PINX:CHCR Comprehensive Care Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

Quarterly report pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

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, FL 33607

(Address of principal executive offices and zip code)

(813) 288-4808

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

Indicate by check mark whether the registrant 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 (Section 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  x    No  ¨

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

As of May 17, 2012, there were 59,251,836 shares of the registrant’s common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

     PAGE  
PART I – FINANCIAL INFORMATION   

ITEM  1— CONSOLIDATED FINANCIAL STATEMENTS

  

Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     3   

Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (unaudited)

     4   

Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

     5   

Notes to Consolidated Financial Statements

     6-12   

ITEM  2 — MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     12-19   

ITEM  3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     20   

ITEM 4 — CONTROLS AND PROCEDURES

     20   
PART II – OTHER INFORMATION   

ITEM 1— LEGAL PROCEEDINGS

     20-21   

ITEM 1A — RISK FACTORS

     21   

ITEM  2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     21   

ITEM  3 — DEFAULTS UPON SENIOR SECURITIES

     21   

ITEM 4 — MINE SAFETY DISCLOSURES

     21   

ITEM 5 – OTHER INFORMATION

     21   

ITEM 6 — EXHIBITS

     22   

SIGNATURES

     23   

CERTIFICATIONS

  

 

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PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Current assets:

    

Cash

   $ 1,173      $ 832   

Accounts receivable

     494        834   

Other

     516        699   
  

 

 

   

 

 

 
     2,183        2,365   

Property and equipment, net

     323        392   

Goodwill

     12,150        12,150   

Other intangible assets, net of accumulated amortization of $1,588 and $1,560, respectively

     —          28   

Other

     370        381   
  

 

 

   

 

 

 
   $ 15,026      $ 15,316   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY DEFICIENCY

    

Current liabilities:

    

Notes payable

   $ 2,609      $ 2,670   

Current portion of long-term debt

     4,340        2,467   

Accounts payable

     1,190        1,323   

Accrued claims payable

     15,053        14,036   

Other accrued expenses

     5,863        7,399   
  

 

 

   

 

 

 
     29,055        27,895   

Long-term liabilities:

    

Long-term debt, net of current portion

     2,222        3,903   
  

 

 

   

 

 

 

Total liabilities

     31,277        31,798   
  

 

 

   

 

 

 

Stockholders’ equity deficiency:

    

Preferred stock, $50.00 par value, noncumulative:

    

Series C Convertible, 14,400 shares authorized; 10,434 shares issued and outstanding

     522        522   

Other series; 981,260 shares authorized; none issued

     —          —     

Common stock, $0.01 par value; authorized shares: 500,000,000 and 200,000,000 respectively; issued and outstanding 59,251,836

     592        592   

Additional paid-in capital

     25,606        25,455   

Deficit

     (42,971     (43,051
  

 

 

   

 

 

 

Total stockholders’ equity deficiency

     (16,251     (16,482
  

 

 

   

 

 

 
   $ 15,026      $ 15,316   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share amounts)

 

     Three Months Ended  
     March 31,  
     2012     2011  

Revenues:

    

Managed care revenues

   $ 17,890      $ 18,282   

Costs and expenses:

    

Costs of revenues

     16,644        16,529   

General and administrative

     515        1,161   

Depreciation and amortization

     96        216   
  

 

 

   

 

 

 
     17,255        17,906   
  

 

 

   

 

 

 

Operating income

     635        376   

Other income (expense):

    

Interest expense, including amortization of debt discount of $195 and $189

     (563     (434

Other non-operating income, net

     11        136   
  

 

 

   

 

 

 

Income before income taxes

     83        78   

Income taxes

     3        37   
  

 

 

   

 

 

 

Net income

   $ 80      $ 41   
  

 

 

   

 

 

 

Net income attributable to common stockholders

   $ 80      $ 41   
  

 

 

   

 

 

 

Earnings per common share:

    

Basic

   $ 0.00      $ 0.00   
  

 

 

   

 

 

 

Diluted

   $ 0.00      $ 0.00   
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     59,252        54,644   
  

 

 

   

 

 

 

Diluted

     62,552        67,959   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net cash provided by operating activities

   $ 378      $ 76   

Cash flows from investing activities:

    

Additions to property and equipment

     (1     (22
  

 

 

   

 

 

 

Net cash used in investing activities

     (1     (22
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net proceeds from sale of common stock

     —          300   

Proceeds from borrowings

     100        100   

Debt issuance costs

     (8     —     

Repayment of debt

     (128     (146
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (36     254   
  

 

 

   

 

 

 

Net increase in cash

     341        308   

Cash at beginning of period

     832        563   
  

 

 

   

 

 

 

Cash at end of period

   $ 1,173      $ 871   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for interest

     158        64   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Common stock and warrants issued for outside services

     —          74   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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NOTE 1 – DESCRIPTION OF THE COMPANYS BUSINESS AND BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements for Comprehensive Care Corporation (referred to herein as the “Company,” or “CompCare”) and its subsidiaries have been prepared in accordance with the Securities and Exchange Commission (“SEC”) rules for interim financial information and do not include all information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Interim results for the current period are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the consolidated financial statements and the notes thereto in our most recent annual report on Form 10-K. Certain minor reclassifications of prior period amounts have been made to conform to the current period presentation.

Our consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, Comprehensive Behavioral Care, Inc. (“CBC”) and Core Corporate Consulting Group, Inc. (“Core”), each with their respective subsidiaries (collectively referred to herein as “we,” “us” or “our”). Through CBC, we provide managed care services in the behavioral health, substance abuse, and psychotropic pharmacy management fields for commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) members on behalf of health plans. We also provide behavioral pharmaceutical management services for two health plans 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 by unrelated vendors on a subcontract basis.

Under our at-risk contracts, 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 (“ASO”) contracts, we may manage 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. In general, our contracts with our other customers have one or two year initial terms, with automatic annual extensions. Such contracts generally provide for cancellation by either party upon 60 to 90 days written notice or the right to request a renegotiation of terms under certain circumstances.

NOTE 2 – NOTES PAYABLE

In March 2012, we renewed a 10% promissory note in the amount of $100,000 and a 7% promissory note in the amount of $50,000, each for additional one-year terms. One of the note holders was issued a three-year warrant to purchase 25,000 shares of our common stock at an exercise price of $0.25.

