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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the calendar year ended December 31, 2009

Commission File Number 1-9927

 

 

COMPREHENSIVE CARE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware		95-2594724
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

3405 W. Dr. Martin Luther King, Jr. Blvd, Suite 101

Tampa, Florida 33607

(Address of principal executive offices, zip code)

(813) 288-4808

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.01 per share

7  ¹/2 % Convertible Subordinated Debentures due 2010

(Title of class)

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  ¨    No  x

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

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

 

Large Accelerated Filer		¨		Accelerated Filer		¨
Non-Accelerated Filer		¨		Smaller Reporting Company		x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the Registrant on June 30, 2009 was approximately $8,912,000 based on the closing price of $0.70 of the common stock on June 30, 2009, as reported on the Over-The-Counter Bulletin Board. This amount excludes approximately 26.9 million shares of common stock held by officers, directors, and persons owning 5% or more of our outstanding common stock. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

On April 9, 2010, the Registrant had 40,244,089 shares of common stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 

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TABLE OF CONTENTS

 

PART I				3
Item 1.		Business		3
Item 1A.		Risk Factors		11
Item 2.		Properties		19
Item 3.		Legal Proceedings		19
PART II				20
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
Item 6.		Selected Financial Data		22
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk		30
Item 8.		Consolidated Financial Statements and Supplementary Data		31
Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		62
Item 9A.		Controls and Procedures		62
Item 9B.		Other Information		63
PART III				64
Item 10.		Directors, Executive Officers and Corporate Governance		64
Item 11.		Executive Compensation		67
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		76
Item 13.		Certain Relationships and Related Transactions, and Director Independence		78
Item 14.		Principal Accounting Fees and Services		79
PART IV				81
Item 15.		Exhibits and Financial Statement Schedules		81
SIGNATURES				84
EXHIBIT 21.1				85
EXHIBIT 23.1				86
EXHIBIT 31.1				87
EXHIBIT 31.2				88
EXHIBIT 31.3				89
EXHIBIT 32.1				90
EXHIBIT 32.2				91
EXHIBIT 32.3				92
EXHIBIT 99.1				93
EXHIBIT 99.2				94

 

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PART I

 

ITEM 1.

BUSINESS

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain information included in this Annual Report on Form 10-K and in our other reports, Securities and Exchange Commission (“SEC”) filings, statements, and presentations is forward looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning the projected successful integration of the operations of Core Corporate Consulting Group, Inc. (“Core”) into the business of CompCare (as defined below), the continuing success that Core is expected to have in marketing its products, the potential represented by ethnic markets and the overall performance of the healthcare market, our anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, predictions of anticipated health care costs, growth and expansion, and the ability to obtain new behavioral healthcare contracts. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in our other reports, SEC filings, statements, and presentations. These risks and uncertainties include, among others, changes in local, regional, and national economic and political conditions, the effect of governmental regulation, competitive market conditions, varying trends in member utilization, our ability to manage healthcare operating expenses, the profitability of our capitated contracts, cost of care, seasonality, CompCare’s ability to obtain additional financing, our ability to renegotiate or extend expiring customer contracts, the risk that any definitive agreements or additional business will result from letters of intent entered into by us, and other risks detailed from time to time in our SEC reports.

OVERVIEW

GENERAL

Established in 1969, Comprehensive Care Corporation, a Tampa-based Delaware corporation (“CompCare”, “we” or the “Company”), provides managed care services in the behavioral health and psychiatric fields. We manage the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) members on behalf of employers, health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. We also provide prior and concurrent authorization for physician-prescribed psychotropic medications. Our managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. As a result of an acquisition in January 2009 of Core Corporate Consulting Group, Inc. (“Core”) as part of our effort to refocus our product offerings, we now market a variety of health related products, insurance, and discount plans.

The Company prides itself on providing personalized attention, a commitment to high-quality services, and innovative approaches to behavioral health that address specific needs of clients in a changing healthcare environment. In 1999 we were awarded our first National Committee for Quality Assurance (“NCQA”) accreditation, which we have consistently maintained ever since.

The services provided through our provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), and inpatient and crisis intervention services. We have a network of over 21,000 contracted providers in the following areas: psychiatrists, psychologists, therapists, other licensed healthcare professionals, psychiatric hospitals, general medical facilities with psychiatric beds, Residential treatment centers and other treatment facilities. The acquisition of Core and subsequent re-structuring (elimination of non-performing contracts and recapitalization) has allowed us to become a stronger player in the behavioral healthcare managed care market. We are in the process of expanding our CompCare ancillary products and services, which are high margin products and services designed to better serve existing clients and to create a distinct competitive advantage in offerings to new customers.

New Management Team/Ownership/Strategic Plan

Clark Marcus and Joe Crisafi and their financial partners joined the Company in the winter of 2008-09 with the goal of unlocking the full potential of CompCare. In January 2009, this team led by Mr. Marcus successfully negotiated the acquisition of a controlling stake in CompCare. Immediately thereafter, we completed the merger of Core with CompCare, expanding our product offerings. In connection with this acquisition we further transformed our Board of Directors by appointing Arnold B. Finestone, Sharon Kay Ray, Joshua I. Smith, and Arthur K. Yeap directors. In addition, we appointed

 

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Clark Marcus as Chairman & Co-Chief Executive Officer (“Co-CEO”), John Hill as Co-CEO, and Joe Crisafi as Chief Financial Officer (“CFO”). The new management team began work immediately to increase capital, raising approximately $7.5 million in private placements during 2009. During the year ended December 31, 2009, some of our larger stockholders provided the additional funds necessary to allow us to accelerate our transformation. In addition to our new financing, we undertook a major restructuring whereby over $20 million worth of non-performing (negative returns) contracts were systematically eliminated allowing us to focus our efforts on profitable, well structured care arrangements and ensuring continued invitations from prospective new clients to bid on their managed behavioral contracts.

During the second half of 2009, we submitted eight significant bids to prospective new customers for behavioral healthcare business. These bids resulted in six new contracts with annual revenues totaling $11.2 million which are scheduled to begin during the first two quarters of 2010. One of our new contract partners and one of our existing clients are planning for significant growth in 2010 and we believe we can expand our provider network and grow along with our clients. As a result, we expect to expand into 19 new states over the course of 2010 and open new geographical markets for CompCare.

As a result of these measures, as of March 31, 2010, CompCare provides behavioral healthcare services to approximately 800,000 members.

MARKET OPPORTUNITIES

CompCare markets to regional health maintenance organizations (“HMOs”) that do not have their own behavioral health network. These HMOs will contract with a managed behavioral healthcare organization (“MBHO”) to obtain access to behavioral healthcare professionals, claims processing, case management and better-integrated behavioral healthcare. The HMOs engage an MBHO on a fixed fee paid on a per-member-per-month (“PMPM”) basis. Often, the PMPM will include the cost of care, which are the costs paid out to the providers and for pharmaceuticals. Such an arrangement is known as a capitated fee contract and the MBHO bears the risk/reward of the costs associated with higher or lower utilization of care. If the PMPM excludes the cost of care, the MBHO is essentially providing a fee for service or administrative service only (“ASO”) contract. In such a case, the MBHO is generally not at risk of over/under utilization.

The majority of small regional HMOs require capitated fee contracts, thereby fully outsourcing the operational and risk of the behavioral piece of their client healthcare delivery. As a result of the risks, HMOs typically require strong financials from MBHOs to ensure that they can meet the risks of the contracts.

Primarily through Comprehensive Behavioral Care, Inc. (“CBC”) and its subsidiaries, we provide managed care services in the behavioral health and psychiatric fields. Recent federal and state legislation provides a new focus for CBC in specialty behavioral health care areas such as Autism Spectrum Disorders (“ASD”) and Attention Deficit Disorder (“ADD”). Additionally, CBC provides analytic services for its health plan customers to integrate medical claims data and pharmacy data into actionable information so patient care can be coordinated cost effectively. We coordinate and manage the delivery of a continuum of psychiatric and substance abuse services and products to:

 

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commercial members;

 

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Medicare members;

 

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Medicaid members; and

 

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CHIP members;

on behalf of:

 

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health plans;

 

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government organizations;

 

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third-party claims administrators;

 

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commercial purchasers; and

 

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other group purchasers of behavioral healthcare services.

Our customer base includes both private and governmental entities. We provide services primarily through a network of contracted providers that includes:

 

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psychiatrists;

 

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•

psychologists;

 

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therapists;

 

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other licensed healthcare professionals;

 

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psychiatric hospitals;

 

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general medical facilities with psychiatric beds;

 

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residential treatment centers; and

 

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other treatment facilities.

The services provided through our provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), and inpatient and crisis intervention services. We do not directly provide treatment or own any provider of treatment services.

We typically enter into contracts on an annual basis to provide managed behavioral healthcare and substance abuse treatment to our clients’ members. Our arrangements with our clients fall into two broad categories:

 

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at-risk, capitation arrangements where our clients pay us a fixed fee per member in exchange for our assumption of the financial risk of providing services; and

 

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fee-for-service (“FFS”) and capitated ASO arrangements where we may manage behavioral healthcare programs or perform various managed care services, such as clinical care management, provider network development, and claims processing without assuming financial risk for member behavioral healthcare costs.

Under capitation arrangements, the number of covered members as reported to us by our clients determines the amount of premiums we receive, which amount is independent of the cost of services rendered to members. The amount of premiums we receive for each member is fixed at the beginning of our contract term. These premiums may be subsequently adjusted up or down, generally at the commencement of each renewal period.

The following table sets forth our managed care revenue, segregated by category, for the years ended December 31, 2009, 2008 and 2007:

 

		Year Ended December 31,
		2009				2008				2007
At-risk revenue		$	10,981,000			$	34,117,000			$	36,295,000
% of total revenues			78	%			97	%			97	%
% of total member lives			63	%			89	%			91	%
At-risk and FFS Pharmacy revenue		$	828,000			$	31,000			$	27,000
% of total revenues			6	%			0	%			0	%
% of total member lives			1	%			1	%			0	%
Other FFS and ASO revenue		$	2,337,000			$	1,008,000			$	1,078,000
% of total revenues			16	%			3	%			3	%
% of total member lives			36	%			10	%			9	%

Over the past several years we have experienced a trend where our clients prefer to contract for services on an at-risk basis instead of on an ASO basis. During 2009 we placed more focus on our ASO contracts to obtain a better balance of risk and non-risk clients.

Our largest expense is the cost of behavioral health services that we provide, which is a function of our arrangements with healthcare providers. Since we are subject to increases in healthcare operating expenses based on an increase in the number and frequency of our members seeking behavioral care services, our profitability depends on our ability to predict and effectively manage healthcare operating expenses in relation to the fixed premiums we receive under capitation arrangements. Providing services on a capitation basis exposes us to the risk that our contracts may ultimately be unprofitable if we are unable to anticipate or control healthcare costs. Estimation of healthcare operating expense is our most significant critical accounting estimate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates.”

 

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We manage programs through which services are provided to recipients in ten states and Puerto Rico. Our programs and services include:

 

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fully integrated capitated behavioral healthcare services;

 

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analytic services for medical and pharmacy claims for medical integration of behavioral and medical care coordination;

 

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specialty programs for care coordination of ASD, ADD, and psychotropic drugs with analytic services for all claims data;

 

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case management/utilization review services;

 

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administrative services management;

 

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preferred provider network development;

 

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management and physician advisor reviews; and

 

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overall care management services.

We provide prior and concurrent authorization for physician-prescribed psychotropic medications for a Medicaid HMO in Michigan and a Medicare health plan in Puerto Rico. Members are generally directed to us by their employer, health plan, or physician and receive an initial authorization for an assessment. Based upon a member physician’s initial assessment, a treatment plan is established for the member.

Our objective is to provide easily accessible, high quality behavioral healthcare services and products and to manage costs through measures such as the monitoring of hospital inpatient admissions and the review of authorizations for various types of outpatient therapy. Our goal is to combine access to quality behavioral healthcare services with effective management controls in order to ensure the most cost-effective use of healthcare resources.

ANCILLARY PRODUCTS

Through our subsidiary Core, we provide healthcare related ancillary products through various distribution channels.

Our Ancillary products include:

 

Ø		LifeGuide247™ -		This is a 24-hour service that provides guidance through life’s difficult situations, such as job stress, financial troubles, relationships, grievance and simple legal matters. Service is available online or by telephone.
Ø		Emergency Vital Records -		This product provides access to members’ vital medical records to emergency responders in the case of an emergency. Paramedics and emergency room practitioners can now access a member’s medical records quickly and easily in cases where the member may not be able to provide key information at such a critical time. The product provides answers to 25 key questions patients need to provide an emergency room. We have immediate interest in this product.
Ø		Home Warranty Program -		This is a home warranty program and is available in three different coverage levels. It provides repair and protection for home appliances, electrical, plumbing, lock repair, etc.
Ø		Vision/Dental/Medical -		These are inexpensive discount programs that are low cost to us but provide an excellent annuity.

 

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Ø		Other Insurance Products -		Through our relationship with Careington International, we have access to a full suite of insurance products. We will begin marketing these additional products to our existing customer base.
Ø		Pharmacy Discounts -		This is a prescription discount program. The program incorporates two tiers. Tier one is a free card that gives discounts on prescription drugs. Tier two provides deeper discounted rates on name brand and generic prescription drugs. Tier two requires the payment of a monthly fee by members.

RECENT DEVELOPMENTS

During the period from January 1 through April 1, 2010, we added five new clients and significantly expanded services to one existing client. In the aggregate, we will manage an additional 275,000 lives on an at-risk and ASO basis for health plans servicing Medicaid, Medicare, CHIP, Healthy Families and commercial members. We estimate aggregate revenues of approximately $8.0 million from these new contracts in 2010 and approximately $11.2 million in annual revenues thereafter.

SOURCES OF REVENUE

We provide managed behavioral healthcare and substance abuse services to recipients, primarily through subcontracts with HMOs, which have historically outsourced these functions to managed behavioral healthcare organizations like us. We generally receive a negotiated amount on a per-member, per-month or capitated basis in exchange for providing these services. We then contract directly with behavioral healthcare providers that receive a predetermined, fee-for-service rate or case rate.

Under such at-risk capitation arrangements, our profit is a function of utilization and the amount of claims payments made to our network providers. We perform periodic reviews of our current client contracts to determine profitability. In the event a contract is not profitable, we may seek to revise the terms of the contract or to terminate the agreement in accordance with its terms.

During the year ended December 31, 2009, we provided services under at-risk capitated arrangements for Medicaid patients in Michigan and Texas and CHIP patients in Texas and Pennsylvania. Such services generated approximately 78% of our behavioral healthcare operating revenue.

Our Medicare, Medicaid and CHIP contracts are subject to agreements with our HMO clients whose contracts with the various governmental agencies may be subject to renegotiation at the election of the specific agency.

Over eighty percent of our operating revenue is currently concentrated, and has been concentrated in past fiscal years, in contracts with six health plans to provide behavioral healthcare services under commercial, Medicare, Medicaid, and CHIP plans. The terms of each contract are generally for one-year periods and are automatically renewable for additional one-year periods unless terminated by either party. The loss of one or more of these clients, without replacement by new business, may adversely impact our financial results.

GROWTH STRATEGY

CBC is a leader in the MBHO field with years of experience serving public program health plans and unique innovative programs addressing ASD, ADD and pharmacy management. The continued consolidation of the behavioral health care market through the acquisition of MBHOs by health plans offers CBC opportunities and we have become one of the few MBHOs that are not owned by a health plan and thus remain independent to focus on many customers at once.

Our objective is to expand our presence in both existing and new managed behavioral healthcare markets by enhancing our product offerings, adjusting our client portfolio to better balance our risk-to-ASO ratio and identifying new business development partners. We have identified portions of our market to focus on health plans known as “safety net” plans, which serve populations that we believe need many of the services that we provide. We have expanded our specialty management products to include ASD, ADD, and pharmacy management for psychotropic medications. We provide data analytic services for health plan claims and pharmacy data to effectively integrate plan data so that actionable information can be utilized to address patient care.

