and Western Virginia Regional Jail, VA.  Revenues also increased as a result of the contracts in Oregon which we acquired when we purchased all of the assets of EMDC in February 2008, plus the revenue generated from the acquisition of CMHS on November 4, 2008. Revenue improvement totaling approximately $584,117, or 5.6% of the increase, resulted primarily from expansion of the services provided under a number of our existing contracts in which we were providing services prior to 2008. Price increases related to existing service requirements totaled approximately $1,362,382 or 13.1% of the revenue increase. Partially offsetting the above were decreases in other volume related activities totaling $1,269,971, or 12.2% of revenue, primarily associated with a decrease in stop/loss reimbursements due to reduced out of facility medical expenditures in excess of stop/loss limits billed back to counties.

 
Page - 19 -
 

Healthcare Expenses
Salaries and employee benefits
Salaries and employee benefits for healthcare employees were $22,138,330 or 57.1% of revenue for the nine months ended September 30, 2009, compared to $14,695,467 or 51.8% of revenue for the nine months ended September 30, 2008. The increase in spending for salaries and employee benefits of $7,442,863 or 50.6% is due primarily to the addition of new healthcare employees resulting from new business. Approximately 63% of the increase related to new healthcare employees required to support the staffing requirements for our new medical service contracts as detailed above and approximately 19% in the increase relates to the salaries and employee benefits for the new mental health employees related to the CMHS acquisition in November 2008.  Additional medical services related to previously existing medical service contracts plus cost-of-living and wage and benefit adjustments for existing employees accounted for the remainder of the increase. The increase in salaries and employee benefits as a percentage of revenue is due to a change in the mix of expense for salaries and benefits. Several of our new medical service contracts plus the mental health contracts related to the CMHS acquisition have a higher proportion of staffing services compared to our previously existing contracts.  As a result, these new contracts increased the mix of salaries and employee benefits as a percentage of total revenue.

Medical expense
Medical expenses for the nine months ended September 30, 2009 and 2008 were $7,248,420 or 18.7% of revenue and $7,702,791 or 27.2% of revenue, respectively, which represented a decrease of $454,371 or 5.9%. The decrease in spending for medical expenses in absolute dollars, despite the increase in revenue, reflects decreases for reimbursable expenditures for hospitalization and pharmacy costs. Additionally, the mental health services provided by CMHS, as a subcontractor, to Conmed prior to the acquisition of CMHS on November 4, 2008 were being recorded as independent contractor medical expenses totaling approximately 662.000.  Following the acquisition, those expenses are primarily recorded as salaries and employee benefits. The reduction in spending as a percentage of revenue results from the favorable mix factor generated from the new staffing services and the CMHS acquisition as detailed above. Finally, the new contracts entered into in 2008 and 2009 have a lower ratio of medical expenses compared to our previously existing contracts, which reduced the mix of medical expenses as a percentage of total revenue.

Other operating expenses
Other operating expenses were $1,388,780, or 3.6% of revenue, for the nine months ended September 30, 2009, compared to $933,932, or 3.3% of revenue, for the nine months ended September 30, 2008. The increase of $454,848 is directly related to the increase in the number of inmates served as a result of the new service contracts and reflects increased spending for employment advertising and recruiting, professional liability insurance, legal expenses and office supplies partially offset by a reduction in travel expenses.

Operating Expenses
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended September 30, 2009 and 2008 were $5,774,101 or 14.9% of revenue and $4,574,429 or 16.1% of revenue, respectively. The increased expenditures of $1,199,672 reflects an increased investment in additional management and administrative personnel required to support additional new contracts and services added in 2008 and 2009, as well as to sustain the Company during anticipated future growth as well as increased travel and legal expenses. Stock based compensation for the nine months ended September 30, 2009 and 2008 was $475,597 and $423,221, respectively.

Depreciation and amortization
Depreciation and amortization primarily reflects the amortization of intangible assets related to the acquisition of Conmed, Inc. in January 2007, the purchase of medical service contracts from EMDC in February 2008 and the acquisition of CMHS in November 2008. Amortization of service contracts acquired was $1,187,000, or 3.8% of revenue, for the nine months ended September 30, 2009, compared to $1,225,000, or 4.3% of revenue, for the nine months ended September 30, 2008. The increase primarily reflects a decrease in amortization expense related to the Conmed, Inc. acquisition and EMDC asset purchase as certain individual contracts acquired have become fully amortized partially offset by additional amortization expense for service contracts acquired in the CMHS acquisition in November 2008. Amortization of non-compete agreements was $289,000, or 0.8% of revenue, for the nine months ended September 30, 2009, compared to $236,000, or 0.8% of revenue, for the nine months ended September 30, 2008. The increase primarily reflects an additional non-compete agreement related to the acquisition of CMHS. Depreciation expense increased to $151,951 for the nine months ended September 30, 2009 compared to $72,870 for the prior year period due primarily to capital expenditures associated with the new corporate office in Hanover, Maryland, vehicle purchases, a new corporate accounting system, and computer equipment in our Pima County, AZ facility.