In February 2012, a zero coupon promissory note in the amount of $230,000 matured and was replaced by a new note of similar terms with a face value of $230,000 and a maturity date of May 31, 2012.

In January 2012, a 24%, $90,000 promissory note matured and was renewed with the same terms. Its maturity date was extended to April 1, 2012, at which time it was renewed again with the same terms and a maturity date of July 1, 2012.

In January 2012, a $200,000 promissory note bearing interest at 14% matured. At maturity, $100,000 was repaid and a new 14% note was issued for the remaining $100,000. The new note matured April 30, 2012 and was renewed at 14% until July 31, 2012.

A 24% convertible promissory note in the amount of $2 million issued to a major stockholder was not repaid on its maturity date of June 4, 2011. As of March 31, 2012, interest of approximately $897,000 was due and not yet paid on this promissory note. While negotiating for a resolution with the note holder, we continue to accrue interest at the rate of 24%.

NOTE 3 – LONG-TERM DEBT

Our senior promissory notes in the total amount of approximately $1.7 million matured on April 15, 2012 but were not repaid. We are currently in negotiations with the holders to resolve the default.

 

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On February 7, 2012, we issued to an investor a $100,000 promissory note paying interest quarterly at 12% and maturing in February 2014. At any time prior to the maturity date, at the election of the holder, all or a portion of the note plus any accrued but unpaid interest may be converted into our common stock at $0.25 per share.

NOTE 4 – CONTINGENCIES

Economic conditions and related risks, concentrations and uncertainties:

The United States and other parts of the world have been experiencing a severe and widespread recession accompanied by, among other things, instability in the financial markets and reduced credit availability, which are likely to continue to have far reaching effects on economic activity for an indeterminate period. The effects and probable duration of these conditions on our ability to obtain continued support from our major stockholders and lenders, success in our marketing efforts, and ultimately, profitable operations and positive cash flows, cannot be estimated at this time.

We occasionally carry cash and equivalents on deposit with financial institutions in excess of federally-insured limits, and the risk of losses related to such concentrations may be increasing as a result of recent economic developments discussed in the foregoing paragraph. The extent of a loss to be sustained as a result of uninsured deposits in the event of a future failure of a financial institution, if any, however, is not subject to estimation at this time.

Going concern uncertainty:

At March 31, 2012, we had a working capital deficiency of approximately $26.9 million and a stockholders’ equity deficiency of approximately $16.3 million resulting from a history of operating losses. Approximately $2.5 million of debt was past due and in default, which had increased to $4.3 million at April 15, 2012. As a result of these conditions, and the aforementioned economic conditions and risks, our ability to continue as a going concern will be dependent upon the success of management’s plans, as set forth in the following paragraph, and is subject to significant uncertainty. Except for the consideration afforded this matter in determining the valuation allowance for deferred tax assets from net operating loss carryforwards (Note 7), the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

We expect that with our existing customer contracts, plus the addition of new contracts we are close to obtaining through our marketing efforts, the launch of our new pharmacy management programs, and the expected continuing financial support from our major stockholders and bond holders, that we will be able to improve our cash flows and operating results and sustain current operations over the next year. However, we do not currently maintain a line of credit or other financing arrangement with any financial institution and have not made any arrangements to obtain any additional financing but are looking at various alternative sources of financing if operations cannot support our ongoing plan. Nevertheless, there can be no assurance that we will be able to find such financing in amounts or on terms acceptable to us, if at all, or that we will be able to achieve profitable operations and positive operating cash flows in the near term. Although subject to the general economic conditions, risks and uncertainties discussed in the preceding paragraphs, management believes that our current cash position plus the expected continued support of our major stockholders and bond holders will likely be sufficient to meet our current levels of operations, our ability to achieve our business objectives and continue as a going concern may be dependent upon the success of our plans to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during 2012.

Concentration, major customer contract:

We currently provide mental health, substance abuse, and pharmacy prescription drugs management services to approximately 210,000 members of a health plan in Puerto Rico on an at-risk basis pursuant to a contract that began in September 2010. The contract accounted for 76.3%, or $13.6 million, of our revenues for the three months ended March 31, 2012. The contract has an initial two-year term with automatic renewals for additional one year terms unless either party provides 90 days prior written notice of its intention not to renew the agreement.

On March 5, 2012, we entered into an amendment with the health plan to extend the contract term to December 31, 2012 and increase the rate for pharmacy management services by approximately 11% effective January 1, 2012. The loss of this customer, without replacement by new business, would adversely affect our future financial results and cash flows and jeopardize our ability to continue as a going concern.

 

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During the second year of the initial term, the health plan has the ability to cancel the contract without cause by providing at least 90 days prior written notice. Should this occur, the health plan would be required to pay to us a termination payment equivalent to $125,000 multiplied by the number of quarters remaining in the second year, including the quarter in which the termination is effective. No termination payment is required by the health plan after the initial two-year term. Each party has the right to terminate after 60 days prior written notice in the event of a material breach of the contract, except that a breach involving either party’s financial obligations requires a 30-day notice. The breaching party will have 30 days to cure the breach to prevent termination of the contact. The loss of this customer, without replacement by new business, would adversely affect our future financial results and jeopardize our ability to continue as a going concern.

Legal matters:

 

  (1) We are subject to a pending judgment of damages to a former director of approximately $1.3 million, plus a court award to the director of $582,000 as reimbursement of legal fees and payment of interest on the pending judgment. The judgment and award are under appeal, and motions for reconsideration by the Company are pending.

 

  (2) A subsidiary is subject to a suit for trademark infringement, among other things, in connection with its proposal to obtain a managed behavioral healthcare services contract in Puerto Rico. The complaint is seeking monetary damages in the amount of $600,000 and certain injunctive relief. We believe the suit is without merit and intend to vigorously defend ourselves against the allegations asserted.

 

  (3) In addition, we and a former customer are being sued for damages of approximately $1.7 million for allegedly unpaid claims for behavioral health professional services rendered in 2007 and 2008. We filed a counterclaim for breach of a settlement agreement that we believe previously resolved many of the claims that are the subject of the complaint, which we believe is without merit and are vigorously opposing.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Aside from the litigation described above, as of the date of this report, we are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business, financial condition or operating results.