 

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We provide our core product, outsourced behavioral healthcare management, to health plans, government entities, and other entities. We focus on continually developing and providing innovative and cost effective solutions to our customers. We expect the demand for our services to increase in the future in response to governmental legislative changes such as the passage of the 2009 economic stimulus legislation, which requires mental health and substance abuse benefits be paid at the same level as medical benefits. In addition, we believe the 2009 extension and expansion of the Children’s Health Insurance Program will generate additional business for us. We also believe the continuing shift in demographics of the U.S. population towards an older population will increase the number of Medicare beneficiaries such that Medicare expenditures are expected to almost double to a cost of $962 billion in the year 2018. Enrollment in Medicare Advantage Plans, which comprise approximately 12% of our covered lives as of February 28, 2010, is also expected to increase with these plans anticipated to reach a coverage level of 25% of all Medicare beneficiaries in the near future. Finally, 15 states have passed legislation requiring insurers to provide coverage of the case management of ASD. Mental health expertise continues to be critical to successful management of healthcare costs, and of particular importance to managing the care of populations with specific needs and we believe we are well positioned for the growth in this sector of the market.

Our acquisition of Core in early 2009 has enabled us to expand our product offerings to include Core’s health-related products under its Medquip™ brand name, insurance and discounted health products branded as Core Advantage™, and durable health and non-health related goods. Our use of traditional and non-traditional distribution channels allows us to focus on our target markets of the uninsured, the underinsured, and underserved ethnic groups. We believe the customer base of each company will provide cross-selling opportunities leading potentially to greater revenue, and the ability of the combined companies to realize synergies that we anticipate will lead to greater profit margins.

PROVIDER NETWORK

As of April 1, 2010, we had approximately 21,000 behavioral healthcare practitioners in our network located in 39 states and in Puerto Rico.

Our managed behavioral healthcare services are provided by contracted providers, including behavioral healthcare professionals and facilities. Our behavioral healthcare professionals include a variety of specialized behavioral healthcare personnel, such as:

 

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psychiatrists;

 

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psychologists;

 

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therapists;

 

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licensed clinical social workers;

 

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substance abuse counselors; and

 

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other licensed healthcare professionals.

The facilities we provide our services to include:

 

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psychiatric hospitals;

 

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general medical facilities with psychiatric beds;

 

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residential treatment facilities; and

 

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other treatment facilities.

Outpatient providers include both individual practitioners, as well as individuals who are members of group practices or other licensed centers or programs. Outpatient providers typically enter into contracts with us under which they are generally paid on a fee-for-service basis.

Our provider network also includes contractual arrangements with intensive outpatient facilities, partial hospitalization facilities, community health centers, and other community-based facilities. Our contracts with facilities are on a per diem or fee-for-service basis and, in some cases, on a “case rate” basis, whereby a fixed amount is paid irrespective of the amount of services provided.

 

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COMPETITION

The behavioral healthcare industry is very competitive and provides products and services that are price sensitive. Competitors include both freestanding MBHOs as well as HMOs and insurers with internal behavioral health units or subsidiaries. Many of these competitors have revenues, financial resources, and membership bases that are substantially larger than ours. The extent of competition results in significant pricing pressures which limits our revenue growth. Accordingly, we expect our future growth to come from our expansion into new states and the sale of our ancillary products to our existing and new customers.

SEASONALITY OF BUSINESS

Historically, we have experienced increased member utilization during the months of March, April and May and consistently low utilization by members during the months of June, July, and August. Such variations in member utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the June through August period and a negative impact on our gross margins and operating profits during the months of March through May.

GOVERNMENT REGULATION

We are subject to extensive and evolving state and federal regulations relating to the nation’s mental health system, as well as changes in Medicaid and Medicare reimbursement that could have an effect on our profitability. These regulations range from licensure and compliance with regulations related to insurance companies and other risk-assuming entities, to licensure and compliance with regulations related to healthcare providers. These laws and regulations may vary considerably between states. As a result, we may be subject to the specific regulatory approach adopted by each state for regulation of managed care companies and for providers of behavioral healthcare treatment services. We hold licenses or certificates to perform utilization review and/or third party administrator (“TPA”) services in:

 

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Connecticut;

 

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Florida;

 

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Georgia;

 

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Illinois;

 

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Indiana

 

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Maryland;

 

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Michigan;

 

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Pennsylvania; and

 

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Texas.

Some of the services provided by our managed behavioral healthcare subsidiaries may be subject to such licensing requirements in other states. There can be no assurance that additional utilization review or TPA licenses will not be required or, if required, that we will qualify to obtain or renew such licenses. In some of the states in which we provide services, entities that assume risk under contract with licensed insurance companies or health plans that retain ultimate financial responsibility have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure as either an insurer or HMO in certain states. If the regulatory positions of these states change, our business could be materially affected until such time as we meet the regulatory requirements. We cannot quantify the potential effects of additional regulation of the managed care industry, but such costs may have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.

As of December 31, 2009, we managed approximately 906,000 lives in connection with behavioral and substance abuse services covered through Medicare and Medicaid programs in Michigan, Florida and California, Medicare programs in Connecticut and Puerto Rico, and CHIP programs in Texas and Pennsylvania. Any significant changes to Medicare, Medicaid or CHIP funding would likely affect our reimbursement and overall profitability.

 

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ACCREDITATION

The NCQA provides information about the quality of national managed care plans to enable consumers to evaluate health plan performance. To develop standards that effectively evaluate the structure and function of medical and quality management systems in managed care organizations, NCQA has developed an extensive review and development process in conjunction with the managed care industry, healthcare purchasers, state regulators, and consumers. The Standards for Accreditation of MBHOs used by NCQA reviewers to evaluate an MBHO address the following areas: quality improvement, utilization management, credentialing, members’ rights and responsibilities, and preventative care. These standards validate that an MBHO is founded on principles of quality and is continuously improving the clinical care and services it provides. NCQA utilizes the Health Plan Employer Data and Information Set, which is a core set of performance measurements developed to respond to complex but clearly defined employer needs as standards for patient care and customer satisfaction.

In October 2008, we were awarded Full Accreditation by NCQA extending through September of 2011. Full Accreditation is granted for a period of three years to those plans that have, according to the NCQA, excellent programs for continuous quality improvement and that meet NCQA’s rigorous standards.

We believe our NCQA accreditation is beneficial to our clients and their members we serve. Additionally, NCQA accreditation is required by several of our client contracts and is frequently an important consideration to our prospective clients.

MANAGEMENT INFORMATION SYSTEMS

All of our health plans information technology and systems operate on a single platform. This approach avoids the costs associated with maintaining multiple systems and improves productivity. The open architecture of the systems gives us the ability to transfer data from other systems thereby facilitating the integration of new health plan business. We use our information system for claims processing, utilization management, reporting, cost trending, planning, and analysis. The system also supports member and provider service functions, including:

 

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enrollment;

 

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member eligibility verification;

 

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provider rosters;

 

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claims status inquiries; and

 

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referrals and authorizations.

We are subject to the requirements of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). One of the purposes of HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and, also, to protect the security and privacy of protected health information. Entities subject to HIPAA include some healthcare providers and all healthcare plans.

We have implemented significant enhancements to our existing healthcare information system with recently made available technology from our current vendor to best meet our future information system needs and comply with all HIPAA requirements. These enhancements include advanced software to facilitate patient case management and provide our healthcare providers with self-serve capabilities through the Internet. We expect all parties involved to benefit from the efficiencies of our improved information systems.

MARKETING AND SALES

Our marketing and sales efforts are led by our Co-CEOs, Senior Vice President of Business Development and Executive Vice President for Sales and Marketing Operations. In addition, we utilize consultants for direct sales to commercial, Medicaid, and Medicare prospective clients. We will continue to dedicate resources to expand our sales staff and marketing efforts as necessary.

CompCare’s sales strategy focuses on matching our solutions to the needs identified by our potential clients. Examples of developing customer solutions include our ASD, ADD, and pharmacy analytics programs that offer unique solutions for our customers. Sales are highly technical and complex, involving many stakeholders within an organization. The sales cycle is typically 12 to 18 months. Sales leads may be generated by our business

 

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development staff, our operations staff, consultants, cold calls, prior business relationships, or recommendations from existing clients. We attend trade shows within geographic areas in which we conduct business and reach out to contacts known to us, our consultants, and our investors. In addition, we maintain permanent marketing outreach through our website, www.compcare.com.

ADMINISTRATION AND EMPLOYEES

Our executive and administrative offices are located in Tampa, Florida, where we maintain operations, business development, accounting, reporting and information systems, and provider and member service functions. Provider management, account management, and certain clinical and utilization management functions are also performed in our Texas office and by employees located in Michigan. As of December 31, 2009, we employed 78 full-time employees and four part-time employees.

AVAILABLE INFORMATION

Our stockholder website can be found at www.compcare-shareholders.com. We make available free of charge, through a link to the SEC Internet site, our annual, quarterly, and current reports, and any amendments to these reports, as well as any beneficial ownership reports of officers and directors filed electronically on Forms 3, 4, and 5. Information contained on our website or linked through our website is not part of this Annual Report on Form 10-K. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which can be found at http://www.sec.gov.

Our Board of Directors has two committees, an audit committee and a compensation and stock option committee. Each of these committees has a formal charter which has been filed as an exhibit to this Annual Report on Form 10-K. Any references to our stockholder website and the SEC’s website above are intended to be inactive textual references only, and the contents of those Web sites are not incorporated by reference herein.

In addition, you may request a copy of the foregoing filings and charters at no cost by writing us at the following address or telephoning us at the following telephone number:

Comprehensive Care Corporation

3405 W. Dr. Martin Luther King Jr. Blvd

Suite 101

Tampa, Florida 33607

Attention: Investor Relations

Tel: (813) 288-4808

CODE OF ETHICS

We have adopted a code of ethics applicable to all of our employees, including our principal executive officers, principal financial officer, principal accounting officer and persons performing similar functions. The text of our code of ethics can be found on our website at www.compcare-shareholders.com. We intend to post notice of any waiver from, or amendment to, any provision of our code of ethics on our website.

 

ITEM 1A.

RISK FACTORS

You should carefully consider and evaluate all of the information in this Annual Report on Form 10-K, including the risk factors listed below. Risks and uncertainties in addition to those we describe below, that may not be presently known to us, or that we currently believe are immaterial, may also harm our business and operations. If any of these risks occur, our business, results of operations and financial condition could be harmed, the price of our common stock could decline, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements contained in this report.

 

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Risks related to our business

We may not be able to successfully implement our modified business strategy.

Our merger with Core in January 2009 resulted in the addition of a variety of health-related products to our currently offered managed behavioral healthcare services. Sales of the new products during 2009 have been slower than expected and we may not be successful in our efforts during 2010 to market the products and achieve the revenue and profit margins anticipated at the time of the merger.

We may not be able to accurately predict utilization of our at-risk contracts, which could result in contracts priced at levels insufficient to ensure profitability.

Managed care operations are at risk for costs incurred to provide agreed upon levels of service. Failure to anticipate or control costs could have material, adverse effects on our business. A very large percentage of our services are provided on an at-risk capitation basis, which exposes us to significant risk that contracts negotiated and entered into may ultimately be unprofitable if utilization levels require us to provide services at a cost in excess of the capitation rates we receive for the services.

Because providers are responsible for claims submission, the timing of which is uncertain, we must estimate the amount of claims incurred but not reported, and actual results may differ materially.

Our costs of care include estimated amounts for claims incurred but not reported (“IBNR”). The IBNR is estimated using an actuarial paid completion factor methodology and other statistical analyses that we continually review and adjust, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. Our estimates of IBNR may be inadequate in the future, which would negatively affect results of operations. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results may differ materially from the estimated amounts reported.

We may be subject to fines and penalties being assessed to us by our clients or by a regulatory agency.

Many of our contracts contain provisions stating that if our clients are assessed penalties or fines by a regulatory agency due to our noncompliance with a contractual requirement, we will be responsible for paying the assessed fine or penalty. Though to date, no material fines have been assessed under such provisions, any future fines would have a negative impact on our results of operations.

A failure of our information systems would significantly impair our ability to serve our customers and manage our business.

An effective and secure information system, available at all times, is vital to our health plan customers and their members. We depend on our computer systems for significant service and management functions, such as providing membership verification, monitoring utilization, processing provider claims, and providing regulatory data and other client and managerial reports. Although our computer and communications hardware is protected by physical and software safeguards, it is still vulnerable to computer viruses, fire, storm, flood, power loss, telecommunications failures, physical or software break-ins, and similar events. We do not have 100% redundancy for all of our computer and telecommunications facilities. A catastrophic event could have a significant negative effect on our business, results of operations, and financial condition.

We also depend on a third-party provider of application services for our core business application. Any sustained disruption in their services to us would have a material negative effect on our business.

We are subject to intense competition that may prevent us from gaining new customers or pricing our contracts at levels sufficient to achieve gross margins to ensure profitability.

We are continually pursuing new business. Many of our competitors are significantly larger and better capitalized than us, and the smaller size and financial condition of our company has proved a deterrent to some prospective customers. Additionally, we will likely have difficulty in matching the financial resources expended on marketing characteristic of our competitors. As a result, we may not be able to successfully compete in our industry. Our major competitors include Magellan Health Services, United Behavioral Health, ValueOptions, MHNet, FHC and APS Healthcare.

We will require additional funding, and we cannot guarantee that we will find adequate sources of capital in the future or that we will be able to continue as a going concern.

We cannot assure you that our existing cash and cash equivalents will be sufficient to fund our business. We expect to obtain these funds from operating activities and financing activities that may include equity or debt financing, which could dilute stockholder ownership. We cannot provide assurance that additional funding will be available on acceptable terms, if at all.

 

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Failure to achieve profitable operations and positive cash flows from operations during 2010 would adversely affect our ability to achieve our business objectives and may require us to raise additional funds that may include equity or debt financing. There can be no assurance as to the availability of needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to us. The inability or failure to raise funds before our available cash is depleted will have a material adverse effect on our business and may raise doubt as to our ability to continue as a going concern.

Our ability to utilize net operating loss carryforwards may be limited.

As of December 31, 2009, we had net operating loss carryforwards (“NOLs”), of approximately $19.4 million for federal income tax purposes that will begin to expire in 2022. These NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percent over a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of our NOLs before utilization.

We underwent such ownership changes in each of June 2005, January 2007, and January 2009. Any future ownership changes can impose the application of another Section 382 limitation on our federal NOLs and can reduce the amount of NOLs we can utilize in a year if the market value of our stock were to decline significantly prior to an ownership change. Such an event may have an adverse impact on our anticipated future cash flow if we have taxable income in the future.

Our sales cycle is long, which complicates our ability to predict our growth.

The sales and implementation process for our services is lengthy and requires us to commit substantial time and other resources to efforts that may or may not yield new business. Our sales cycle has generally ranged from 12 to 18 months from our initial contact to an executed contract. Accordingly, it may be difficult to replace lost business quickly.

We are dependent on a limited number of customers, and a loss or reduction in business of any one could have a material adverse effect on our working capital and results of operations.

For the year ended December 31, 2009, we provided behavioral healthcare services to the members of six health plans under contracts that on a combined basis represented approximately 84% of our managed care operating revenue. The loss of one or more of these clients, unless replaced by new business, would negatively affect our financial condition. During 2009, we experienced the loss of a major customer in Michigan, which provided approximately 10% of our managed care operating revenue for 2009. As a result, we experienced lower operating margins and profitability. The terms of each contract are generally for one-year periods and are automatically renewable for additional one-year periods unless terminated by either party by giving the requisite written notice.

We may be unsuccessful in obtaining performance bonds or other security that is required by our existing or future clients, and consequently may lose clients.

Some of our clients may require us to maintain performance bonds, restricted cash accounts, or other security with respect to our obligations to pay IBNR claims and claims not yet processed and paid. Due to current market conditions, we may be unable to provide the security required by our client. This could result in the loss of a client or clients which would negatively affect our financial condition.

We are dependent on our provider network to provide services to our members.