 
Page - 20 -
 

Interest income
Interest income was $61,127 for the nine months ended September 30, 2009 compared to $145,085 for the same period in 2008. Average cash balances in the first nine months of 2009 were higher compared to the first nine months of 2008, however the lower interest income reflects reduced short-term interest rates during the period.

Interest expense
Interest expense for the first nine months increased to $7,991 in 2009 compared to $4,721 in the same period in 2008.

Change in fair value of derivatives
As a result of adopting derivative accounting for warrants effective January 1, 2009, 1,705,000 of our issued and outstanding common stock purchase warrants previously treated as equity were no longer afforded equity treatment and as a result they are now being recorded as a liability based on fair value estimates.  These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model and all changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised, amended or expire.  As such, on January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $366,612 to beginning retained earnings and $2,399,538 to a long-term warrant liability to recognize the fair value of such warrants on such date.

During the nine months ended September 30, 2009, warrants to purchase 40,000 shares of common stock were exercised generating $12,000 of net proceeds and warrants to purchase 132,333 shares of common stock were exercised by cashless exercise and as a result, a total of 155,783 shares of common stock were issued.

The following table summarizes the warrant activity for the nine months ended September 30, 2009:

   
Pre-
Acquisition
Warrants
    
Investor
Warrants @
$0.30 per
share
    
Investor
Warrants @
$2.50 per
share
    
Total
  
Shares outstanding as of January 1, 2009
     225,000       980,000       500,000       1,705,000  
                                 
Shares exercised
     2,000       167,000       3,333       172,333  
Fair value of shares exercised
   $ 7,584     $ 424,846     $ 10,507     $ 442,937  
Realized (loss) on shares exercised
   $ (479 )   $ (87,536 )   $ (3,276 )   $ (91,291 )
                                 
Shares amended
     -       91,570       -       91,570  
Fair value of shares amended
   $ -     $ 290,968     $ -     $ 290,968  
Realized gain on shares amended
   $ -     $ 35,363     $ -     $ 35,363  
                                 
Shares outstanding as of September 30, 2009
     223,000       721,430       496,667       1,441,097  
                                 
Unrealized loss on shares outstanding as of September 30, 2009
   $ (259,373 )   $ (989,097 )   $ (384,225 )   $ 1,632,695  
Fair value of shares outstanding as of September 30, 2009
   $ 680,490     $ 2,208,156     $ 832,221     $ 3,720,867  

Income tax expense
Our effective tax rate differs from the expected tax rate primarily due to permanent differences related to stock-based compensation and derivatives related to warrants.  The change in our effective tax rate from prior periods is primarily due to the relation of our taxable income relative to pre-tax income and the ability to effectively determine our annualized effective tax rate.  For the nine months ended September 30, 2009, we recorded income tax expense of $402,000.  Management continues to apply a valuation allowance against certain deferred tax assets because of a limited history of taxable income, the long-term nature of the deferred tax asset and certain limitations regarding the utilization of the net operating loss carryforwards. The Company’s ability to utilize its net operating loss carryforwards and research and development credit is currently limited due to limitations on change of control under Section 382 of the IRC. Accordingly, we have fully reserved for the net operating loss carryforwards and research and development credit as we do not expect to derive any future benefit from them.

 
Page - 21 -
 

Liquidity and Capital Resources
 
Financing is generally provided by funds generated from our operating activities.

Cash as of September 30, 2009 and September 30, 2008 was $10,119,183 and $8,229,776, respectively.  We believe that our existing cash balances and anticipated cash flows from future operations will be sufficient to meet our normal operating requirements and liquidity needs for at least the next twelve months.

Cash flow for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008
Cash flow from operations for the nine months ended September 30, 2009 totaled $3,111,164. The net loss of $1,439,760 was offset by $3,415,171 in adjustments for non-cash expenses such as the change in fair value of derivatives of $1,688,623, amortization of $1,476,000, stock-based compensation of $475,597 and deferred income taxes of $377,000.  Changes in working capital components generated an additional $1,135,753, reflective of increases in accounts payable of $120,886, accrued expenses of $766,590, income taxes payable of $220,860 and deferred revenue of $374,888, as well as a decrease in prepaid expenses of $114,820 partially offset by an increase in accounts receivable of $462,016.  The increase in accounts payable resulted primarily from the timing of vendor payments in relation to quarter end.  The increase in accrued expenses resulted primarily from the addition of new healthcare employees required to support the increased staffing requirements from our new medical service contracts in addition to the wage accrual covering eight additional days as compared to December 31, 2008 partially offset by a reduction in accrued medical expenses. The increase in income taxes payable resulted primarily from our increased estimate of taxable income resulting in taxes payable in excess of scheduled estimated tax payments. The increase in deferred revenue resulted primarily from an increase in advance customer payments for services to be provided in the future.  The decrease in prepaid expenses resulted primarily from a reduction in prepaid professional liability insurance as September is the end of the primary policy period.  The increase in accounts receivable resulted primarily from new medical service contracts added in 2009. 
 