During the three months ended March 31, 2012, we re-evaluated the adequacy of our provision for possible litigation settlements and legal defense costs and made adjustments to reduce the provision by the amount of approximately $1.6 million, which resulted in an equal reduction of general and administrative expense. The reduction is primarily due to the acquisition by the Company of a judgment (“Acquired Judgment”) owed by an individual that also has pending judgments against us, as described in item (1) under Legal Matters immediately above. Should the individual prevail in the case, the Acquired Judgment plus statutorily added interest will be used to effectively offset the damages owed by us, and accordingly we have reduced the provision for possible litigation settlements in our financial records. Management believes that the remaining provision is adequate for the estimated probable minimum losses, including legal defense costs, to be incurred from the litigation described above. In addition, our operating expenses were reduced by the reversal of $0.3 million in accrued bonuses and consulting.

Other:

In connection with an agreement with a new customer to provide mental health, substance abuse and pharmacy prescription drugs management services in Puerto Rico, we obtained a letter of credit from a bank in the amount of $4.0 million to assure our the customer of our compliance with our obligations under the agreement. Under such agreement, the customer may draw on all or part of the letter of credit under certain defined circumstances. Collateral for the letter of credit was provided by a major stockholder of the Company. If the client draws upon the letter of credit, we may become liable to our major stockholder for the amount of collateral accessed by the bank to fulfill its obligations under the letter of credit.

We also obtained a letter of credit in 2011 in the approximate amount of $1.9 million to collateralize two surety bonds that permit our appeal of judgments against us related to the matter described in item (1) under Legal Matters above.

 

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NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, accounts receivable and accounts payable approximate their estimated fair value due to the short-term nature of these instruments. Since our other financial liabilities are not traded in an open market, we generally use a present value technique, which is a level 3 input, as defined in generally accepted accounting principles, to measure the estimated fair value of these financial instruments, except for valuing stock options and warrants. The rate used for discounting expected cash flows is a risk-free rate adjusted for systematic and unsystematic risk.

The carrying amounts and estimated fair values of these financial instruments (all are liabilities) at March 31, 2012, are as follows (in thousands):

 

     Carrying
Amount
    Estimated
Fair Value
 

Promissory notes

   $ 4,590      $ 4,590   

Zero-coupon promissory notes

     230        225   

Debentures

     549        574   

Senior promissory notes

     1,758        1,837   

Long-term promissory notes

     1,900        1,920   

Less: unamortized discount

     (172     —     
  

 

 

   

 

 

 

Net liabilities

   $ 8,855      $ 9,146   
  

 

 

   

 

 

 

NOTE 6 – EQUITY INSTRUMENTS

Our Series C preferred stock is currently convertible into common stock at the rate of approximately 316.28 common shares for each share of Series C preferred, adjustable for any dilutive issuances of common occurring in the future. Series C preferred shares vote with the common stockholders on an as-converted basis. The shares are nonparticipating except that dividends, when declared by our Board of Directors must be paid before any dividends are paid on our common stock. Other significant rights and preferences of the Series C preferred include:

 

   

the right to vote as a separate class to appoint five directors of the Company, and

 

   

liquidation preferences, whereby the Series C holders 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 value of the liquidation preference is $250 per share, or approximately $2.6 million at March 31, 2012).

We also have a class of convertible preferred stock, Series D, that is authorized but for which no vested shares were outstanding at March 31, 2012. On January 4, 2012, 250 shares of Series D stock were issued that do not vest until the tenth anniversary of the grant date and are therefore will not be considered outstanding until that time. Such shares were issued in exchange for the cancelation of 120 previously granted warrants to purchase Series D shares. Once vested, a Series D preferred share will be convertible at any time into 100,000 shares of common stock, subject to adjustment in the event of any common stock dividend, split, combination thereof or other similar recapitalization, without additional consideration. Each Series D convertible preferred share is entitled to the number of votes equal to those of 500,000 shares of common stock, irrespective of whether the share is vested. Unless otherwise required by applicable law, holders of vested shares of Series D will have the right to vote together with holders of common stock as a single class on all matters submitted to a vote of our stockholders. Holders of Series D convertible preferred shares also enjoy certain specified liquidation and dividend preferences prior to and subsequent to vesting.

STOCK INCENTIVE COMPENSATION PLANS

WARRANTS:

We periodically issue warrants to purchase shares of our common and preferred stock for the services of employees and non-employee directors.

 

 

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To Purchase Common Stock:

During the quarter ended March 31, 2012, we issued to a note holder an immediately exercisable, three-year warrant to purchase 25,000 shares of our common stock at a price of $0.25. We recognized approximately $8,600 of compensation costs related to warrants to purchase common stock during the three months ended March 31, 2012. Total unrecognized compensation costs related to warrants as of March 31, 2012 was approximately $253,000 which is expected to be recognized over a weighted-average period of 30 months. The total fair value of warrants vested during the three months ended March 31, 2012 was $5,708.

A summary of our warrant activity for the three months ended March 31, 2012 and 2011 follows:

 

Warrants

   Shares     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic Value
 

Outstanding at January 1, 2012

     41,057,583      $ 0.35       4.86 years   

Granted

     25,000      $ 0.25         

Forfeited or expired

     (100,000   $ 0.53         
  

 

 

         

Outstanding at March 31, 2012

     40,982,583      $ 0.35       4.61 years   
  

 

 

         

Exercisable at March 31, 2012

     39,315,583      $ 0.33       4.67 years      —     

Outstanding at January 1, 2011

     27,209,750      $ 0.38       4.25 years   

Granted

     1,291,500      $ 0.89         

Reclassified

     500,000      $ 0.55         

Forfeited, expired, or cancelled

     (650,000   $ 0.51         
  

 

 

         

Outstanding at March 31, 2011

     28,351,250      $ 0.40       4.05 years   
  

 

 

         

Exercisable at March 31, 2011

     25,026,250      $ 0.34       4.01 years      —     

To Purchase Series D Convertible Preferred Stock:

As of March 31, 2012, there were warrants outstanding to purchase up to 100 shares of our Series D convertible preferred stock, all of which expire May 13, 2012. Each warrant may be exercised at any time prior to expiration at $25,000 per share. Each share of Series D Convertible Preferred Stock acquired through exercise of a warrant is convertible into 100,000 shares of our common stock at any time. For the presentation below, warrants to purchase shares of Series D Convertible Preferred Stock are stated in common shares, as if the warrant was exercised and the resulting Series D Convertible Preferred Stock was converted. The exercise price of the warrant has been similarly adjusted to an as-converted to common stock equivalent. A summary of our warrant activity for the three months ended March 31, 2012 and 2011 follows:

 

Warrants

   Underlying
Shares
    Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic Value
 

Outstanding at January 1, 2012

     39,000,000      $ 0.25       0.31 years   

Cancelled or expired

     (29,000,000     —           
  

 

 

         

Outstanding at March 31, 2012

     10,000,000      $ 0.25       0.12 year   
  

 

 

         

Exercisable at March 31, 2012

     10,000,000      $ 0.25       0.12 year      —     

Outstanding at January 1, 2011

     39,000,000      $ 0.25       1.31 years   

Granted

     —          —           

Exercised

     —          —           

Forfeited or expired

     —          —           
  

 

 

         

Outstanding at March 31, 2011

     39,000,000      $ 0.25       1.06 years   
  

 

 

         

Exercisable at March 31, 2011

     39,000,000      $ 0.25       1.06 years      —     

 

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OPTIONS:

From time-to-time, we grant stock options as compensation for services to our employees, non-employee directors and certain consultants (“grantees”) allowing grantees to purchase our common stock pursuant to stockholder-approved stock option plans. We currently have three active incentive qualified option plans, the 1995 Incentive Plan, the 2002 Incentive Plan and the 2009 Equity Compensation Plan (collectively, the “Plans”), that provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, restricted preferred stock, and common stock grants to grantees. Grants issued under the Plans may qualify as incentive stock options (“ISOs”) under Section 422A of the Internal Revenue Code of 1986, as amended. Options for ISOs may be granted for terms of up to ten years. The vesting of options issued under the 1995 and 2002 plans generally occurs after six months for one-half of the options and after 12 months for the remaining options. For the 2009 Equity Compensation Plan, the vesting period is determined by the Compensation Committee. The exercise price for ISOs must equal or exceed the fair market value of the shares on the date of grant. The Plans also provide for the full vesting of all outstanding options under certain change of control events. The maximum number of common shares authorized for issuance of options totals 52,000,000 under the Plans. As of March 31, 2012, there were a total of 43,838,600 options available for grant and 7,130,400 options outstanding, 6,439,400 of which were exercisable, under the Plans.

In addition, under our Non-employee Directors’ Stock Option Plan, we are authorized to issue non-qualified stock options to our non-employee directors for up to 1,000,000 common shares. Each non-qualified stock option is exercisable at a price equal to the average of the closing bid and asked prices of the common stock in the over-the-counter market for the most recent preceding day there was a sale of the stock prior to the grant date. Grants of options vest in accordance with vesting schedules established by our Board of Directors’ Compensation and Stock Option Committee. Upon joining our Board of Directors, directors receive an initial grant of 25,000 options. Annually, directors are granted 15,000 options on the date of our annual meeting. As of March 31, 2012, there were 776,668 shares available for option grants and 125,000 options outstanding under the non-qualified directors’ plan, 65,000 of which were exercisable.

As of March 31, 2012, we also had 1,500,000 options outstanding and exercisable. These options were issued outside the option plans described above.

A summary of our option activity for the three months ended March 31, 2012 and 2011 follows:

 

Options

   Shares     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic Value
 

Outstanding at January 1, 2012

     8,795,400      $ 0.33       7.74 years   

Forfeited or expired

     (40,000   $ 0.38         
  

 

 

         

Outstanding at March 31, 2012

     8,755,400      $ 0.33       7.49 years   
  

 

 

         

Exercisable at March 31, 2012

     8,004,400      $ 0.33       7.40 years      —     

Outstanding at January 1, 2011

     2,611,100      $ 0.50       8.09 years   

Granted

     25,000      $ 0.23       9.82 years   

Forfeited or expired

     (464,750   $ 0.30         
  

 

 

         

Outstanding at March 31, 2011

     2,171,350      $ 0.54       7.77 years   
  

 

 

         

Exercisable at March 31, 2011

     1,178,500      $ 0.66       7.02 years      —     

Total recognized compensation costs during the three months ended March 31, 2012 were approximately $95,000. As of March 31, 2012, there was approximately $215,000 of unrecognized compensation cost related to options expected to be recognized over a weighted-average period of 16 months. We might have recognized approximately $18,000 of tax benefits attributable to stock-based compensation expense recorded during the quarter ended March 31, 2012. However, this potential benefit was fully offset by our valuation allowance due to the aforementioned significant uncertainty of future realization. The total fair value of options vested during the three months ended March 31, 2012 was $11,148.

 

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NOTE 7 – INCOME TAXES

We are subject to the income tax jurisdictions of the U.S., Puerto Rico, as well as multiple state tax jurisdictions. Our provisions for income taxes for the three months ended March 31, 2012 and 2011 represented solely income tax expenses for certain states. We incurred approximately $27,000 of federal income tax expense, which was fully offset by a decrease in the valuation allowance provided against deferred tax assets. We continue to maintain an effective 100% valuation allowance against the balance of the net deferred tax assets.

Management has evaluated our tax positions taken or to be taken on income tax returns that remain subject to examination (i.e., tax years 2008 and thereafter federally, earlier for certain states,), and has concluded that there are no uncertain tax positions, as defined in generally accepted accounting principles, that require recognition or disclosure in the consolidated financial statements.

NOTE 8 – PER SHARE DATA

For the periods presented, the following table sets forth the computation of basic and diluted earnings per share attributable to common stockholders (amounts in thousands, except per share data):

 

     March 31,  
     2012      2011  

Numerator:

     

Net income attributable to common stockholders

   $ 80       $ 41   

Denominator:

     

Weighted average common shares – basic

     59,252         54,644   

Effect of dilutive securities:

     

Series C convertible preferred stock

     3,300         4,555   

Stock options

     —           14   

Warrants

     —           8,746   
  

 

 

    

 

 

 

Weighted average common shares – diluted

     62,552         67,959   
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.00       $ 0.00   
  

 

 

    

 

 

 

Diluted

   $ 0.00       $ 0.00   
  

 

 

    

 

 

 

NOTE 9 – SUBSEQUENT EVENTS

Other than the changes in our outstanding debt instruments described in Notes 2 and 3, no events were identified that in our opinion require accounting recognition or disclosure in these financial statements.