We contract with providers as a means to assure access to behavioral health services for our members. Some providers could refuse to contract with us, demand higher payments, or take other actions which could result in higher healthcare operating expenses. In addition, certain providers may have significant market position, which could cause disruption to provider access in a particular geographic area for our members and affect our contractual requirements with our customers of maintaining an adequate network.

 

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Claims brought against us may exceed our insurance coverage.

We maintain a program of insurance coverage against a broad range of risks related to our business. As part of this program of insurance, we are subject to certain deductibles and self-insured retentions. Our insurance may not be sufficient to cover all judgments, settlements, or costs relating to future claims, suits or complaints. Upon expiration of our insurance policies, sufficient insurance may not be available on favorable terms, if at all. If we are unable to secure adequate insurance in the future, this may have a material adverse effect on our profitability and financial condition.

We may be unable to attract and retain qualified personnel.

The success of our business is largely dependent on the skills, experience and performance of key members of our senior management team. We believe our ability to attract and retain highly skilled and qualified technical, managerial, and marketing personnel will determine whether we meet our goals. The market for highly skilled sales, marketing and support personnel is highly competitive as a result of the limited availability of technically qualified personnel with the requisite understanding of the markets which we serve. The inability to hire or retain qualified personnel may hinder our ability to implement our business strategy and may harm our business.

Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Our expected growth in our operations will place a significant strain on our management, administrative, operational, and financial infrastructure. Our future success will depend in part upon the ability of our management to manage growth effectively. This may require us to hire and train additional personnel to manage our expanding operations. In addition, we will be required to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our growth, we may be unable to execute our business plan and our business and operations may be adversely impacted.

Our profitability could be adversely affected if the value of our intangible assets and goodwill is not fully realized.

Our total assets at December 31, 2009 reflect goodwill of approximately $12.2 million, representing approximately 80% of our total assets. We completed our annual impairment analysis of goodwill as of December 31, 2009 and noted no impairment.

At December 31, 2009, identifiable intangible assets (customer contracts, provider networks and NCQA accreditation) totaled approximately $1.0 million. Intangible assets are amortized over their estimated useful lives, which we have estimated at approximately three years. The amortization period used may differ from those used by other entities. In addition, we may be required to shorten the amortization period for intangible assets in future periods based on changes in our business. There can be no assurance that such goodwill or intangible assets will be realizable.

We evaluate, on a regular basis, whether for any reason the carrying value of our intangible assets and other long-lived assets may no longer be completely recoverable, in which case a charge to earnings for impairment losses could become necessary. When events or changes in circumstances occur that indicate the carrying amount of long-lived assets may not be recoverable, we assess the recoverability of long-lived assets other than goodwill by determining whether the carrying value of such intangible assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition. Any event or change in circumstances leading to a future determination requiring write-off of a significant portion of unamortized intangible assets or goodwill would adversely affect our profitability.

Changes in, or interpretations of, accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results, and may even retroactively affect previously reported transactions.

 

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The holders of our 7  ¹/2% convertible subordinated debentures (“debentures”) due 2010 may be unwilling to negotiate an extension to the maturity date of these debentures.

We are currently attempting to negotiate an extension to the maturity date of our debentures, which were due April 15, 2010 but were not repaid. If these negotiations are not successful, we will be in default under the terms of these debentures. We may be subject to litigation or other remedies as a result of this default.

Risks related to our industry

Adverse conditions in the global economy could negatively affect our revenues and sources of liquidity.

The financial markets have been experiencing extreme disruption, including severely diminished liquidity and availability of credit, which could adversely affect our ability to raise additional capital. State and federal budgets could be adversely affected resulting in reduced payments to our clients for health care coverage programs, including Medicare, Medicaid, and CHIP, which in turn could result in lower revenues being paid to us and adversely affecting our results of operations.

Our existing and potential managed care clients operate in a highly competitive environment and may be subject to a higher rate of merger, acquisition, and regulation than in other industries.

We typically contract with small to medium sized HMOs that may be adversely affected by the continuing efforts of governmental and third-party payers to contain or reduce the costs of healthcare through various means. Our clients may also decide to manage the behavioral healthcare benefits “in-house” and, as a result, discontinue contracting with us. Additionally, our clients may be acquired by larger HMOs, in which case there can be no assurance that the acquiring company would renew our contract. The non-renewal of one or more contracts could adversely impact our business.

Many managed care companies, including 16 of our existing clients, provide services to groups covered by Medicare, Medicaid and/or CHIP programs. Such federal and state controlled programs are susceptible to annual changes in reimbursement rates and eligibility requirements that could ultimately affect companies such as CompCare.

As of December 31, 2009, we managed approximately 906,000 lives in connection with behavioral and substance abuse services covered through Medicare and Medicaid programs in Michigan, Florida and California; Medicare in Connecticut and Puerto Rico; and CHIP programs in Texas and Pennsylvania. Any changes in Medicare, Medicaid, and/or CHIP reimbursement could ultimately affect us through contract bidding and cost structures with the health plans first impacted by such changes. If we are unable to adapt to the differing needs of our Medicare members and the Medicare regulations, we may be unsuccessful in managing this line of business.

Temporary reductions in state funding have previously had a negative impact on us, and if implemented in the future, could have a material, adverse impact on our operations. In addition, states in which we operate may pass legislation that would reduce our revenue or increase our claims expense through changes in the reimbursement rates, changes in the benefit covered, or in the number of eligible participants. We may be unable to reduce our costs to a level that would allow us to maintain current gross margins specific to our Medicare, Medicaid and CHIP programs.

The industry is subject to extensive state and federal regulations, as well as diverse licensure requirements varying by state. Changes in regulations could affect the profitability of our contracts or our ability to retain clients or to gain new customers.

We are required to hold licenses or certificates to perform utilization review and/or TPA services in Connecticut, Florida, Georgia, Indiana, Illinois, Maryland, Michigan, Pennsylvania, and Texas. Additional utilization review or TPA licenses may be required in the future, and we may not qualify to obtain new licenses or renew existing licenses. In many states in which we provide services, entities that assume risk under contract with licensed insurance companies or health plans have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure as either an insurer or HMO in any state. If the regulatory positions of these states were to change, our business could be materially affected until such time as we are able to meet the regulatory requirements, if at all. Additionally, some states may decide to contract directly with companies such as ours for managed behavioral healthcare services, in which case they may also require us to maintain financial reserves or net worth requirements that we may not be able to meet. Currently, we cannot quantify the potential effects of additional regulation of the managed care industry, but such costs will have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.

 

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Healthcare reform may significantly reduce our revenues and profitability.

The U.S. Congress has passed legislation that, among other things, could limit funding to our clients. We cannot predict the effect of this legislation on our business.

We are subject to federal statutes prohibiting false claims.

The Federal False Claims Act imposes civil penalties for knowingly making or causing to be made false claims with respect to governmental programs, such as Medicare and Medicaid, for services not rendered, or for misrepresenting actual services rendered, in order to obtain higher reimbursement. While we do not directly provide services to beneficiaries of federally funded health programs and, accordingly, do not submit claims to the federal government, we do provide services to health plans that could become involved with false claims, which could result in allegations against us as well.

Failure to adequately comply with HIPAA may result in penalties and loss of revenues.

We are subject to the requirements of HIPAA. The purpose of HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and to protect the security and privacy of protected health information. We have implemented policies and practices to achieve compliance with HIPAA, and believe we are fully compliant with all HIPAA regulations. However, any lack of compliance with HIPAA regulations may result in penalties and have a material adverse effect on our ability to retain our customers or to gain new business.

The managed care industry is subject to class action lawsuits and claims for professional liability that could increase our expenditures and have an adverse effect on our profitability and financial condition.

In recent years the managed care industry has been subject to a greater number of lawsuits and claims of professional liability alleging negligence in performing utilization review and other managed care activities and in the denial of payment for services. Such incidents may result in professional negligence or other claims against us causing us to incur fees and expend substantial resources in defense of such actions. Although we maintain professional liability insurance, there can be no assurance that future claims will not have a material effect on our profitability and financial position.

Risks related to our common and preferred stock

Our Series C Convertible Preferred stockholders have significant rights and preferences over the holders of our common stock.

Our Series C Convertible Preferred stockholders are entitled to receive dividends when declared by our Board of Directors before dividends are paid on our common stock. The holders also have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up. The aggregate amount of that senior claim is approximately $3,600,000, which will increase as our preferred stock accrues dividends or if we issue additional shares of such preferred stock. In addition, each Series C Convertible Preferred stockholder is entitled to vote together with the holders of our common stock on an “as converted” basis. The holders of our Series C Convertible Preferred Stock have other rights and preferences, including the following:

 

•

to designate representatives to appoint a majority of our Board of Directors;

 

•

to prevent the creation and issuance of capital stock with rights equal to or superior to those of the Series C Preferred Convertible Stock;

 

•

to prevent alteration of the rights of the Series C Preferred shares or an increase in the authorized number of shares of common stock;

 

•

prior consent for a sale or merger including a material portion of our assets or business; and

 

•

prior consent before entering into any single or series of related transactions exceeding $5,000,000 or incurring any debt in excess of $5,000,000.

These rights and preferences could adversely affect our ability to finance future operations, satisfy capital needs or engage in other business activities that may be in our interest.

 

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If issued, holders of our Series D Convertible Preferred Stock would have significant rights and preferences over the holders of our common stock.

At December 31, 2009, warrants were outstanding and exercisable allowing the purchase of 290 shares of our Series D Convertible Preferred Stock. If exercised, the holders of our Series D Convertible Preferred stock would have rights and preferences subordinate to the holders of our Series C Preferred Stock but senior to the holders of our common stock. Such preferences would include the right to receive dividends prior to the holders of the common stock, paid at an amount equal to 50% of the dividend declared with respect to each common share and multiplied by 100,000, the number of common shares into which each Series D Convertible Preferred share is entitled to convert. In addition, the Series D Convertible Preferred Stock will have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up. Each Series D Convertible Preferred stockholder would additionally be entitled to vote together with the holders of our common stock. If issued, each Series D Convertible Preferred share (which is convertible into 100,000 shares) is entitled to the number of votes that the holder of 500,000 shares of common stock would be entitled to by virtue of holding such common shares. At December 31, 2009, no shares of our Series D Convertible Preferred Stock were issued.

The price of our common stock may be adversely affected by our small public capitalization.

The size of our public market capitalization is relatively small, and the volume of our shares that are traded is low. These factors could cause significant fluctuation in the trading of our stock, which may adversely affect the price and volatility of our common stock.

We may experience fluctuations in our quarterly operating results, which would cause our stock price to decline.

Our quarterly operating results have varied in the past and may fluctuate significantly in the future due to seasonal changes in utilization levels, changes in estimates regarding IBNR claims, the timing of implementation of new contracts, and enrollment changes. These factors may affect our quarterly and annual net revenue, expenses, and profitability in the future, and consequently we may fail to meet market expectations, causing our stock price to decline.

Shares reserved for future issuance upon the conversion of our preferred stock, subordinated debentures, options, warrants, and convertible promissory notes will cause dilution to our common stockholders.

As of December 31, 2009, 41,908,797 shares of our common stock were reserved for the potential conversion of our Series C and Series D Convertible Preferred Stock, subordinated debentures, and convertible promissory notes. In addition, 16,855,668 shares of our common stock were reserved for the possible exercise of stock options and warrants and for the future issuance of options under existing stock option plans. Our stockholders would experience significant dilution of their investment upon conversion or exercise of these securities.

Errors in estimates may have a significant negative impact on our financial condition and results of operations.

Assumptions relating to certain business, accounting and financial estimates involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our budgets which may in turn affect our results. In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

We incur costs as a result of being a publicly-traded company.

As a publicly-traded company, we incur legal, accounting, and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, and other rules implemented by the SEC and the Financial Industry Regulatory Authority.

We may raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.

To fund acquisitions, sales expansions and our operations, we may raise additional capital in the future through sales of shares of our common stock or securities convertible into shares of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuances

 

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of shares of our common stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.

We are not subject to certain of the corporate governance provisions of the Sarbanes-Oxley Act of 2002 and, without voluntary compliance with such provisions, neither you nor the Company will receive the benefits and protections they were enacted to provide.

Since our common stock is not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance rules established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002. These rules relate to independent director standards, director nomination procedures, audit and compensation committees standards, the use of an audit committee financial expert and the adoption of a code of ethics.

While we intend to file an application to have our securities listed for trading on a national securities exchange in the future that would require us to fully comply with those obligations, we cannot assure you that we will file such an application, that we will be able to satisfy applicable listing standards, or, if we do satisfy such standards, that we will be successful in receiving approval of our application by the governing body of the applicable national securities exchange.

Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price of our common stock.

Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock may be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

Our common share price may subject us to securities litigation.

The market for our common stock is characterized by significant price volatility when compared to other issuers, and we expect that our share price will continue to be volatile for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

Our stock price may be volatile, which may result in losses to our stockholders.

Stock markets are susceptible to significant price and trading volume fluctuations, and the market prices of companies listed on the OTC Bulletin Board® (“OTCBB”) have been especially volatile in the past. The trading price of our common stock is likely to be volatile and could fluctuate widely in response to many of the following factors, some of which are beyond our control:

 

•

variations in our operating results;

 

•

changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;

 

•

changes in operating and stock price performance of other companies in our industry;

 

•

additions or departures of key personnel; and

 

•

future sales of our common stock.

Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock.

A significant portion of our total outstanding shares of common stock may be sold in the market in the near future.

 

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As of March 31, 2010, approximately 30 million or 76% of our registered securities are beneficially owned by eight persons or groups. Sales of substantial amounts of these securities, when sold, could reduce the market price of our common stock. This could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market of such sales, may have a material adverse effect on the market price of our common stock.

 

ITEM 2.

PROPERTIES

We do not own any real property. We lease our Tampa corporate office and Texas office. In our Tampa office we maintain clinical operations, business development, accounting, reporting and information systems, and provider and member service functions. Provider service, account management, and certain clinical functions are also performed in our Texas office. The following table sets forth certain information regarding our leased properties as of December 31, 2009. The lease for our Texas office is a full service lease under which we bear only those costs of operations and property taxes exceeding the base-year expenses. The Florida lease monthly base rent covers all services and property taxes. We believe our current office space is suitable and adequate to meet our existing needs and that additional facilities will be available for lease to meet our future needs.

 

Name and Location		Lease Expires		Monthly  Base Rent (in Dollars)
Corporate Headquarters, Regional, Administrative, and Other Offices
Tampa, Florida, Corporate Headquarters		2010		$	36,978
Grand Prairie, Texas		2010			3,086

 

ITEM 3.

LEGAL PROCEEDINGS

A complaint entitled “MDwise, Inc. vs. Comprehensive Behavioral Care, Inc.” was filed against us in April 2009 in the Marion County Superior Court in Indiana by MDwise, Inc. (“MDwise”), our former client. The complaint seeks unspecified damages and a declaratory judgment requiring CBC to pay outstanding provider claims that are allegedly CBC’s responsibility under the expired contract with the customer. On May 8, 2009, we successfully filed a motion to remove the case to federal court. On September 18, 2009, MDwise filed a counterclaim seeking damages, interest and cost of suit related to claims of fraud, estoppel and breach of contract. We intend to vigorously defend the claims alleged by MDwise. Until the actions are withdrawn or settled, we may incur further legal defense fees and may be subject to awards of plaintiff’s attorney fees.

The Company initiated an action against Jerry Katzman in July 2009 in the U.S. District Court for the Middle District of Florida alleging that Mr. Katzman, a former director, fraudulently induced the Company to enter into an employment agreement and, alternatively, that Mr. Katzman breached that alleged employment agreement. In December 2009, Mr. Katzman filed an answer and counterclaim. The counterclaim requests judgment in Mr. Katzman’s favor and compensatory damages to remedy alleged breaches of contract by the Company. We have and will continue to vigorously pursue our allegations and defend against the claims alleged by the defendant. Until the actions are withdrawn or settled, we may incur further legal fees and may be subject to awards of compensatory damages and defendant’s attorney fees.