Cash flow from operations for the nine months ended September 30, 2008 totaled $1,750,791.  The net loss of $937,844 was offset by $1,659,348 in adjustments for non-cash expenses such as amortization of $1,461,000, stock-based compensation of $423,221 and deferred income taxes of ($300,000).  Changes in working capital components generated an additional $1,029,287 because of increases in accrued expenses of $2,254,553 and income taxes payable of $203,260 partially offset by an increase in accounts receivable of $1,086,746 and prepaid expenses of $277,580 and a decrease in deferred revenue of $133,923.  The increase in accrued expenses resulted primarily from increases in estimated medical expenses resulting primarily from the increase in medical service contracts and accrued wages resulting primarily from the addition of new healthcare employees required to support the increased staffing requirements from our new medical service contracts in addition to the wage accrual covering eight additional days as compared to December 31, 2007.  The increase in income taxes payable resulted primarily from an increase in the liability in excess of estimated tax payments.  The increase in accounts receivable resulted primarily from new medical service contracts added in 2008.  The increase in prepaid expenses resulted primarily from the premiums related to the six month extension of our insurance policies.  The decrease in deferred revenue resulted primarily from a reduction in advance customer payments.

Cash flow from investing activities for the nine months ended September 30, 2009 used $282,339 primarily for purchases of vehicles and equipment.

Cash flow from investing activities for the nine months ended September 30, 2008 used $603,771. The asset purchase of EMDC service contracts used $245,853 and purchases of computer and office equipment primarily related to the new corporate office in Hanover, Maryland used $357,918.

Cash flow from financing activities for the nine months ended September 30, 2009 used cash of $181,782. Payments on the line of credit were $100,000 and payments on loans were $93,782 which was partially offset by proceeds from warrant exercises of $12,000.

Cash flow from financing activities for the nine months ended September 30, 2008 used cash of $53,964 for payments on loans.

Loans
As of September 30, 2009, we had a short-term note payable for $11,446.

 
Page - 22 -
 

Off Balance Sheet Arrangements
We are required to provide performance and payment guarantee bonds to county governments under certain contracts. As of September 30, 2009, we have three performance bonds totaling $8,042,424 and two payment bonds for $2,855,537, totaling $10,897,961. The surety issuing the bonds has recourse against our assets in the event the surety is required to honor the bonds.

Contractual Obligations
The following table presents our expected cash requirements for contractual obligations outstanding as of September 30, 2009:

   
Total
    
Due as of
9/30/10
    
Due as of
9/30/11
and
9/30/12
    
Due as of
9/30/13
and
9/30/14
    
Due
Thereafter
  
Note Payable
     11,446       11,446       —       —       —  
Equipment Leases
     140,714       58,630       68,716       13,368       —  
Automobile Leases
     48,631       30,233       18,398       —       —  
Office Space Leased
     513,836       175,139       289,290       49,407       —  
Total Contractual Cash Obligations
   $ 714,627     $ 275,448     $ 376,404     $ 62,775     $ —  

Effects of Inflation
We do not believe that inflation and changing prices over the past three years have had a significant impact on our revenue or results of operations.

Potential Future Service Contract Revenue
As of September 30, 2009, we have entered into 55 agreements with county governments to provide medical and healthcare services primarily to county and municipal correctional facilities. Most of these contracts are for multiple years and include option renewal periods which are, in all cases, at the county's option. The original terms of the contracts are from one to nine years. These medical service contracts have potential future service contract revenue of $155 million as of September 30, 2009, with a weighted-average term of 4.1 years, of which approximately $35 million relates to the initial contract period and approximately $120 million relates to the option renewal periods.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The information in this Item is not required to be provided by Smaller Reporting Companies pursuant to Regulation S-K.
 
ITEM 4(T).
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting. During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
Page - 23 -
 

PART II.  OTHER INFORMATION

 
ITEM 1.
LEGAL PROCEEDINGS
 
There are no material changes in the legal proceedings pending against us.
 
ITEM 1A.
RISK FACTORS
 
The information in this Item is not required to be provided by Smaller Reporting Companies.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
ITEM 5.
OTHER INFORMATION
 
None
 
ITEM 6.
EXHIBITS
 
 
31.1
Section 302 Certification of Principal Executive Officer
 
31.2
Section 302 Certification of Principal Financial Officer
 
32.1
Section 906 Certification of Principal Executive Officer   
 
32.2
Section 906 Certification of Principal Financial Officer

 
Page - 24 -
 
 
SIGNATURES

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

 
Conmed Healthcare Management, Inc.
   
November 12, 2009
  
 
By /s/ Richard W. Turner
 
Richard W. Turner, Ph.D.
 
Chairman and Chief Executive Officer
 
(principal executive officer)
   
November 12, 2009
  
 
By /s/ Thomas W. Fry
 
Thomas W. Fry
 
Chief Financial Officer and Secretary
 
(principal financial officer and principal accounting officer)

 
Page - 25 -
 
 

Conmed Healthcare Management, Inc. Reports