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, the following information contains forward-looking statements as defined under federal securities laws. Such statements include, but are not limited to, the overall performance of the healthcare market, our anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, growth and expansion, the ability to obtain new and maintain existing behavioral healthcare contracts and the profitability, if any, of such behavioral healthcare contracts. These statements are based on current expectations, estimates and projections about the industry and markets in which we operate, the customers we serve and management’s beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, 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, our ability to achieve expected results from new business, the profitability of our capitated contracts, cost of

 

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care, seasonality, our ability to obtain additional financing, and other risks detailed herein and from time to time in our filings with the SEC. The following discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto of CompCare and subsidiaries appearing elsewhere in this report.

OVERVIEW

The Company provides health care services and products through its primary operating subsidiaries, Comprehensive Behavioral Care, Inc. (“CBC”) and Core Corporate Consulting Group, Inc. (“Core.”)

Through CBC and its subsidiaries, we provide managed behavioral healthcare, substance abuse, and psychotropic pharmacy management services. We provide these services primarily to commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) health plans. Additionally, CBC provides pharmacy and 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. Our managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts.

SOURCES OF REVENUE

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

 

     Three Months Ended  
     March 31,  
     2012      2011  

At-risk behavioral contracts

   $ 7,476       $ 9,569   

Administrative services only contracts

     817         702   

At-risk pharmacy contracts

     9,597         8,011   
  

 

 

    

 

 

 
   $ 17,890       $ 18,282   
  

 

 

    

 

 

 

Our customer base primarily includes regional health plans that do not have their own behavioral network. We provide services primarily through a network of contracted providers that includes:

 

   

psychiatrists;

 

   

psychologists;

 

   

therapists;

 

   

other licensed healthcare professionals;

 

   

psychiatric hospitals;

 

   

general medical facilities with psychiatric beds;

 

   

residential treatment centers; and

 

   

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), inpatient programs and crisis intervention services. We do not directly provide treatment or own any treatment facility.

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

 

   

At-risk arrangements under which our clients pay us a fixed fee per member in exchange for our assumption of the financial risk of providing services; and

 

   

ASO arrangements where we 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.

We also cover psychotropic pharmacy management services, where we receive an additional per-member per-month amount. We manage psychotropic pharmacy services through the collection and analysis of pharmacy

 

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claims data which is provided by the health plan’s pharmacy benefit manager (“PBM”), whose primary functions are claims adjudication and drug cost negotiation. Through data analysis and usage evaluation against clinically sound, evidence-based criteria, we are able to identify ineffective, inappropriate and costly drug utilization. Our approach is to address these issues in a collaborative manner with the primary care physicians and psychiatrists through the provision of useful information based on our analysis. Our goal is to produce positive outcomes for patients while controlling pharmacy costs.

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

Our largest expense is the cost of behavioral health services and pharmacy drugs that we provide, which is based primarily on 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 at-risk arrangements. Providing services on an at-risk basis exposes us to the risk that our contracts may ultimately be unprofitable if we are unable to control or otherwise anticipate healthcare costs. Accrued claims payable and claims expense are our most significant critical accounting estimates. See “Critical Accounting Policies and Estimates” below.

We manage programs through which services are provided to recipients in 23 states, the District of Columbia and Puerto Rico. Our objective is to provide easily accessible, high quality behavioral healthcare and pharmacy services 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.

Our programs and services include:

 

   

management of prescription drugs on an at-risk basis for health plans;

 

   

fully integrated behavioral healthcare and psychotropic pharmacy management services;

 

   

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

 

   

case management/utilization review services;

 

   

administrative services management;

 

   

preferred provider network development;

 

   

management and physician advisor reviews; and

 

   

overall care management services.

We also manage physician-prescribed psychotropic medications for two Medicare health plans in Puerto Rico. Members are generally given a prescription from their primary care physician or psychiatrist. We are at-risk for the psychotropic drug costs and manage that appropriate medications are being utilized by the prescribing physician.

RECENT DEVELOPMENTS

Senior Promissory Note Default

We were unable to repay our 10% senior promissory notes in the amount of $1,758,563 on the maturity date of April 15, 2012. We are currently in negotiations with the holders to resolve the default.

Contract Termination

On March 26, 2012, we received a letter from a customer terminating our contract effective July 1, 2012. Under the contract we provide behavioral healthcare services on an at-risk and ASO basis to approximately 204,000 Medicaid and Medicare members. The contract accounted for 5.2% or $0.9 million, and 5.3%, or $1.0 million, of our revenues for the three months ended March 31, 2012 and 2011, respectively. As this contract resulted in an operating loss for 2011, its elimination slightly improves our prospects for future profitability.

 

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Rate Increase – Major Contract

On March 5, 2012, we entered into an amendment of our major Puerto Rico contract which provided approximately 76% of our operating revenue during the three months ended March 31, 2012 and under which we provide mental health, substance abuse treatment, and pharmacy management services. Pursuant to the amendment, the original contract term was extended to December 31, 2012 and the contract rate for pharmacy management services was increased by approximately 11% effective January 1, 2012.

New or Increased Business

On March 1, 2012, we began supplying behavioral health services on an at-risk basis to approximately 7,000 members of a Texas health plan that serves Medicaid and CHIP beneficiaries.

In February 2012, we added approximately 40,000 lives to our covered membership through the increased business of an existing customer. We will provide behavioral health care services to participants of the In-home Support Services Workers Health Care Program in Los Angeles County, California.

Effective January 1, 2012, we began providing behavioral health services to approximately 39,000 members of a Medicare Advantage population serviced by a health plan in the states of Missouri and Washington. Services will be provided on an at-risk basis.

Increase in Authorized Common Shares

Effective January 13, 2012, we increased the number of authorized shares of our common stock that we may issue from 200 million to 500 million , based on an affirmative vote by written consent of a majority of our shareholders.

Pharmaceutical Drug Management Initiative

We have recently launched an effort to expand our drug management program. We will offer to manage on an at-risk basis prescription drug programs for health plans. We believe we can reduce drug costs for our clients that utilize our program.