 

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PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

(a)

Market Information - Our common stock is traded on the OTCBB under the symbol CHCR. The following table sets forth the range of high and low bid quotations for the common stock, as reported by the OTCBB, for the fiscal quarters indicated. The market quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

 

				Price
YEAR				HIGH			LOW
2008		FIRST QUARTER		$	0.70		0.45
		SECOND QUARTER			0.59		0.30
		THIRD QUARTER			0.47		0.25
		FOURTH QUARTER			0.51		0.15
2009		FIRST QUARTER		$	0.95		0.45
		SECOND QUARTER			0.91		0.31
		THIRD QUARTER			0.75		0.36
		FOURTH QUARTER			0.60		0.30

 

(b)

Holders - As of April 9, 2010, we had 1,136 holders of record of our common stock.

 

(c)

Dividends - We did not pay any cash dividends on our common stock during the years ended December 31, 2009, 2008 and 2007 and do not contemplate the initiation of payment of any cash dividends in the foreseeable future. In the event that we do pay dividends, the holders of record of our Series C Convertible Preferred Stock are entitled to receive such dividends in preference to the holders of our common stock and any of our equity securities ranking junior to our Series C Convertible Preferred Stock, when and if declared by our Board of Directors. If declared, holders of our Series C Convertible Preferred Stock will receive dividends in an amount equal to the amount that would have been payable had the Series C Convertible Preferred Stock been converted into shares of our common stock immediately prior to the declaration of such dividend. No dividends shall be authorized, declared, paid or set apart for payment on any class or series of our stock ranking, as to dividends, on a parity with or junior to the Series C Convertible Preferred Stock for any period unless full cumulative dividends have been, or contemporaneously are, authorized, declared, paid or set apart in trust for such payment on the Series C Convertible Preferred Stock. In addition, as long as a majority of the 14,400 shares of our Series C Convertible Preferred Stock are outstanding, we cannot declare or pay any dividend or other distribution with respect to any equity securities without the affirmative vote of holders of at least 50% of the outstanding shares of Series C Convertible Preferred Stock.

 

(d)

Securities Authorized for Issuance under Equity Compensation Plans - The equity compensation plan information contained in Item 12 of Part III of this Annual Report on Form 10-K is incorporated herein by reference.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period November 13, 2009 (the filing date of our filing with the SEC within which unregistered sales were previously reported) to April 14, 2010, we sold and issued shares of our common stock and issued warrants to purchase shares of our common stock in private placements not involving a public offering as follows:

 

•

On November 24, 2009, we issued a warrant with a five year term to purchase 800,000 shares of our common stock to a consultant in exchange for advisory services to one of our subsidiaries. The warrant may be exercised at a price equal to the market value of a share of our common stock on the date of issue, which was

 

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$0.50 per share, to the extent vested. Of the 800,000 shares acquirable pursuant to the warrant, the right to acquire 200,000 shares vested at the warrant issue date. The remaining 600,000 shares were forfeited in December 2009 upon termination of the services agreement with the consultant. On February 24, 2010, the vested shares expired unexercised in accordance with the terms of the warrant.

 

•

On November 25, 2009, we issued a warrant with a five year term to purchase 100,000 shares of our common stock to a consultant in exchange for advisory services to one of our subsidiaries. The warrant may be exercised at a price equal to the market value of a share of our common stock on the date of issue, which was $0.50 per share, to the extent vested. The shares acquirable pursuant to the warrant vest as follows:

 

•

25,000 vest at the warrant issuance date;

 

•

25,000 vest 12 months after the warrant issuance date;

 

•

25,000 vest 24 months after the warrant issuance date; and

 

•

25,000 vest 36 months after the warrant issuance date.

 

•

On December 30, 2009, we issued a warrant to an individual who extended a short term loan to the Company. The warrant has a duration of three years and enables the lender to purchase 200,000 shares of our common stock. The warrant was vested in full at issuance and may be exercised at the price of $0.25 per share.

 

•

On December 31, 2009, we issued a warrant to each of two individuals who extended a short term loan to the Company. Each warrant has a three year term and enables the lender to purchase 200,000 shares of our common stock. Each warrant vested immediately at issuance and may be exercised at the price of $0.25 per share.

 

•

On February 23, 2010, we issued 25,000 shares of our common stock to a former consultant as part of a settlement and release agreement. The consultant had provided sales and marketing services to us during 2009.

 

•

On March 2, 2010, we issued a warrant to a investor who extended a one year loan to us. The warrant has a three year term and enables the lender to purchase 25,000 shares of our common stock. The warrant was vested in full at issuance and may be exercised at the price of $0.75 per share.

 

•

On March 8, 2010, we issued 150,000 shares of our common stock in exchange for investment banking services provided to the Company by a vendor that accepted the shares in lieu of cash compensation. For these services, we estimated a value of approximately $36,000 which will be amortized to expense ratably over the six month contract term.

 

•

On April 5, 2010, we sold 200,000 shares of our common stock to one accredited investor for aggregate proceeds of $50,000.

 

•

On April 14, 2010, we issued a warrant to an investor who extended a one year loan to us. The warrant has a three year term and enables the lender to purchase 50,000 shares of our common stock. The warrant was vested in full at issuance and may be exercised at the price of $0.25 per share.

Based on certain representations and warranties of the purchasers in their respective subscription agreements, we relied on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), for an exemption from the registration requirements of the Securities Act for the sales and issuances described above. These shares, and the shares underlying the warrants, have not been registered under the Securities Act and may not be sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. No underwriting discounts or commissions were given or paid in connection with the sales described above. We intend to use the net proceeds from the sales and issuances described above for product and sales expansion and for working capital purposes.

 

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ITEM 6.

SELECTED FINANCIAL DATA

The selected consolidated financial data that follows should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report.

 

		Year Ended December 31,				(Predecessor) Year  Ended December 31,				(Predecessor) Year Ended December 31,				(Predecessor) Seven  Months Ended December 31,				(Predecessor) Fiscal Year  Ended May 31,
		2009				2008				2007				2006				2006				2005
		(Amounts in thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Managed care revenues		$	14,146			$	35,156			$	37,400			$	10,315			$	23,956			$	24,473
Other revenues			38				—				—				—				—				—
Total revenues			14,184				35,156				37,400				10,315				23,956				24,473
Costs of services and sales:
Cost of care			13,427				36,496				36,790				9,713				20,562				21,298
Other costs of services and sales			16				—				—				—				—				—
Total costs of services and sales			13,443				36,496				36,790				9,713				20,562				21,298
Gross margin			741				(1,340	)			610				602				3,394				3,175
Expenses:
General and administrative expenses			9,699				3,612				3,913				1,688				3,263				3,043
Provision for (recovery of ) doubtful accounts			4				(49	)			(4	)			(136	)			(88	)			(4	)
Impairment loss			146				—				—				—				—				—
Depreciation and amortization			685				153				154				62				87				96
Total operating expenses			10,534				3,716				4,063				1,614				3,262				3,135
Merger transaction costs			589				—				—				—				—				—
Equity based expenses			8,929				130				119				79				53				35
Total expenses			20,052				3,846				4,182				1,693				3,315				3,170
Operating (loss) income			(19,311	)			(5,186	)			(3,572	)			(1,091	)			79				5
Other income (expenses):
Other non operating income, net			1				5				224				273				(74	)			(30	)
Interest income			3				26				147				58				78				15
Interest expense			(313	)			(192	)			(190	)			(113	)			(186	)			(206	)
Loss from continuing operations before income taxes			(19,620	)			(5,347	)			(3,391	)			(873	)			(103	)			(216	)
Income tax expense			189				5				72				43				78				52
Loss from discontinued operations			—				—				—				(20	)			—				—
Net loss before pre-acquisition loss			(19,809	)			(5,352	)			(3,463	)			(936	)			(181	)			(268	)
Add back pre-acquisition loss			721				—				—				—				—				—
Net loss after pre-acquisition loss		$	(19,088	)		$	(5,352	)		$	(3,463	)		$	(936	)		$	(181	)		$	(268	)
Add back net loss attributable to non-controlling interest			169				—				—				—				—				—
Net loss attributable to common stockholders		$	(18,919	)		$	(5,352	)		$	(3,463	)		$	(936	)		$	(181	)		$	(268	)
Loss per common share - basic:
Loss from continuing operations		$	(0.59	)		$	(0.67	)		$	(0.45	)		$	(0.14	)		$	(0.03	)		$	(0.05	)
Loss from discontinued operations			—				—				—				(0.01	)			—				—
Net loss		$	(0.59	)		$	(0.67	)		$	(0.45	)		$	(0.15	)		$	(0.03	)		$	(0.05	)
Loss per common share - diluted:
Loss from continuing operations		$	(0.59	)		$	(0.67	)		$	(0.45	)		$	(0.14	)		$	(0.03	)		$	(0.05	)
Loss from discontinued operations			—				—				—				(0.01	)			—				—
Net loss		$	(0.59	)		$	(0.67	)		$	(0.45	)		$	(0.15	)		$	(0.03	)		$	(0.05	)
BALANCE SHEET DATA:
Working capital (deficit)		$	(13,822	)		$	(5,710	)		$	(721	)		$	2,502			$	120			$	(3,589	)
Total assets			15,223				4,605				8,232				8,114				8,182				6,448
Total long-term debt and capital lease obligations			307				2,585				2,403				2,402				2,432				2,375
Stockholders’ deficit		$	(3,145	)		$	(9,196	)		$	(4,132	)		$	(803	)		$	(743	)		$	(4,117	)

No dividends were paid during any of the periods presented above.

 

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes forward-looking statements, the realization of which may be impacted by certain important factors discussed previously under Item 1A “Risk Factors.”

OVERVIEW

CompCare manages the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf of health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. Our managed care operations include at-risk contracts, administrative service agreements, and fee-for-service agreements. The customer base for our services includes both employers and health plans that contract with governmental entities. Our clinical services are provided primarily by unrelated contracted providers on a fee for service or subcapitated basis.

On January 20, 2009, CompCare acquired Core. This acquisition expanded CompCare’s marketing capabilities, and also provided CompCare with a substantially expanded product line to be marketed as companion products to its already existing line of healthcare offerings.

The following table sets forth our operating results from continuing operations comparing the combined operating results of Core and CompCare for the year ended December 31, 2009 to the operating results of the predecessor company, CompCare, for the years 2008 and 2007 (amounts in thousands):

 

		COMPCARE  AND CORE FOR THE YEAR ENDED DECEMBER 31, 2009				(PREDECESSOR) COMPCARE  FOR THE YEAR ENDED DECEMBER 31,
						2008				2007
Operating revenues:
At-risk contracts		$	10,981			$	34,117			$	36,295
Administrative services only contracts			2,337				1,008				1,078
Pharmacy revenue			828				31				27
Other revenues			38				—				—
Total operating revenues			14,184				35,156				37,400
Costs of service and sales:
Claims expense			8,399				30,492				30,315
Other healthcare operating expenses			4,196				6,004				6,475
Pharmacy expenses			832				—				—
Other costs of services and sales			16				—				—
Total costs of services and sales			13,443				36,496				36,790
Gross margin			741				(1,340	)			610
Other Expenses:
General and administrative expenses			9,699				3,612				3,913
Provision for (recovery of) doubtful accounts			4				(49	)			(4	)
Impairment loss			146				—				—
Depreciation and amortization			685				153				154
Total operating expenses			10,534				3,716				4,063
Merger transaction costs			589				—				—
Equity based expenses			8,929				130				119
Total expenses			20,052				3,846				4,182
Operating loss before pre-acquisition loss		$	(19,311	)		$	(5,186	)		$	(3,572	)

 

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RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31, 2009 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2008.

Operating revenues from at-risk contracts decreased by 67.8%, or $23.1 million, to $11.0 million for the year ended December 31, 2009 compared to $34.1 million for the year ended December 31, 2008. The decrease is primarily attributable to the expiration of two major customer contracts accounting for $23.8 million in revenue. This decrease was partially offset by $0.5 million in additional business from an existing client in Michigan and $0.3 million in business from a new Puerto Rico client. Revenue from ASO contracts increased by 131.8%, or approximately $1.3 million, to $2.3 million for the year ended December 31, 2009, compared to $1.0 million for the year ended December 31, 2008, due primarily to the addition of a new ASO contract. Pharmacy revenue increased to $0.8 million for the year ended December 31, 2009 from $31,000 for the year ended December 31, 2008, attributable primarily to a new contract that combines psychotropic drug management services with traditional behavioral managed care.

Claims expense on at-risk contracts decreased by approximately 72.5%, or $22.1 million, for the year ended December 31, 2009 as compared to the year ended December 31, 2008, due to the expiration of the two major customer contracts described above. Claims expense as a percentage of at-risk revenues decreased from 89.4% for the year ended December 31, 2008 to 76.5% for the for the year ended December 31, 2009 due to high medical loss ratios experienced from serving the members of these expired contracts. Other healthcare operating expenses, attributable to servicing both at-risk contracts and ASO contracts, decreased by 30.1%, or approximately $1.8 million, due primarily to the elimination of costs associated with contracts that expired in 2008, such as salaries and external medical case review fees. Pharmacy expense of $0.8 million for the year ended December 31, 2009 represents the cost of behavioral prescription drugs attributable to a new contract. Overall, gross margin increased by $2.1 million from a loss of $1.3 million for the year ended December 31, 2008 to a gross profit of $0.7 million for the year ended December 31, 2009 due to the expiration of contracts with high utilization of behavioral services.

General and administrative expenses increased by $6.1 million, or 168.5%, for the year ended December 31, 2009 as compared to the year ended December 31, 2008 due primarily to costs related to increasing the size of our employee base to accommodate expected growth prospects in the near future, financial advisory and consulting fees to identify new capital sources, and litigation expenses. General and administrative expense as a percentage of operating revenue increased from 10.3% for the year ended December 31, 2008 to 68.4% for the year ended December 31, 2009. Our review at December 31, 2009 of identifiable intangible assets acquired as the result of the merger with Core resulted in the recording of an impairment loss of $0.1 million due to the loss of two contracts that existed at the time of the merger. Depreciation and amortization increased by $0.5 million from $0.2 million for the year ended December 31, 2008 to $0.7 million for the year ended December 31, 2009 due to amortization of identifiable intangible assets acquired as the result of the Core merger.

During the year ended December 31, 2009, we incurred $0.6 million of merger related costs, consisting mainly of financial advisory fees and legal fees. Equity based expenses of $8.9 million is comprised of $8.1 million of expense recognized upon the issuance of the warrants to executive employees, $0.1 million of expense related to the issuance of common stock to an employee pursuant to an employment agreement, $0.1 million of expense due to the early vesting of stock options as a result of the change in control, and $576,000 of expense related to the issuance of stock and warrants to outside consultants.

RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31, 2008 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2007.

The decrease in at-risk contract revenue from $36.3 million to $34.1 million was primarily attributable to the loss of one client in Texas and two customers in Indiana, which accounted for approximately $5.7 million in revenue for the year ended December 31, 2007 compared to $37,000 for the year ended December 31, 2008. This was partially offset by additional business from existing clients in Indiana, Maryland, and Michigan, which contributed an additional $3.7 million. The decrease in ASO revenue was primarily attributable to the loss of business from customers in Indiana and Texas.

Claims expense on at-risk contracts increased approximately $177,000, or 0.6%, for the year ended December 31, 2008 as compared to the year ended December 31, 2007. Claims expense as a percentage of at-risk revenues increased from 83.5% for the year ended December 31, 2007 to 89.4% for the year ended December 31, 2008 due to a high medical loss ratio experienced with our major Indiana client. Other healthcare operating expenses, which are incurred to service both at-risk and ASO contracts, decreased approximately $471,000, or 7.3%, due to staff decreases in response to the loss of revenues in Indiana and Pennsylvania. As a percentage of total revenue, other healthcare operating expenses decreased from 17.3% for the year ended December 31, 2007 to 17.1% for the year ended December 31, 2008.