RESULTS OF OPERATIONS

Three months ended March 31, 2012 vs. 2011

Revenues.

At-risk behavioral health contracts: Operating revenues from at-risk contracts decreased by 21.9%, or approximately $2.1 million, to $7.5 million for the three months ended March 31, 2012, compared to $9.6 million for the three months ended March 31, 2011. The decrease was primarily attributable to the loss of customers in Missouri, Texas and Wisconsin during the fourth quarter of 2011 that accounted for $3.1 million of revenue for the three months ended March 31, 2011. The decrease was offset by approximately $1.1 million in additional revenues from new and previously existing customers.

ASO contracts: Revenue from ASO contracts increased by 16.4%, or approximately $0.1 million, to $0.8 million for the three months ended March 31, 2012, due primarily to additional revenue from the expansion of business of previously existing ASO customers.

Pharmacy management contracts: Pharmacy revenue increased by 19.8% to $9.6 million for the three months ended March 31, 2012, from approximately $8.0 million for the three months ended March 31, 2011, attributable primarily to a 9.9% increase in membership and a contract rate increase effective January 1, 2012 from our major customer in Puerto Rico.

 

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Costs of revenues.

Claims costs, at-risk behavioral health contracts: Claims expense on at-risk contracts decreased by 20.2%, or approximately $1.3 million, to $5.0 million for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The decrease was primarily attributable to a lack of claims for three contracts that were terminated during the fourth quarter of 2011 described above as compared to $2.5 million of claims costs for these contracts for the comparable period. The claims costs decrease was offset by increases of $0.7 million and $0.3 million resulting from the expansion of existing contracts and the addition of new at-risk business, respectively. Claims costs as a percentage of at-risk revenues increased to 67.2% for the three months ended March 31, 2012, from 65.8% for the three months ended March 31, 2011, attributable to higher utilization.

Pharmacy drug costs: Pharmacy costs increased by 16.8%, or approximately $1.4 million, to $9.6 million for the three months ended March 31, 2012 as compared to $8.3 million for the three months ended March 31, 2011. Pharmacy costs as a percentage of pharmacy revenue decreased from 103.0% for the three months ended March 31, 2011 to 100.5% for the three months ended March 31, 2012 due to an increase in the contract rate effective January 1, 2012 for one major customer in Puerto Rico.

Other healthcare operating costs: Other healthcare costs, attributable to servicing both at-risk contracts and ASO contracts, were approximately $2.0 million for each of the three month periods ended March 31, 2012 and 2011. Total healthcare costs as a percentage of total operating revenue increased slightly to 11.0% for the three months ended March 31, 2012 compared to 10.8% for the three months ended March 31, 2011.

General and administrative expense: General and administrative expense decreased by 55.6%, or approximately $0.6 million, to $0.5 million for the three months ended March 31, 2012, as compared to the three months ended March 31, 2011. The decrease was primarily attributable to a $1.6 million reduction in legal expense due to an adjustment of an estimated legal settlement provision. As a percentage of total operating revenue, general and administrative expense decreased to 2.9% for the three months ended March 31, 2012 compared to 6.4% for the three months ended March 31, 2011, attributable to the aforementioned.

Interest expense. Interest expense, excluding amortization of debt discount, increased by approximately $123,000 for the three months ended March 31, 2012, as compared to the three months ended March 31, 2011 due to an increase in the weighted average amount of debt outstanding to $9.4 million for the three months ended March 31, 2012 from $5.8 million for the comparable prior period net of a decline in the effective interest rate, excluding amortization of debt discount, for the three months ended March 31, 2012, to approximately 15.8% from 17.0% for the same period in 2011, which was the result of adding $3.5 million in debt at 14% during the second half of 2011.

Income taxes. Our provisions for income taxes for the three months ended March 31, 2012 and 2011 represented solely income tax expenses for certain states. Our effective income tax rate for the three months ended March 31, 2012 was 3.6% as compared to 47.4% for the comparable period. The decrease was mainly due to the loss of business in the states where we provided for income taxes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of our consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements. 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, premium deficiencies and claims expense, goodwill, and income taxes are critical to the preparation of our consolidated financial statements.

Revenue recognition. The majority of our managed care activities are performed under at-risk arrangements pursuant to terms of agreements primarily with health plans to provide contracted behavioral healthcare and pharmacy management services to subscribing members. For the three months ended March 31, 2012 and 2011, such agreements accounted for 95.4%, or $17.1 million, and 96.2%, or $17.6 million, respectively, of our revenue. Revenue under these agreements is earned continuously over time regardless of services actually provided and, therefore, is recognized monthly based on the number of qualified members. The information regarding qualified members is

 

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supplied by our clients, and we review member eligibility records and other reported information to verify its accuracy and determine the amount of revenue to be recognized. The remaining balance of our revenues is earned and recognized as services are delivered on a non-risk basis.

We also manage the psychotropic drug benefit under certain behavioral health contracts for certain health plans’ subscribing members and are responsible for the cost of drugs dispensed. In accordance with the contracts, the health plan’s pharmacy benefit manager (“PBM”) performs drug price negotiation and claims adjudication. As such, payment for our pharmacy management services is withheld until a monthly or quarterly comparison of our total premium to total drug cost is made, at which time we receive or pay the difference. Accordingly, similar to our other at-risk arrangements, pharmacy drug management revenue is earned at a contracted rate per eligible member and recognized monthly.

Accrued claims payable. Claims expense, a major component of cost of care, is recognized in the period in which an eligible plan member actually receives services and includes incurred but not reported (“IBNR”) claims. 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 required. If all of these requirements are met, the claim is entered into our claims system for payment.

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 IBNR. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last two years.

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 estimates would increase claims expense and could adversely affect our ability to achieve and sustain improvements in profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate.

Whenever we believe it is probable that a future loss will be incurred under a managed care contract based on an expected premium deficiency and we are unable to cancel our obligation or renegotiate the contract, we record a loss in the amount of the expected future losses. We perform our loss accrual analysis on a contract-by-contract basis by taking into consideration various factors such as future contractual revenue, estimated 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 estimated future healthcare and maintenance costs are based on historical trends and expected future cost increases. Our analysis at March 31, 2012 did not identify any loss contracts other than a contract previously identified at December 31, 2011, for which we have pending a rate increase request. Based on available information, we continue to maintain a $450,000 allowance for a contract loss, which we believe to be adequate as of March 31, 2012.

Accrued claims payable consists primarily of amounts 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. However, estimating IBNR claims involves a significant amount of judgment by our management. The following are the principal factors that would have an impact on our future operations and financial condition:

 

 

Changes in the number of employee plan members due to economic factors;

 

 

Other changes in utilization patterns;

 

 

Changes in healthcare costs;

 

 

Changes in claims submission timeframes by providers;

 

 

Success in renegotiating contracts with healthcare providers;

 

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Occurrence of catastrophes;

 

 

Changes in benefit plan design; and

 

 

The impact of present or future state and federal regulations.

The accrued claims payable ranges were between $15.0 and $15.1 million at March 31, 2012 and between $13.9 and $14.1 million at December 31, 2011. Based on the information available, we determined our best estimate of the accrued claims liability to be $15.1 million at March 31, 2012 and $14.0 million at December 31, 2011. Our accrued claims liability at March 31, 2012 and December 31, 2011 includes approximately $9.9 million and $7.3 million, respectively, of submitted and approved but unpaid claims, $4.7 million and $6.2 million for IBNR claims, respectively, and $0.5 million and $0.5, respectively, of contract loss allowance. A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at March 31, 2012 could increase our claims expense by approximately $120,000. Actual claims incurred could differ from estimated claims accrued.

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, based on level 3 inputs as defined in generally accepted accounting principles. Management considers both the income and market approaches in the fair value estimation. 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 our common stock and the quoted market prices of our common stock. However, actual results may differ significantly from management’s assumptions, resulting in a potentially adverse impact to our consolidated financial statements.

Since December 31, 2011, there had been no changes in the conditions affecting the valuation of goodwill that would require us to re-evaluate goodwill for impairment at March 31, 2012.

Income taxes. Computing our provision for income taxes involves significant judgment and estimates particularly in relation to the realization of deferred tax assets from net operating loss carryforwards, uncertain income tax positions, and in estimating the probable annual effective income tax rates for interim financial reporting periods.

At March 31, 2012, we have federal net operating loss carryforwards of approximately $34.0 million, the deductibility of $29.4 million of which is presently limited under Section 382 of the Internal Revenue Code to approximately $361,000 annually due to recent changes in control of the Company. We are particularly vulnerable to additional changes in control in the near term due to probable future equity dilution or possible takeover resulting in further loss of our ability to utilize the remaining carryforwards pursuant to Section 382. In addition, as of March 31, 2012, the Company continues to be in a deficit position. Based on this evidence, and the uncertainty as to our ability to continue as a going concern and current economic conditions discussed under LIQUIDITY AND CAPITAL RESOURCES below, we concluded that at this time, it is not more likely than not that the Company’s deferred tax assets, which relate primarily to the federal net operating losses, will be realizable within the carryforward period. Accordingly, the Company continues to maintain an effective 100% valuation allowance against the balance of these deferred tax assets at this time. Our judgments regarding future taxable income may change due to many factors, including changes in operating results from changing economic or market conditions, or changes in tax laws, operating results or other factors.

RECENT ACCOUNTING PRONOUNCEMENTS

No recent accounting pronouncements have been issued that are not yet effective and have not been early adopted that we believe will have a significant effect on our consolidated financial in future periods.

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 affect our costs of care during these months, having a generally positive impact on our operations during June through August and a negative impact from March through May.

CONCENTRATION OF RISK

For the three months ended March 31, 2012, approximately 76.3% of our operating revenue was attributable to a health plan customer serving Medicare members in Puerto Rico. The term of the contract is for two years and is automatically renewable for additional one-year periods. On March 5, 2012, we entered into an amendment with the

 

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health plan to extend the contract term to December 31, 2012 and increase the rate for pharmacy management services by approximately 11% effective January 1, 2012. Each party has the right to terminate after 60 days prior written notice in the event of a material breach of the contract, except that a breach involving either party’s financial obligations requires a 30 day notice. The breaching party will have 30 days to cure the breach to prevent termination of the contact. The loss of this customer, without replacement by new business, would adversely affect our future financial results and jeopardize our ability to continue as a going concern (see LIQUIDITY AND CAPITAL RESOURCES, below).

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2012, we had a working capital deficiency of approximately $26.9 million and a stockholders’ equity deficiency of approximately $16.3 million resulting from a history of operating losses. Approximately $2.5 million of debt was past due and, therefore, in default. As a result of these conditions, and the economic conditions and risks discussed in the second paragraph, below, our ability to continue as a going concern will be dependent upon the success of management’s plans, as set forth in the following paragraphs, and is subject to significant uncertainty. In their report on our most recent audited financial statements as of and for the year ended December 31, 2011, our independent auditors expressed substantial doubt as to our ability to continue as a going concern. Except for its consideration in establishing our valuation allowance for deferred tax assets, the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

We are negotiating with lenders and expect to establish payment plans in the near future to cure certain debt defaults. We also expect that with our existing customer contracts, plus the addition of new contracts we are close to obtaining through our marketing efforts, including the launch of our new pharmacy management program, and the expected continuing financial support from our major stockholders and bondholders, that we will be able to improve our cash flows and operating results and sustain current operations over the next year. However, 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 arrangements to obtain such additional financing but are looking at various alternative sources of financing if operations cannot support our ongoing plan. Nevertheless, there can be no assurance that we will be able to find such financing in amounts or on terms acceptable to us, if at all, or that we will be able to achieve profitable operations and positive operating cash flows. Although management believes that our current cash position plus the expected continued support of our major stockholders will be sufficient to meet our current levels of operations, failure to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during the remainder of 2012 would adversely affect our ability to achieve our business objectives and continue as a going concern.

The United States and other parts of the world have been experiencing a severe and widespread recession accompanied by, among other things, instability in the financial markets and reduced credit availability, and uncertainty about the effects of prospective U.S. government action on healthcare all of which are likely to continue to have far-reaching effects on economic activity for an indeterminate period. The effects and probable duration of these conditions on our future operations and positive cash flows, including our ability to obtain continued support from our major stockholders and lenders, cannot be estimated at this time.