 

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General and administrative expenses decreased by $301,000, or 7.7%, for the year ended December 31, 2008 as compared to the year ended December 31, 2007. This decrease was primarily attributable to the $416,000 severance benefit of two years salary paid in 2007 to our former Chief Executive Officer upon her resignation pursuant to her employment agreement following the January 12, 2007 change in ownership of a company that owned a controlling interest in us. General and administrative expense as a percentage of operating revenue decreased from 10.5% for the year ended December 31, 2007 to 10.3% for the year ended December 31, 2008.

EFFECTS OF INFLATION

To minimize the effect of inflation, some of our multi-year revenue contracts contain provisions for annual rate increases that average approximately three percent per year. Our largest expense, the cost of care provided by our contracted providers, is frequently tied to standard Medicaid, CHIP, and Medicare reimbursement rates set by governmental entities. To the extent these standard rates are periodically increased to reflect the effects of inflation, we may be adversely affected by rising prices, absent a sufficient compensating increase in our revenues.

SEASONALITY OF BUSINESS

Historically, we have experienced increased member utilization during the months of March, April and May, and consistently low utilization by members during the months of June, July, and August. Such variations in member utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the June through August period and a negative impact on our gross margins and operating profits during the months of March through May.

LIQUIDITY AND MANAGEMENT PLANS REGARDING GOING CONCERN

During the year ended December 31, 2009, net cash and cash equivalents increased by $191,000. Net cash used in operations totaled $6.5 million, attributable in part to the payment of claims on our expired Indiana, Pennsylvania and Maryland contracts and expenditures to increase the size of our employee base to accommodate our future growth. Cash used in investing activities is comprised primarily of $978,000 for the reverse acquisition of CompCare and $167,000 in additions to property and equipment. Cash provided by financing activities consists primarily of $4.8 million in net proceeds from the issuance of common and preferred stock, $490,000 representing a capital contribution from the minority owner of our Puerto Rico subsidiary and $2.7 million in net proceeds from the issuance of note obligations.

At December 31, 2009, cash and cash equivalents were approximately $694,000. We had a working capital deficit of $13.8 million at December 31, 2009 and an operating loss of $19.3 million for the year ended December 31, 2009. We expect that our existing contracts, plus the addition of new contracts implemented as of the date of this report, will reduce our operating losses. Management believes that with the addition of new contracts expected to be awarded to us, in addition to the continued financial support from our major stockholders, we will be able to sustain current operations over the next 12 months. We are looking at various sources of financing if operations cannot support our ongoing plan; however there are no assurances that we will be able to find such financing in the amounts or on terms acceptable to us, if at all. Failure to obtain sufficient debt or equity financing and, ultimately to achieve profitable operations and positive cash flows from operations would adversely affect our ability to achieve our business objectives and continue as a going concern. There can be no assurance as to the availability of any additional debt or equity financing or that we will be able to achieve profitable operations and positive cash flows. These conditions raise doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and may impact our ability to achieve and sustain profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results could differ from the $4.7 million claims payable amount reported as of December 31, 2009.

In January 2009, CompCare merged with Core, which had previously purchased a 49% interest in CompCare to increase our pipeline for selling opportunities and to create additional distribution channels for product

 

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offerings from which additional positive cash flow is expected. During the year ended December 31, 2009, we raised additional capital of $7.5 million for working capital purposes and the payment of accrued claims payable. Although management believes that our current cash position plus the continued support of our major stockholders will be sufficient to meet our current levels of operations, additional cash resources may be required should we wish to accelerate sales or complete one or more acquisitions. Additional cash resources may be needed if we do not meet our sales targets, cannot refinance our debt obligations, exceed our projected operating costs or if unanticipated expenses arise or are incurred. We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution and have not made any other arrangements to obtain additional financing. We can provide no assurance that we will not require additional financing. Likewise, we can provide no assurance that if we need additional financing that it will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute our business plan or pay our costs and expenses as they are incurred, which could have a material adverse effect on our business, financial condition and results of operations.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2009 and 2008, the Company did not have any off-balance sheet arrangements.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The following is a schedule of our contractual commitments as of December 31, 2009, future minimum lease payments under non-cancelable operating lease arrangements, and other obligations:

 

		Payments Due by Period
		Total			Less Than 1 Year		1 – 3 Years		4 – 5 Years		After 5 Years
		(Amounts in thousands)
Long-term Debt Obligations		$	211		—		211		—		—
Capital Lease Obligations and related interest			135		72		63		—		—
Subordinated Debentures (a)			2,244		2,244		—		—		—
Promissory Notes Payable			2,798		2,798		—		—		—
Operating Lease Obligations			534		501		33		—		—
Total		$	5,922		5,615		307		—		—

 

(a)	Excludes 7  1/2% in interest payable semi-annually in April and October (see Note 15 – “Long-term Debt” and Note 22 “Subsequent Events” to the audited, consolidated financial statements).

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements, most notably our estimate for claims IBNR. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe our accounting policies specific to our revenue recognition, accrued claims payable and claims expense, premium deficiencies, goodwill and stock compensation expense involve our most significant judgments and estimates that are material to our consolidated financial statements (see Note 3 – “Summary of Significant Accounting Policies” to the audited, consolidated financial statements).

 

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REVENUE RECOGNITION

We provide managed behavioral healthcare and substance abuse services to recipients, primarily through subcontracts with HMOs. Revenue under the vast majority of these agreements is earned and recognized monthly based on the number of covered members as reported to us by our clients regardless of whether services actually provided are lesser or greater than anticipated when we entered into such contracts (generally referred to as at risk arrangements). The information regarding the number of covered members is supplied by our clients and we review membership eligibility records and other reported information to verify its accuracy in calculating the amount of revenue to be recognized. Consequently, the vast majority of our revenue is determined by the monthly receipt of covered member information and the associated payment from the client, thereby removing uncertainty and precluding us from needing to make assumptions to estimate monthly revenue amounts.

We may experience adjustments to our revenues to reflect changes in the number and eligibility status of members subsequent to when revenue is recognized. Subsequent adjustments to our revenue have not been material in the past.

ACCRUED CLAIMS PAYABLE AND CLAIMS EXPENSE

Cost of care includes amounts paid to hospitals, physician groups and other managed care organizations under at-risk contracts. It also includes the costs of information systems, case management and quality assurance, which are attributable to both at-risk and ASO contracts.

We recognize the cost of behavioral health services in the period in which an eligible member actually receives services and includes an estimate of IBNR. We contract with various healthcare providers including hospitals, physician groups and other managed care organizations either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine whether (1) the member is eligible to receive such services, (2) the service provided is medically necessary and is covered by the benefit plan’s certificate of coverage, and (3) the service has been authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for payment and the associated cost of behavioral health services is recognized. If the claim is denied, the service provider is notified and has appeal rights under its contract with us.

Accrued claims payable consists primarily of reserves established for reported claims and IBNR claims, which are unpaid through the respective balance sheet dates. Our policy is to record management’s best estimate of IBNR. The IBNR liability is estimated monthly using an actuarial paid completion factor methodology and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability as more information becomes available. In deriving an initial range of estimates, we use an industry accepted actuarial model that incorporates past claims payment experience, enrollment data and key assumptions such as trends in healthcare costs and seasonality. Authorization data, utilization statistics, calculated completion percentages and qualitative factors are then combined with the initial range to form the basis of management’s best estimate of the accrued claims payable balance.

The accrued claims payable ranges were between $4.6 and $4.7 million at December 31, 2009, between $6.4 and $6.9 million at December 31, 2008 and between $4.9 and $5.5 million at December 31, 2007. Based on the information available, we determined our best estimate of the accrued claims liability to be $4.7 million, $6.8 million and $5.5 million at December 31, 2009, 2008 and 2007, respectively. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three years.

 

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The following table provides a reconciliation of the beginning and ending balance of accrued claims payable for the years ended December 31, 2009, 2008 and 2007:

 

		Year Ended December 31,
		2009				2008			2007
		(Amounts in thousands)
Beginning accrued claims payable		$	6,791			5,464			2,746
Claims expense:
Current period			9,099			30,579			30,674
Prior period			(700	)		(87	)		(359	)
Total claims expense			8,399			30,492			30,315
Claims payments:
Current period			6,659			23,788			25,210
Prior period			3,852			5,377			2,387
Total claims payments			10,511			29,165			27,597
Ending accrued claims payable		$	4,679			6,791			5,464

Changes in prior year claims expense were primarily due to changes in utilization patterns and changes in claim submission timeframes by providers. We consider these changes in claims expenses to be immaterial when compared to the total claims expenses incurred in prior years.

Accrued claims payable at December 31, 2009, 2008 and 2007 is comprised of approximately $2.7 million, $1.6 million and $1.1 million, respectively, of submitted and approved claims which had not yet been paid, and $2.0 million, $5.2 million and $4.4 million for IBNR claims, respectively.

Many aspects of our business are not predictable with consistency, and therefore, estimating IBNR claims involves a significant amount of judgment by our management. Actual claims incurred could differ from the estimated accrued claims payable amount presented. The following are factors that would have an impact on our future operations and financial condition:

 

•

Changes in utilization patterns;

 

•

Changes in healthcare costs;

 

•

Changes in claims submission timeframes by providers;

 

•

Success in renegotiating contracts with healthcare providers;

 

•

Occurrence of catastrophes;

 

•

Changes in benefit plan design; and

 

•

The impact of present or future state and federal regulations.

A five percent increase in assumed healthcare cost trends from those used in our calculations of IBNR at December 31, 2009 could increase our claims expense by approximately $40,000 as illustrated in the table below:

 

Change in Healthcare Costs:
		(Decrease)
(Decrease)		Increase
Increase		in Claims Expense
(5%)		($41,000)
5%		$40,000

 

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PREMIUM DEFICIENCIES

We accrue losses under our managed care contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We perform this loss accrual analysis on a contract-by-contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance costs, and each contract’s specific terms related to future revenue increases as compared to expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate of future cost increases.

At any time prior to the end of a contract or contract renewal, if a managed care contract is not meeting its financial goals, we generally have the ability to cancel the contract with 60 to 90 days’ written notice. Prior to cancellation, we will usually submit a request for a rate increase accompanied by supporting utilization data. Although our clients have historically been generally receptive to such requests, no assurance can be given that such requests will be fulfilled in the future in our favor. If a rate increase is not granted, we have the ability, in most cases, to terminate the contract and limit our risk to a short-term period.

On a quarterly basis, we perform a review of our portfolio of contracts to identify loss contracts (as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide – Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. At December 31, 2009 and 2008, no contract loss reserve for future periods was necessary.

GOODWILL

We evaluate at least annually the amount of our recorded goodwill by performing impairment tests that compare the carrying amount to an estimated fair value. Management considers both the income and market approaches in the fair value determination. In estimating the fair value under the income approach, management makes its best assumptions regarding future cash flows and applies a discount rate to the cash flows to yield a present, fair value of equity. The market approach is based primarily on reference to transactions including the Company’s common stock and the quoted market prices of our common stock. As a result of such tests, management believes there is no material risk of loss from impairment of goodwill. However, actual results may differ significantly from management’s assumptions, resulting in a potentially adverse impact to our consolidated financial statements.

STOCK COMPENSATION EXPENSE

We issue stock-based awards to our employees and members of our Board of Directors. Effective June 1, 2006, we adopted ASC 718 Compensation – Stock Compensation and elected to apply the modified-prospective method to measure compensation cost for stock options at fair value on the grant date and recognize compensation cost on a straight-line basis over the service period for those options expected to vest. We use the Black-Scholes option pricing model, which requires certain variables for input to calculate the fair value of a stock award on the grant date. These variables include the expected volatility of our stock price, award exercise behaviors, the risk free interest rate, and expected dividends. We use significant judgment in estimating expected volatility of the stock, exercise behavior and forfeiture rates.

Expected Volatility

We estimate the volatility of the share price by using historical data of our traded stock in combination with our expectation of the extent of fluctuation in future stock prices. We believe our historical volatility is more representative of future stock price volatility and as such it has been given greater weight in estimating future volatility.

Expected Term

A variety of factors are considered in determining the expected term of options granted. Options granted are grouped by their homogeneity based on the optionees’ position, whether managerial or clerical, and length of service and turnover rate. Where possible, we analyze exercise and post-vesting termination behavior. For any group without sufficient information, we estimate the expected term of the options granted by averaging the vesting term and the contractual term of the options.

Expected Forfeiture Rate

We generally separate our option awards into two groups: employee and non-employee awards. The historical data of each group are analyzed independently to estimate the forfeiture rate of options at the time of grant. These estimates are revised in subsequent periods if actual forfeitures differ from estimated forfeitures.

 

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RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) as the single authoritative source of accounting and reporting guidance to be applied when preparing financial statements in conformity with generally accepted accounting principles (“GAAP”). The guidance also specifically recognizes SEC rules and interpretations as authoritative GAAP for SEC registrants. The ASC does not change GAAP but instead requires that we refer to the ASC rather than to specific accounting pronouncements when describing the guidance that determines our accounting for transactions. We first incorporated references to the ASC in our interim financial statements for the quarter ended September 30, 2009.

In May 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 164, “Subsequent Events,” which was amended in February 2010 and codified into ASC Topic 855. This guidance establishes general standards on the accounting for and reporting of events that occur after the balance sheet date but before financial statements are issued. We adopted the provisions of ASC Topic 855 upon its effective date of June 30, 2009. There was no material impact to our financial statements from the adoption of this standard.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”, which was codified as Topic ASC 810 (“ASC 810”). ASC 810 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. ASC 810 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. ASC 810 additionally establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. This standard is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. In accordance with ASC 810, our noncontrolling interest is classified as a component of equity.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” This statement was incorporated into ASC 805 “Business Combinations” (“ASC 805”). ASC 805 defines the acquirer and the acquisition date in a business combination and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. It also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to an acquired business. We adopted ASC 805 on January 1, 2009 and utilized its guidance in accounting for our acquisition of Core.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which was primarily codified into ASC Topic 820, and which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. We have adopted this statement and incorporated its requirements into our disclosures and periodic tests of impairment of carrying values. In April 2009, the FASB issued additional guidance on this subject which provided information on how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains an orderly, rather than forced, transaction between market participants at the measurement date under current market conditions. Our adoption of this guidance did not have a material effect on our consolidated financial statements.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

While we currently have market risk sensitive instruments, we have no material exposure to changing interest rates as the interest rates on our short term and long-term debt is fixed. Additionally, we do not use derivative financial instruments for investment or trading purposes and our investments are generally limited to cash deposits.

 

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ITEM 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Year Ended December 31, 2009, Period Ended January 20, 2009 (Predecessor) (Unaudited), and Years Ended December 2008 and 2007, (Predecessor)

 

Report of Kirkland, Russ, Murphy & Tapp P.A.		32
Consolidated Balance Sheets, December 31, 2009 and 2008, and December 31, 2008 (Predecessor)		33
Consolidated Statements of Operations, Year Ended December 31, 2009, Period Ended January  20, 2009 (Predecessor) (Unaudited), and Years Ended December 2008 and 2007, (Predecessor)		34
Consolidated Statements of Changes in Deficit, Years Ended December  31, 2009, 2008 (Predecessor) and 2007 (Predecessor)		35
Consolidated Statements of Cash Flows, Years Ended December 31, 2009, Period Ended January  20, 2009 (Predecessor) (Unaudited), and Years Ended December 2008 and 2007, (Predecessor)		37
Notes to Consolidated Financial Statements		40

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Comprehensive Care Corporation

We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation and Subsidiaries (Company) as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in deficit and cash flows for the years ended December 31, 2009, 2008 and 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comprehensive Care Corporation and Subsidiaries as of December 31, 2009 and 2008 and the consolidated results of their operations and their cash flows for the years ended December 31, 2009, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and has not generated sufficient cash flows from operations to fund its working capital requirements. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Notes 1 and 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Kirkland, Russ, Murphy & Tapp P.A.