Our primary internal source of liquidity (i.e., from operations) on an on-going basis consists of the monthly capitation payments we receive from our clients for providing managed care services. Based on historical experience, there is a high degree of certainty with respect to the reliability and timing of these payments from continuing contracts. However, the expiration or termination of existing contracts or commencement of new contracts may cause our operational cash flow to vary significantly.

Our external sources of funds consist primarily of borrowings and the use of our equity instruments as a form of liquidity. Our ability to continue to borrow funds on an unsecured basis is unknown, as well as our ability to sell shares of our common stock in private placement offerings. With the exception of contracted maturities of debt, there are no other known future liquidity commitments or events. We do not have any off-balance sheet financing arrangements. The duration of our borrowings has typically ranged from one week to three years, with stated interest rates ranging from 7% to 24%. Certain of the loans have contained features such as the ability to convert all or a portion of the loan into our common stock, or have had a warrant for the purchase of our common stock issued in conjunction with the loan, or both.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

While we currently have market risk sensitive instruments, we have no significant exposure to changing interest rates, as the interest rates on our short-term debt is fixed. Additionally, we do not use derivative financial instruments for investment or trading purposes.

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer along with the Acting Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Acting Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

 

(b) Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary conduct of our business, we are subject to periodic lawsuits and claims. Although we cannot predict with certainty the ultimate resolution of lawsuits and claims asserted against us, we do not believe that any currently pending legal proceedings to which we are a party could have a material adverse effect on our business, or our future results of operations, cash flows or financial condition except as described below:

 

  (1) We initiated an action against Jerry Katzman, a former director, in July 2009 alleging that Mr. Katzman, fraudulently induced us to enter into an employment agreement and, alternatively, that Mr. Katzman breached that alleged employment agreement and was rightfully terminated. In September 2010, the matter proceeded to a trial by jury. The jury found that Mr. Katzman did not fraudulently induce CompCare to enter into the contract. The jury also found that Mr. Katzman was not entitled to damages. On defendant’s motion to amend the verdict due to inconsistency, the trial court set aside the jury verdict and awarded Mr. Katzman damages of approximately $1.3 million. In February 2011, the Company filed a Notice of Appeal, posted a collateralized appeal bond for approximately $1.3 million, and filed a motion for reconsideration. The appeal is set to be heard in May 2012.

In addition, in July 2011, the District Court awarded Mr. Katzman approximately $582,000 as reimbursement of his legal fees and costs, and payment of prejudgment interest on the damage award of $1.3 million. In response, the Company in August 2011 filed a Notice of Appeal, posted a collateralized appeal bond for approximately $582,000, and filed a motion for reconsideration. The appeal is set to be heard in May 2012.

 

  (2) On September 21, 2010, a complaint entitled “InfoMC, Inc. v. Comprehensive Behavioral Care, Inc. and CompCare de Puerto Rico, Inc.” was filed against us alleging, among other things, that the Company improperly used InfoMC, Inc.’s trademarks in connection with CompCare de Puerto Rico Inc.’s proposal to obtain a managed behavioral healthcare services contract in Puerto Rico. The complaint asserts claims for federal trademark infringement, false advertising, unfair competition, conversion, promissory estoppel and unjust enrichment. The plaintiff is seeking monetary damages in the amount of $600,000 and certain injunctive relief. We filed a motion to dismiss the complaint which was denied on March 30, 2012, but our motion to transfer the case to the District of Puerto Rico was granted effective April 30, 2012. We believe the suit is without merit and if the case proceeds, we intend to vigorously defend ourselves against the allegations asserted.

 

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  (3) On January 5, 2011, a complaint entitled “Community Hospitals of Indiana, Inc. vs. Comprehensive Behavioral Care, Inc. and MDwise, Inc.” was filed against us. The complaint claims damages of approximately $1.7 million from us and MDwise, Inc., a former client, for allegedly unpaid claims for behavioral health professional services rendered between 2007 and 2008. The complaint alleges, among other things, breach of contract and unjust enrichment, and requests recovery of alleged losses despite the absence of a contract between us and complainant. We believe the suit against the Company is without merit and are vigorously opposing the litigation.

Management believes that the Company has made adequate provision for any estimated probable losses, including legal defense costs, from the litigation described above. Management also believes that the resolution of these matters will not have a material adverse effect on the Company’s future financial condition or results of operations.

ITEM 1A. RISK FACTORS

The risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2011 have not materially changed.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period March 16, 2012 through April 30, 2012, we issued warrants to purchase shares of our common stock in private placements not involving a public offering as follows:

 

   

On March 16, 2012, we issued a warrant to an investor who agreed to renew a loan of $100,000 to us. The warrant had a three year term and is exercisable at $0.25 per share to purchase 25,000 shares of our common stock. The warrant was vested in full at issuance.

Based on certain representations and warranties of the recipients referenced above, we relied on Section 3(a)(9) and 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) as applicable, for an exemption from the registration requirements of the Securities Act. The shares purchased have not been registered under the Securities Act and may not be sold in the United States absent registration or an applicable exemption from registration requirements.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

We were unable to repay our 10% senior promissory notes in the amount of $1,758,563 on the maturity date of April  15, 2012. We are currently in negotiations with the holders to resolve the default.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 

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ITEM 6. EXHIBITS

 

EXHIBIT

NUMBER

  

DESCRIPTION

    3.1    Certificate of Amendment to the Amended and Restated Certificate of Incorporation dated January 12, 2012, incorporated by reference to Exhibit 3.8 to our Form 10-K Annual Report dated December 31, 2011 and filed March 30, 2012.
  10.1    Second Amendment to the Agreement for the Provision of Services with an effective date of March 1, 2012, by and between CompCare de Puerto Rico, Inc. and MSO of Puerto Rico, Inc. incorporated by reference to Exhibit 10.1 to our Form 8-K Current Report dated March 5, 2012 and filed March 8, 2012.
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following materials from Comprehensive Care Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

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

COMPREHENSIVE CARE CORPORATION

May 21, 2012

 

  By  

/s/ CLARK A. MARCUS

 
    Clark A. Marcus  
    Chief Executive Officer and Chairman  
    (Principal Executive Officer)  
  By  

/s/ ROBERT J. LANDIS

 
    Robert J. Landis  

Acting Chief Financial Officer and Chief Accounting Officer

(Principal Financial and Accounting Officer)

 

23

PINX:CHCR Comprehensive Care Corp Quarterly Report 10-Q Filling

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