Clearwater, Florida

April 15, 2010

 

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CONSOLIDATED BALANCE SHEETS

 

		December 31, 2009				December 31, 2008				(Predecessor) December 31, 2008
		(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	694			$	503			$	1,136
Accounts receivable, net			5				—				1,581
Other current assets			741				—				336
Total current assets			1,440				503				3,053
Property and equipment, net			311				—				235
Intangible assets, net			1,042				—				—
Goodwill			12,175				25				991
Other assets			255				—				326
Total assets		$	15,223			$	528			$	4,605
LIABILITIES AND (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	5,721			$	149			$	1,953
Accrued claims payable			4,679				—				6,791
Accrued pharmacy payable			23				—				—
Note obligations due within one year			4,721				—				—
Income taxes payable			118				—				19
Total current liabilities			15,262				149				8,763
Long-term liabilities:
Long-term debt			200				—				2,444
Other liabilities			2,584				—				2,589
Total long-term liabilities			2,784				—				5,033
Total liabilities			18,046				149				13,796
Stockholders’ deficit:
Preferred stock, $50.00 par value; authorized shares: 974,260, none, and 4,340, respectively; none issued			—				—				—
Preferred stock, Series A, $50.00 par value; authorized shares: none, none, and 14,400, respectively; issued and outstanding: none, none, and 14,400, respectively			—				—				720
Preferred stock, Series C, $50,00 par value; authorized shares: 14,400, none and none, respectively; issued and outstanding: 14,400, none, and none, respectively			720				—				—
Preferred stock, Series D, $50,00 par value; authorized shares: 7,000, none and none, respectively; issued and outstanding: none			—				—				—
Common stock, $0.01 par value; authorized shares: 100,000,000, 30,000,000 and 30,000,000, respectively; issued and outstanding 39,869,089, 1,760,000, and 8,327,766, respectively			399				18				83
Common stock subscribed			—				4				—
Additional paid-in capital			14,814				1,516				57,919
Common stock subscriptions receivable			—				(1,000	)			—
Accumulated deficit			(19,078	)			(159	)			(67,918	)
Total stockholders’ (deficit) equity			(3,145	)			379				(9,196	)
Non-controlling interest			322				—				5
Total (deficit) equity			(2,823	)			379				(9,191	)
Total liabilities and (deficit) equity		$	15,223			$	528			$	4,605

See accompanying report of independent registered public accounting firm and notes to the consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

 

								(Predecessor)
		Year Ended December 31, 2009						(Unaudited) January 1 to January 20, 2009
											Year Ended December 31,
											2008			2007
Revenues:
Managed care revenues		$	14,146					710			35,156			37,400
Other revenues			38					—			—			—
Total Revenues			14,184					710			35,156			37,400
Costs of services and sales:
Cost of care			13,427					703			36,496			36,790
Other costs of services and sales			16					—			—			—
Total costs of services and sales			13,443					703			36,496			36,790
Gross margin			741					7			(1,340	)		610
Expenses:
General and administrative expenses			9,699					142			3,612			3,913
Provision for (recovery of) doubtful accounts			4					(2	)		(49	)		(4	)
Impairment loss			146					—			—			—
Depreciation and amortization			685					5			153			154
Total operating expenses			10,534					145			3,716			4,063
Merger transaction costs			589					480			—			—
Equity based expenses			8,929					91			130			119
Total expenses			20,052					716			3,846			4,182
Operating loss			(19,311	)				(709	)		(5,186	)		(3,572	)
Other income (expense):
Gain from sale of available-for-sale securities			—					—			—			29
(Loss) gain on sale of assets			—					—			(9	)		3
Other non-operating income, net			1					—			14			192
Interest income			3					—			26			147
Interest expense			(313	)				(11	)		(192	)		(190	)
Loss before income taxes			(19,620	)				(720	)		(5,347	)		(3,391	)
Income tax expense			189					1			5			72
Net loss before pre-acquisition loss			(19,809	)				(721	)		(5,352	)		(3,463	)
Add back pre-acquisition loss			721					—			—			—
Net loss after pre-acquisition loss			(19,088	)				(721	)		(5,352	)		(3,463	)
Add back net loss attributable to non-controlling interest			169					4			—			—
Net loss attributable to stockholders		$	(18,919	)				(717	)		(5,352	)		(3,463	)
Net loss per common share:
Basic		$	(0.59	)				(0.09	)		(0.67	)		(0.45	)
Diluted		$	(0.59	)				(0.09	)		(0.67	)		(0.45	)
Weighted average common shares outstanding:
Basic			32,292					8,328			7,954			7,697
Diluted			32,292					8,328			7,954			7,697
Dilutive common shares without respect to anti-dilutive effect			50,786					13,745			12,608			12,196

See accompanying report of independent registered public accounting firm and notes to the consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT

(In thousands)

 

		PREFERRED STOCK							COMMON STOCK							ADDITIONAL PAID-IN			ACCUMULATED			TOTAL STOCKHOLDERS’			NON-CONTROLLING			TOTAL
		SHARES			AMOUNT				SHARES			AMOUNT				CAPITAL			DEFICIT			DEFICIT			INTEREST			DEFICIT
Balance, December 31, 2006		14			$	720			7,655			$	77			57,503			(59,103	)		(803	)		—			(803	)
Net loss		—				—			—				—			—			(3,463	)		(3,463	)		—			(3,463	)
Compensatory stock issued to non-employees		—				—			10				—			25			—			25			—			25
Exercise of stock options		—				—			38				—			19			—			19			—			19
Expense of stock options		—				—			—				—			90			—			90			—			90
Balance, December 31, 2007		14			$	720			7,703			$	77			57,637			(62,566	)		(4,132	)		—			(4,132	)
Net loss		—				—			—				—			—			(5,352	)		(5,352	)		—			(5,352	)
Shares issued in connection with private transactions		—				—			500				5			120			—			125			—			125
Cash contribution from noncontrolling interest		—				—			—				—			—			—			—			5			5
Exercise of stock options		—				—			125				1			32			—			33			—			33
Expense of stock options		—				—			—				—			130			—			130			—			130
Balance, December 31, 2008		14			$	720			8,328			$	83			57,919			(67,918	)		(9,196	)		5			(9,191	)
Net loss		—				—			—				—			—			(18,919	)		(18,919	)		(173	)		(19,092	)
Shares issued in connection with private transactions		—				—			14,943				150			3,500			—			3,650			—			3,650
Conversion of Series A preferred stock to common stock		(14	)			(720	)		4,553				46			674			—			—			—			—
Shares issued in connection with acquisition of a business		4				217			10,294				103			1,251			—			1,571			—			1,571
Equity structure adjustment due to reverse acquisition		—				—			—				—			(55,567	)		67,759			12,192			—			12,192
Cancellation of reacquired common stock		—				—			(6,292	)			(63	)		(1,500	)		—			(1,563	)		—			(1,563	)
Conversion of Series B-1 preferred stock to Series C preferred stock		13				636			—				—			(636	)		—			—			—			—
Conversion of Series B-2 preferred stock to common stock		(3	)			(133	)		7,247				72			61			—			—			—			—
Cash contribution from noncontrolling interest		—				—			—				—			—			—			—			490			490
Compensatory stock issued to an employee		—				—			500				5			120			—			125			—			125
Stock issued in exchange for consulting services		—				—			295				3			108			—			111			—			111

 

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CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT (Continued)

(In thousands)

 

		PREFERRED STOCK					COMMON STOCK					ADDITIONAL PAID-IN		ACCUMULATED			TOTAL STOCKHOLDERS’			NON-CONTROLLING		TOTAL
		SHARES		AMOUNT			SHARES		AMOUNT			CAPITAL		DEFICIT			DEFICIT			INTEREST		DEFICIT
Expense of warrants to employees:
- convertible to Series D preferred stock		—			—		—			—		8,072		—			8,072			—		8,072
- convertible to common stock		—			—		—			—		45		—			45			—		45
Expense of warrants issued in exchange for services		—			—		—			—		482		—			482			—		482
Warrants issued in connection with debt financings		—			—		—			—		89		—			89			—		89
Beneficial conversion in connection with debt financings		—			—		—			—		84		—			84			—		84
Exercise of stock options		—			—		1			—		—		—			—			—		—
Expense of stock options		—			—		—			—		112		—			112			—		112
Balance, December 31, 2009		14		$	720		39,869		$	399		14,814		(19,078	)		(3,145	)		322		(2,823	)

See accompanying report of independent registered public accounting firm and notes to the consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

								(Predecessor)
		Year Ended December 31, 2009						(Unaudited) January 1 to January 20, 2009			Year Ended December 31,
											2008			2007
Cash flows from operating activities:
Net loss		$	(18,919	)				(717	)		(5,352	)		(3,463	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			680					5			153			154
Provision for doubtful accounts			4					—			—			—
Asset writedown – eye care memberships			—					—			—			62
Asset write-off			—					—			—			3
Loss on sale of assets			—					—			9			(3	)
Gain from sale of available-for-sale securities			—					—			—			(29	)
Impairment loss of intangible assets			146					—			—			—
Non-controlling interest			(169	)				(4	)		—			—
Equity based expenses			8,838					91			130			119
Changes in assets and liabilities:
Accounts receivable			607					965			(1,546	)		128
Other current assets and other non-current assets			(346	)				13			(129	)		388
Accounts payable and accrued liabilities			3,463					141			17			734
Accrued claims payable			(958	)				(1,154	)		1,327			2,718
Accrued pharmacy payable			(21	)				44			—			—
Income taxes payable			99					—			(75	)		44
Other liabilities			27					3			—			(29	)
Net cash (used in) provided by continuing operations			(6,549	)				(613	)		(5,466	)		826
Net cash used in discontinued operations			—					—			—			(20	)
Net cash (used in) provided by continuing and discontinued operations			(6,549	)				(613	)		(5,466	)		806
Cash flows from investing activities:
Cash paid for the acquisition of a business, net of cash acquired			(978	)				—			—			—
Net proceeds from sale of available-for-sale securities			—					—			—			30
Net proceeds from sale of property and equipment			—					—			2			3
Payment received on notes receivable			14					2			27			25
Additions to property and equipment, net			(167	)				—			(48	)		(58	)
Net cash (used in) provided by investing activities			(1,131	)				2			(19	)		—
Cash flows from financing activities:
Proceeds from the issuance of common and preferred stock			4,796					—			158			19
Capital contribution from non-controlling interest			490					—			—			—
Proceeds from non-controlling interest			—					—			5			—
Net proceeds from the issuance of note obligations			2,650					—			200			—
Repayment of debt			(65	)				(3	)		(55	)		(55	)
Net cash provided by (used in) financing activities			7,871					(3	)		308			(36	)
Net increase (decrease) in cash and cash equivalents			191					(614	)		(5,177	)		770
Cash and cash equivalents at beginning of period			503					1,136			6,313			5,543
Cash and cash equivalents at end of period		$	694					522			1,136			6,313
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest		$	204					1			192			190
Income taxes		$	90					—			88			30
Non-cash operating, financing and investing activities:
Property acquired under capital leases		$	12					—			6			60
Conversion of Series B-1 to Series C Preferred Stock		$	720					—			—			—
Conversion of Series B-2 Preferred Stock to common stock		$	133					—			—			—
Common stock and warrants issued for outside services		$	576					—			—			—

See accompanying report of independent registered public accounting firm and notes to the consolidated financial statements.

 

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NOTE 1 — DESCRIPTION OF THE COMPANY’S BUSINESS AND BASIS OF PRESENTATION

Comprehensive Care Corporation (the “Company,” “CompCare,” “we”, “us,” or “our”) is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the “Company” include Comprehensive Behavioral Care, Inc. (“CBC”) and Core Corporate Consulting Group, Inc. (“Core”), each with their respective subsidiaries. Through CBC, we provide managed care services in the behavioral health and psychiatric fields. We manage the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) members on behalf of employers, health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. We also provide prior and concurrent authorization for physician-prescribed psychotropic medications for a major Medicaid HMO in Michigan, and behavioral pharmaceutical management services for a health plan in Puerto Rico. Our managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. The customer base for our services includes both private and governmental entities. Our services are provided primarily by unrelated vendors on a subcontract basis. Through Core, we market a variety of health related products, insurance, and discount plans to targeted markets such as the uninsured, the underinsured, and underserved ethnic groups.

On January 20, 2009, CompCare acquired Core, a privately held company, in exchange for CompCare common and convertible preferred stock. As a result of the merger, the former Core stockholders as a collective group obtained voting control of CompCare. Consequently, the transaction was accounted for as a reverse acquisition with Core designated as the accounting acquirer and CompCare as the predecessor. The combined entity elected to retain the Comprehensive Care Corporation name and status as a SEC registrant.

As a result of Core being treated as the accounting acquirer, the historical financial statements of the combined entity were restated to be those of Core. Therefore, the consolidated balance sheet as of December 31, 2008 presented herein includes only the accounts of Core at historical carrying amounts. In contrast, the consolidated balance sheet as of December 31, 2009 is a combination of Core and CompCare accounts. The capital structure (common and preferred stock) of CompCare as the registrant was retained and the accumulated deficit of Core at the time of the merger was carried forward as the beginning retained deficit balance for the combined entity.

For comparative purposes, the predecessor company’s financial activity for the years ended December 31, 2008 and 2007 is provided in the consolidated statement of operations and consolidated statement of cash flows presented herein. To facilitate comparison, the pre-acquisition results for CompCare for the period January 1 to January 20, 2009 are shown in the consolidated statements of operations and consolidated statements of cash flows. Earnings per share for periods prior to the merger did not require restatement because CompCare common and convertible preferred stock (on an as-converted basis) were exchanged on a one-for-one basis for Core common stock.

Our Board of Directors approved on May 21, 2007 a change in the Company’s fiscal year end from May 31 to December 31, effective December 31, 2006. The seven months ended December 31, 2006 was our transition period for financial reporting purposes.

MANAGEMENT ASSESSMENT OF LIQUIDITY

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The 2009 financial statements do not include any adjustments that are necessary should we be unable to continue as a going concern. We have incurred recurring operating losses and negative cash flows from operating activities. In addition, our note obligations of $4.7 million, including our subordinated debentures of $2.2 million which are currently in default, are due in the coming year. As of December 31, 2009, we had a working capital deficiency of $13.8 million and negative net worth of $2.8 million. These conditions, as well as the uncertainty to generate sufficient cash flows to meet our working capital requirements, raise substantial doubt about our ability to continue as a going concern.

In order to mitigate these going concern issues, we are currently evaluating our operating plans to improve profitability via cost reduction and business expansion. For the period January 1 to April 1, 2010, we successfully added five new customers to our portfolio of clients and significantly expanded services to one existing client. We are also in discussions with our bond holders to extend the maturity date of our bonds, which were due April 15, 2010. We are aggressively exploring other means of raising capital through equity and debt financings. Although management believes that our current cash position plus the continued support of our major stockholders will be sufficient to meet its current levels of operations, additional cash resources may be required should we wish to accelerate sales or complete one or more acquisitions. Additional cash resources may be needed if we do not meet our sales targets, cannot refinance our debt obligations, exceed our projected operating costs or if unanticipated expenses arise or are incurred. There can be no assurance that our efforts will be successful.

 

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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Comprehensive Care Corporation and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates and assumptions are of particular importance in our accounting for revenue recognition, accrued claims payable, premium deficiencies, goodwill, and stock compensation expense. Actual results could differ from these estimates.

REVENUE RECOGNITION

Our managed care activities are performed under the terms of agreements with health maintenance organizations, preferred provider organizations, and other health plans or payers to provide contracted behavioral healthcare services to subscribing participants. Revenue under a substantial portion of these agreements is earned monthly based on the number of qualified participants regardless of services actually provided (generally referred to as at risk arrangements). The information regarding qualified participants is supplied by our clients and we review membership eligibility records and other reported information to verify its accuracy to determine the amount of revenue to be recognized. For the years ended December 31, 2009, 2008 and 2007 such agreements accounted for 77.6%, or $11.0 million, 97.0%, or $34.1 million, and 97.0%, or $36.3 million, respectively, of revenue. The remaining balance of our revenues is earned on a fee-for-service basis and is recognized as services are rendered.

COST OF CARE RECOGNITION

Cost of care is recognized in the period in which an eligible member actually receives services and includes an estimate of the cost of behavioral health services that have been incurred but not yet reported. See “Accrued Claims Payable” for a discussion of claims incurred but not yet reported. We contract with various healthcare providers including hospitals, physician groups and other licensed behavioral healthcare professionals either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine whether the member is eligible to receive the service, the service provided is medically necessary and is covered by the benefit plan’s certificate of coverage, and the service is authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for payment.

PREMIUM DEFICIENCIES

We accrue losses under our managed care contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We perform this loss accrual analysis on a contract-by-contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance costs, and each contract’s specific terms related to future revenue increases as compared to expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate of future cost increases.

At any time prior to the end of a contract or contract renewal, if a managed care contract is not meeting its financial goals, we generally have the ability to cancel the contract with 60 to 90 days’ written notice. Prior to cancellation, the Company will usually submit a request for a rate increase accompanied by supporting utilization data. Although our clients have historically been generally receptive to such requests, no assurance can be given that such requests will be fulfilled in the future in our favor. If a rate increase is not granted, we have the ability, in most cases, to terminate the contract and limit our risk to a short-term period.

On a quarterly basis, we perform a review of our portfolio of contracts for the purpose of identifying loss contracts (as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide – Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. At December 31, 2009 and 2008, no contract loss reserve for future periods was necessary.

 

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CASH AND CASH EQUIVALENTS

At December 31, 2009 and 2008, cash and cash equivalents consisted entirely of funds on deposit in savings and checking accounts at major financial institutions.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Expenditures for renewals and improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives ranging from 2 to 12 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Amortization of assets acquired under capital leases is included in depreciation expense. Depreciation and amortization expense was $685,000, $153,000 and $154,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

GOODWILL

Goodwill represents the cost in excess of the fair value of net assets acquired in purchase transactions. Pursuant to Accounting Standards Codification (“ASC”) 350-20, “Intangibles – Goodwill and Other,” goodwill is not amortized but is periodically evaluated for impairment to carrying amount, with decreases in carrying amount recognized immediately. We review goodwill for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The tests for impairment of goodwill require us to make estimates about fair value, which are based on discounted projected future cash flows and the quoted market price of our common stock. We performed an impairment test as of December 31, 2009, 2008 and 2007, and determined that no impairment of goodwill had occurred as of such dates.

ACCRUED CLAIMS PAYABLE

The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims incurred but not yet reported (“IBNR”) to us. The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. However, actual claims incurred could differ from the estimated accrued claims payable amount reported. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate.

NON-CONTROLLING INTEREST

Non-controlling interest on our balance sheet as of December 31, 2009 and 2008 represents the minority owner’s interest in our majority owned subsidiary, CompCare de Puerto Rico, Inc. and incorporates adjustments to reflect the minority owner’s share of operating results for 2009 and 2008. CompCare de Puerto Rico, Inc. is 51% owned by Comprehensive Behavioral Care, Inc. and 49% owned by a major behavioral health services company based in San Juan, Puerto Rico.

OTHER LIABILITIES

Other liabilities include accrued reinsurance claims payable liabilities representing amounts payable to providers under state reinsurance programs.

FAIR VALUE MEASUREMENTS

ASC 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820-10 also establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques and creates the following three broad levels, with Level 1 being the highest priority:

 

Level 1:		Observable inputs that reflect quoted (unadjusted) market prices in active markets for identical assets or liabilities that are accessible at the measurement date;
Level 2:		Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and

 

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Level 3:		Unobservable inputs that reflect a reporting entity’s own assumptions in pricing an asset or liability.

ASC 820-10 requires us to segregate our assets and liabilities measured at fair value in accordance with the above hierarchy. During the years ended December 31, 2009 and 2008, we had no assets or liabilities required to be measured at fair value on a recurring basis. Therefore, there is no disclosure concerning assets or liabilities measured at fair value on a recurring basis. Other non-financial assets that are measured at fair value on a nonrecurring basis for the purposes of determining impairment include goodwill and identifiable intangible assets. See “Fair Value of Nonfinancial Assets” below.

ASC 825-10, “Financial Instruments” (“ASC 825-10”), provides that companies may elect to measure many financial instruments and certain other items at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the “fair value option,” will enable some companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently. We chose not to measure at fair value our eligible financial assets and liabilities existing at December 30, 2009. Consequently, ASC 825-10 has had no impact on our consolidated financial statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 825-10 requires disclosure of fair value information about financial instruments for which it is practical to estimate that value.

For cash and cash equivalents and restricted cash, our carrying amount approximates fair value. Our financial assets and liabilities other than cash are not traded in an open market and therefore require us to estimate their fair value. Pursuant to the disclosure requirements prescribed by ASC 825-10, we use a present value technique, which is a type of income approach, to measure the fair value of these financial instruments. The rate used for discounting expected cash flows is a risk-free rate adjusted for systematic and unsystematic risk.

The carrying amounts and fair values of our financial instruments at December 31, 2009 and 2008 are as follows:

 

		December 31, 2009					December 31, 2008
		Carrying Amount*			Fair Value		Carrying Amount		Fair Value
		(Amounts in thousands)
Assets
Cash and cash equivalents		$	694		694		1,136		1,136
Restricted cash			1		1		1		1
Note receivable			—		—		17		17
Liabilities
Promissory note			350		334		200		200
Callable promissory note			2,500		2,588		—		—
Debentures			2,244		2,256		2,244		2,223

 

*-	before any discount attributable to associated equity instruments

FAIR VALUE OF NONFINANCIAL ASSETS

The following is an asset measured at fair value on a nonrecurring basis to determine whether impairment exists at December 31, 2009. We use a discounted cash flow technique in valuing the asset. Inputs used to develop future cash flows derive from our own data and assumptions. We use the discount rate that reflects systematic and unsystematic risk.

 

										Total Gain (Loss) for  the Year Ended December 31, 2009
		December 31, 2009
Intangible Asset:		Level 1		Level 2		Level 3		Total
Customer contracts		—		—		402		402		(146	)

In accordance with the provisions of ASC 350-10 “Intangibles – Goodwill and Other,” customer contracts with a carrying amount of $548,000 were written down to their implied fair value of $402,000, resulting in an impairment loss of $146,000 for the year ended December 31, 2009.

 

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INCOME TAXES

Under the asset and liability method of ASC 740-10, “Income Taxes” (“ASC 740-10”), deferred tax assets and liabilities are recognized for the future tax consequences attributable to net operating loss carryforwards and to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10, the effect of a change in tax rates on deferred tax assets or liabilities is recognized in the consolidated statements of operations in the period that included the enactment. A valuation allowance is established for deferred tax assets unless their realization is considered more likely than not.

Prior to being acquired by CompCare, Core had purchased in January 2009 a 48.85% ownership interest in CompCare from Hythiam, Inc. (“Hythiam”). The purchase by Core of Hythiam’s ownership interest resulted in a change in control of the Company. As a result, our ability to carryforward and deduct losses incurred prior to January 20, 2009 on current federal tax returns is subject to a limitation of approximately $361,000 per year. Any unused portion of such limitation can be carried forward to the following year. We may be subject to further limitation in the event that we issue or agree to issue substantial amounts of additional equity.

ASC 740-10 also clarifies the accounting for uncertainty in income taxes and requires that companies recognize in their consolidated financial statements the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. ASC 740-10 additionally provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of ASC 740-10 are effective for fiscal years beginning after December 15, 2006. Our adoption of ASC 740-10 had no impact on our consolidated financial statements.

STOCK OPTIONS

We grant stock options to our employees, non-employee directors and certain consultants (“grantees”) allowing grantees to purchase our common stock pursuant to stockholder approved stock option plans. Under ASC 718-10, “Compensation – Stock Compensation” we measure compensation cost for stock options issued to grantees at fair value on the grant date and recognize compensation expense over the service period for those options expected to vest. For stock options issued in exchange for the services of consultants, the transaction is measured at the fair value of the goods and services received or the fair value of the stock options issued, whichever is more reliably measurable as prescribed in ASC 505-50, “Equity.” We use a Black-Scholes valuation model to determine the fair value of options on the measurement date.

PER SHARE DATA

In calculating basic loss per share, net loss is divided by the weighted average number of common shares outstanding for the period. For the periods presented, diluted loss per share is equivalent to basic loss per share. The following table sets forth the computation of basic and diluted loss per share in accordance with ASC 260-10, “Earnings Per Share.”

 

						(Predecessor)
		Year Ended December 31, 2009				January 1 to January  20, 2009			Year Ended December 31,
									2008			2007
		(Amounts in thousands, except per share information)
Numerator:
Net loss		$	(18,919	)		(717	)		(5,352	)		(3,463	)
Denominator:
Weighted average shares – basic			32,292			8,328			7,954			7,697
Effect of dilutive securities:
Employee stock options			—			—			—			—
Warrants			—			—			—			—
Weighted average shares – diluted			32,292			8,328			7,954			7,697
Loss per share – basic and diluted		$	(0.59	)		(0.09	)		(0.67	)		(0.45	)

 

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NOTE 3 — LIQUIDITY

During the year ended December 31, 2009, net cash and cash equivalents increased by $191,000. Net cash used in operations totaled $6.5 million, attributable in part to the payment of claims on our expired Indiana, Pennsylvania and Maryland contracts and expenditures to increase the size of our employee base to accommodate growth prospects. Cash used in investing activities is comprised primarily of $978,000 for the reverse acquisition of CompCare and $167,000 in additions to property and equipment. Cash provided by financing activities consists primarily of $4.8 million in net proceeds from the issuance of common and preferred stock, $490,000 representing a capital contribution from the minority owner of our Puerto Rico subsidiary and $2.7 million in net proceeds from the issuance of note obligations.

At December 31, 2009, cash and cash equivalents were approximately $694,000. We had a working capital deficit of $13.8 million at December 31, 2009 and an operating loss of $19.3 million for the year ended December 31, 2009. We expect that our existing contracts, plus the addition of new contracts implemented as of the date of this report, will reduce our operating losses. Management believes that with the addition of new contracts expected to be awarded to us, in addition to the continued financial support from our major stockholders, we will be able to sustain current operations over the next 12 months. We are looking at various sources of financing if operations cannot support our ongoing plan; however there are no assurances that we will be able to find such financing in the amounts or on terms acceptable to us, if at all. Failure to obtain sufficient debt or equity financing and, ultimately to achieve profitable operations and positive cash flows from operations during 2010 would adversely affect our ability to achieve our business objectives and continue as a going concern. There can be no assurance as to the availability of any additional debt or equity financing or that we will be able to achieve profitable operations and positive cash flows. These conditions raise doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and may impact our ability to achieve and sustain profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results could differ from the $4.7 million claims payable amount reported as of December 31, 2009.

In January 2009, CompCare merged with Core, which had previously purchased a 49% interest in CompCare to increase our pipeline for selling opportunities and to create additional distribution channels for product offerings from which additional positive cash flow is expected. During the year ended December 31, 2009, we raised additional capital of $7.5 million for working capital purposes and the payment of accrued claims payable. Although management believes that our current cash position plus the continued support of our major stockholders will be sufficient to meet its current levels of operations, additional cash resources may be required should we wish to accelerate sales or complete one or more acquisitions. Additional cash resources may be needed if we do not meet our sales targets, cannot refinance our debt obligations, exceed our projected operating costs or if unanticipated expenses arise or are incurred. We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution and have not made any other arrangements to obtain additional financing. We can provide no assurance that we will not require additional financing. Likewise, we can provide no assurance that if we need additional financing that it will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute our business plan or pay our costs and expenses as they are incurred, which could have a material adverse effect on our business, financial condition and results of operations.

NOTE 4 — SOURCES OF REVENUE

Our revenue can be segregated into the following significant categories (amounts in thousands):

 

		Year Ended December 31,
		2009			2008			2007
At-risk contracts		$	10,981		$	34,117		$	36,295
Administrative services only contracts			2,337			1,008			1,078
Pharmacy contracts			828			31			27
Other			38			—			—
Subtotal		$	14,184		$	35,156		$	37,400
Less: Pre-acquisition revenues			710			—			—
Total		$	13,474		$	35,156		$	37,400

At-risk revenues include contracts under which we assume the financial risk for the costs of member behavioral healthcare services in exchange for a fixed, per member per month fee. Under our administrative services only contracts, we may manage

 

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behavioral healthcare programs or perform various managed care functions, such as clinical care management, provider network development, and claims processing without assuming financial risk for member behavioral healthcare costs. Under our pharmacy contracts, we manage behavioral pharmaceutical services for the members of health plans on an at-risk or ASO basis. Other revenues represent commissions earned through the sale of durable goods.

NOTE 5 — MAJOR CONTRACTS/CUSTOMERS

(1) We currently furnish behavioral healthcare services to approximately 219,000 members of a health plan providing Medicaid and Medicare benefits. Services are provided on an at-risk and ASO basis. The contract accounted for 23.1%, or $3.3 million, of our revenues for the year ended December 31, 2009, and 9.0%, or $3.2 million, of our revenues for the year ended December 31, 2008. The health plan has been a customer since June of 2002. The initial contract was for a one-year period and has been automatically renewed on an annual basis. Termination by either party may occur with 90 days written notice to the other party.

(2) We currently contract with an HMO to provide behavioral healthcare services to approximately 208,000 Medicaid and Medicare members on an at-risk and ASO basis. Our contract with the HMO accounted for 27.1%, or $3.8 million, of our operating revenues for the year ended December 31, 2009 and 9.4%, or $3.3 million, of our operating revenues for the year ended December 31, 2008. The initial contract was for a one-year term and has been automatically renewed on an annual basis. Termination by either party may occur with 90 days written notice to the other party. The HMO has been a customer since June 2003.

(3) Effective December 31, 2009, we ceased providing behavioral health services on an ASO basis to approximately 237,000 members of a Medicaid health plan in Michigan. Services provided accounted for 10.2%, or $1.4 million, of our operating revenues for the year ended December 31, 2009. The health plan had been a customer since January 2009.

In general, our contracts with our customers are typically for initial one-year terms, with automatic annual extensions. Such contracts generally provide for cancellation by either party with 60 to 90 days written notice.

NOTE 6 — ACCOUNTS RECEIVABLE

Accounts receivable of $5,000 at December 31, 2009 and $1.6 million at December 31, 2008 consists of trade receivables resulting from services rendered under managed care capitation contracts.

NOTE 7 — OTHER CURRENT ASSETS

Other current assets consist of the following:

 

		December 31, 2009			December 31, 2008			(Predecessor) December 31, 2008
		(Amounts in thousands)
Accounts receivable – other (1)		$	375		$	—		$	6
Restricted cash			1			—			1
Prepaid insurance			89		$	—			99
Note receivable			—			—			17
Other prepaid fees and expenses			276			—			213
Total other current assets		$	741		$	—		$	336

 

(1)	Amount consists of $318,000 due from the minority stockholder of our subsidiary CompCare de Puerto Rico, Inc. and $57,000 representing a refund due of state and federal employment taxes.

NOTE 8 — OTHER ASSETS

Other assets consist of the following:

 

		December 31, 2009			December 31, 2008			(Predecessor) December  31, 2008
		(Amounts in thousands)
Deferred costs – NCQA accreditation		$	63		$	—		$	164
Deferred costs – provider credentialing			109			—			82
Deposits			83			—			80
Total other assets		$	255		$	—		$	326

 

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NOTE 9 — PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following:

 

									(Predecessor)
		December 31, 2009				December 31, 2008			December 31, 2008
		(Amounts in thousands)
Furniture and equipment		$	1,334			$	—		$	1,286
Leasehold Improvements			67				—			58
Capitalized leases			215				—			233
			1,616				—			1,577
Less: accumulated depreciation and amortization			(1,305	)			—			(1,342	)
Total property and equipment, net		$	311			$	—		$	235

NOTE 10 — GOODWILL AND INTANGIBLE ASSETS

On January 20, 2009, CompCare acquired Core, a privately held company, through a merger and in exchange for CompCare common and convertible preferred stock. As a result of the merger, the former Core stockholders as a collective group obtained voting control of CompCare. Consequently, the transaction was accounted for as a reverse acquisition with Core designated as the accounting acquirer and CompCare as the predecessor.

The assets acquired by Core included identifiable intangible assets, such as CompCare’s customer contracts, provider network, and its accreditation from the NCQA. Identifiable intangible assets were valued using either an income or cost approach, while the other assets acquired and liabilities assumed were recorded at their carrying values, which approximated their fair values.

Customer contracts

We valued customer contracts with an income approach based on a discounted cash flow analysis utilizing management’s best estimates of inherent assumptions such as the discount rate and expected life of the contract.

Provider network

We used a cost approach that estimated the average cost to recruit a provider derived from historical external costs and multiplied by the number of providers existing at acquisition.

NCQA accreditation

Utilizing a cost approach, we estimated the value of CompCare’s NCQA accreditation as the sum of the fee charged by the NCQA plus the estimated internal and external costs of preparing for the review.

In January 2009, prior to acquiring CompCare, Core purchased a 48.85% interest in CompCare for $1,500,000, yielding an implied purchase price of $3,071,000 for the entire company. In accordance with ASC 805-10, “Business Combinations,” the implied purchase price of CompCare was first allocated to the fair value of CompCare’s assets and liabilities, including identifiable intangible assets. The excess of implied purchase price over the fair value of net assets acquired was assigned to goodwill. Goodwill related to this acquisition is not deductible for tax purposes and in accordance with ASC 350-10, “Intangibles – Goodwill and other,” is not amortized, but instead is subject to periodic impairment tests. Identifiable intangible assets with definite useful lives are amortized on a straight-line basis over three years, which approximates their remaining lives. Deferred tax liabilities resulting from the difference between the assigned values and tax bases of identifiable intangible assets were not recorded due to net operating loss carryforwards.

 

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The following table summarizes the allocation of implied purchase price to the assets acquired and liabilities assumed at the acquisition date (amounts in thousands):

 

					January 20,
					2009
Implied purchase price					$	3,071
Less: recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents		522
Trade accounts receivable		616
Other current assets		325
Intangible assets:
Customer contracts		800
NCQA accreditation		500
Provider networks		434
Property and equipment		230
Other non-current assets		322
Accounts payable and accrued liabilities		(2,156	)
Accrued claims payable		(5,637	)
Long-term debt		(2,444	)
Other liabilities and non-controlling interest		(2,591	)
Total identifiable net assets						(9,079	)
Goodwill from acquisition of CompCare					$	12,150

The following table presents intangible assets, net as at December 31, 2009 and 2008.

 

									(Predecessor)
		December 31,				December 31,			December 31,
		2009				2008			2008
		(Amounts in thousands)
Customer contracts		$	800			$	—		$	—
NCQA accreditation			500				—			—
Provider networks			434				—			—
			1,734				—			—
Less: amortization and impairment loss			(692	)			—			—
Total intangible assets, net		$	1,042			$	—		$	—

NOTE 11 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

 

								(Predecessor)
		December 31,			December 31,			December 31,
		2009			2008			2008
		(Amounts in thousands)
Accounts payable		$	864		$	149		$	540
Accrued salaries and wages			501			—			246
Accrued vacation			151			—			122
Accrued legal and audit			2,995			—			537
Short term portion of capital leases			77			—			64
Other accrued liabilities			1,133			—			444
Total accounts payable and accrued liabilities		$	5,721		$	149		$	1,953

 

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NOTE 12 — NOTE OBLIGATIONS DUE WITHIN ONE YEAR

Note obligations due within one year consists of the following: (amounts in thousands):

 

		December 31, 2009				December 31, 2008		(Predecessor) December 31, 2008
7 1/2 % convertible subordinated debentures due April 2010, interest payable semi-annually in April and October (1)		$	2,244			—		—
10% callable convertible promissory note due June 2010 (2)		$	2,000			—		—
10% callable promissory notes due May 15, 2010 (3)		$	200			—		—
10% convertible promissory notes due November 2010 (4)		$	150			—		—
10% callable convertible promissory notes issued with detachable warrants and no specified maturity date (5)		$	300			—		—
Total note obligations due within one year before discount		$	4,894			—		—
Less: Unamortized discount on notes payable			(173	)		—		—
Total note obligations due within one year		$	4,721			—		—

 

(1)

The debentures are due on April 15, 2010 and accordingly have been reclassified from long term debt at December 31, 2008 to note obligations due within one year at December 31, 2009. The debentures are convertible into 40,133 shares of common stock at a conversion price of $55.91 per share at December 31, 2009. See Note 22 “Subsequent Events.”

(2)

In June 2009 we issued a callable convertible promissory note to an existing investor in the Company. The note bears interest at the rate of 10% per annum payable at maturity and has a term of one year. At maturity, the principal plus accrued interest will be mandatorily converted into shares of the Company’s common stock at a conversion price of $0.35 per share. At any time prior to the maturity date of the note, the note holder may elect to convert the outstanding balance of the note plus any accrued interest into shares of the Company’s common stock at $0.35 per share. Upon giving the Company 30 days notice, at any time after June 30, 2009 and until the maturity date, the note holder may redeem all or part of the note and will be entitled to receive the outstanding balance plus accrued interest thereon calculated through the date of redemption.

(3)	In October 2009 we issued a $100,000 promissory note to each of two individuals. The notes bear interest at a rate of 10% with interest payable at maturity. The notes are callable by the lenders with 30 days notice to the Company.

(4)

In November 2009 we issued promissory notes in the amounts of $100,000 and $50,000 to two individuals, respectively. The notes bear interest at the rate of 10% with interest payable quarterly in arrears. At the option of the note holders, all or a portion of the principal and accrued but unpaid interest may be converted into common stock of the Company at maturity or at any time prior to maturity at a conversion price of $0.25 per share. At maturity, the balance of the note and accrued but unpaid interest not converted into Company common stock will be repaid.

(5)

In December 2009 we issued $100,000 promissory notes to each of three individuals. The notes had no stated maturity date but were callable by the note holder with five days notice. Two of the notes were repaid by the Company in January 2010 at the request of the note holder. The notes each bore interest at the rate of 10% and were convertible into common stock of the Company at any time at a conversion price of $0.25 per share. In conjunction with the loans, each note holder received a warrant to purchase 200,000 shares of the Company’s common stock at $0.25 per share. The warrants were vested upon issuance and have terms of three years. We allocated the proceeds from the notes into two components, debt and warrants, based on their relative fair values. The warrants were valued at approximately $89,000 in the aggregate using the Black-Scholes option valuation model. We also determined that the promissory notes contained beneficial conversion features valued at $84,000 in the aggregate. The values of the warrants and beneficial conversion features were recorded as discount on notes payable which will be amortized over the expected life of the notes using the effective interest method. For the year ended December 31, 2009, there was no discount amortization since these notes were issued at the end of the year.

 

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NOTE 13 — CAPITAL LEASE OBLIGATIONS

We use capital leases to finance the acquisition of certain computer and telephone equipment. Terms of the leases range from three to five years.

 

								(Predecessor)
		December 31,			December 31,			December 31,
		2009			2008			2008
		(Amounts in thousands)
Classes of property:
Computer equipment		$	78		$	—		$	96
Telephone equipment			137			—			137
Total equipment cost			215			—			233
Less: accumulated depreciation			154			—			131
Net book value		$	61		$	—		$	102

Future minimum lease payments under the capital leases are as follows:

 

Year ended December 31, 2010		$	73
Year ended December 31, 2011			46
Year ended December 31, 2012			16
Total minimum lease payments			135
Less: amount representing interest			15
Total obligations under capital leases			120
Less: current installments of capital lease obligations			63
Long–term obligation under capital leases		$	57

NOTE 14 — LONG-TERM DEBT

Long-term debt consists of the following:

 

								(Predecessor)
		December 31,			December 31,			December 31,
		2009			2008			2008
		(Amounts in thousands)
7 1/2 % convertible subordinated debentures due April 2010, interest payable semi-annually in April and October (1)		$	—		$	—		$	2,244
8 1/2 % convertible promissory note due August 2011, interest payable monthly (2)			200			—			200
Total long-term debt		$	200		$	—		$	2,444

 

(1)	The debentures are due on April 15, 2010 and accordingly have been reclassified from long term debt at December 31, 2008 to note obligations due within one year at December 31, 2009. See Note 12 “Note Obligations Due Within One Year” and Note 22 “Subsequent Events.”

(2)	The promissory note is convertible at the option of the note holder into 800,000 shares of common stock at a conversion price of $0.25 per share.

 

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NOTE 15 — INCOME TAXES

Provision for income taxes consists of the following (amounts in thousands):

 

		Year Ended December 31,
		2009			2008		2007
Current:
Federal		$	—		—		—
State			189		5		72
Provision for income taxes		$	189		5		72

Reconciliation between the provision for income tax and the amount computed by applying the statutory Federal income tax rate (34%) to loss before income tax is as follows (amounts in thousands):

 

		Year Ended December 31,
		2009				2008			2007
Income tax benefit at the statutory tax rate		$	(6,368	)		(1,818	)		(1,153	)
State income tax benefit, net of federal tax effect			(593	)		(248	)		(51	)
Change in valuation allowance			6,283			2,039			1,218
Non-deductible items			832			41			48
Other			35			(9	)		10
Provision for income taxes		$	189			5			72

Significant components of our deferred income taxes are as follows:

 

		December 31, 2009				December 31, 2008				(Predecessor) December 31, 2008
Deferred Tax Assets:
Net operating loss carryforwards		$	7,397			$	25			$	4,861
Accrued expenses			1,285				21				208
Loss on impairment – investment in marketable securities			40				—				40
Employee benefits			57				—				47
Equity based compensation expense			2,522				—				37
Bad debt			9				7				—
Other, net			73				—				91
Total Deferred Tax Assets			11,383				53				5,284
Valuation Allowance			(10,812	)			(53	)			(5,135	)
Net Deferred Tax Assets			571				—				149
Deferred Tax Liabilities:
Purchased intangible assets			(396	)			—				—
Depreciation			(9	)			—				—
Goodwill amortization			(166	)			—				(149	)
Total Deferred Tax Liabilities			(571	)			—				(149	)
Net Deferred Tax		$	—			$	—			$	—

In June 2005, we completed a private placement transaction that constituted a “change of ownership” under IRS Section 382 rules, which impose limitations on the ability to deduct prior period net operating losses on current federal tax returns. As a result, our ability to use our net operating losses incurred prior to June 14, 2005 is limited to approximately $400,000 per year.

 

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On January 12, 2007, the sale of an investor’s majority interest in the Company to Hythiam constituted a second “change of ownership” under IRS Section 382 rules. In the event that the Company has two or more ownership changes, Section 1.382-5(d) also describes a potential impact on the limitation for any losses attributable to the period preceding the earlier ownership change. We have determined that this change of ownership does not change the limitation of approximately $400,000 per year for net operating losses incurred prior to June 14, 2005, the date of the first change in control. Furthermore, our ability to use net operating losses incurred between June 15, 2005 and January 12, 2007 is limited to approximately $490,000 per year. Net operating losses for periods prior to June 15, 2005 and for the subsequent period of June 15, 2005 to January 12, 2007 may be deducted simultaneously subject to the applicable limitations.

The purchase by Core of Hythiam’s ownership interest resulted in a third change in control of the Company. As a result, any losses incurred prior to January 20, 2009 are now subject to a lesser limitation, which approximates $361,000 per year. Any unused portion of such limitation can be carried forward to the following year. We may be subject to further limitation in the event that we issue or agree to issue substantial amounts of additional equity.

At December 31, 2009, the Company’s federal net operating loss carryforwards total approximately $19.4 million, of which approximately $6.8 million is not subject to Section 382 limitations from the first two changes in control transactions. These losses were incurred in the years ended May 31, 2002 through December 31, 2008, and expire in years 2022 through 2028. The Company may be unable to utilize some or all of its allowable tax deductions or losses, depending upon factors including the availability of sufficient taxable income from which to deduct such losses during limited carryover periods.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Tax years that remain subject to examinations by tax authorities are 2008, 2007, and 2006.

After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2009 and 2008 was necessary to fully offset the deferred tax assets based on the likelihood of future realization.

NOTE 16 — EMPLOYEE BENEFIT PLAN

We offer a 401(k) Plan (the “Plan”), which is a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of our eligible employees. All full-time and part-time employees who have attained the age of 21 and have completed one thousand hours of service are eligible to participate in the Plan. Each participant may contribute from 2% to 50% of his or her compensation to the Plan up to the annual maximum allowed amount, which was $16,500 during 2009, subject to limitations on the highly compensated employees to ensure the Plan is non-discriminatory. Our plan year ends at May 31. Company contributions are discretionary and are determined by the Company’s management. Our employer matching contributions to the Plan were $0, $4,316 and $8,906 in 2009, 2008 and 2007, respectively.

NOTE 17 — PREFERRED STOCK, COMMON STOCK, AND STOCK OWNERSHIP PLANS

PREFERRED STOCK

As of December 31, 2009, there were 995,660 shares of Preferred Stock authorized and 14,400 shares issued and outstanding. The outstanding shares consist of Series C Convertible Preferred Stock, $50.00 par value, which are convertible into Common Stock at the initial rate of approximately 316.28 shares of Common Stock for each share of Series C Convertible Preferred Stock. The conversion rate is adjustable for any dilutive issuances of Common Stock occurring in the future. The rights and preferences of the Series C Convertible Preferred Stock include, among other things, the following:

 

•

liquidation preferences,

 

•

dividend preferences,

 

•

the right to vote with the common stockholders on matters submitted to the Company’s stockholders, and

 

•

the right, voting as a separate class, to elect five directors of the Company.

In March 2009 the Company designated 7,000 shares of Series D Convertible Preferred Stock, par value $50.00 per share. No shares of Series D Convertible Preferred Stock are outstanding as of December 31, 2009. Of the 7,000 designated shares, 290 are presently acquirable through the exercise of warrants issued to members of the Board of Directors and certain members of management during 2009. Once issued, a Series D Convertible Preferred Share is convertible at any time after the date of issuance and without the payment of additional consideration into 100,000 shares of common stock, subject to adjustment in the event of any stock dividend,

 

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stock split, combination or other similar recapitalization. Each holder of Series D Preferred Shares is entitled to notice of any stockholders’ meeting and to vote on any matters on which the shares of Company’s common stock may be voted. In a stockholder vote, a Series D Convertible Preferred Share is entitled to the number of votes that the holder of 500,000 shares of common stock would be entitled to by virtue of holding such shares of common stock. Series D Preferred Shares also enjoy liquidation and dividend preferences.

We are authorized to issue shares of Preferred Stock, $50.00 par value, in one or more series, each series to have such designation and number of shares as the Board of Directors may determine prior to the issuance of any shares of such series. Each series may have such preferences and relative participation, optional or special rights with such qualifications, limitations or restrictions stated in the resolution or resolutions providing for the issuance of such series as may be adopted from time to time by the Board of Directors prior to the issuance of any such series.

PREFERRED AND COMMON STOCK ISSUED AND RESERVED

Authorized shares of common and preferred stock outstanding and reserved for possible issuance for convertible debentures, convertible preferred stock, convertible notes payable, stock options, and warrants are as follows at December 31, 2009:

Capitalization Table

As of December 31, 2009

 

Common Stock (Authorized 100 million shares)		Issued		Reserved		Total
Common Stock issued and outstanding		39,869,089		—		39,869,089
Reserved for convertible debentures(a)				40,133		40,133
Reserved for convertible promissory notes(b)				8,314,285		8,314,285
Reserved for outstanding stock options(c)				2,498,000		2,498,000
Reserved for outstanding warrants to purchase common stock(d)				4,906,000		4,906,000
Reserved for Series C Convertible Preferred Stock( e)				4,554,379		4,554,379
Reserved for Series D Convertible Preferred Stock( f)				29,000,000		29,000,000
Reserved for future issuance under stock option plans				9,451,668		9,451,668
Total shares issued or reserved for issuance		39,869,089		58,764,465		98,633,554
Preferred Stock (Authorized 995,660 shares)		Issued		Reserved		Total
Series C Convertible Preferred Stock( e