UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q





QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended September 30, 2010





COMMISSION
FILE NUMBER 0-26168





CAREADVANTAGE,
INC.


(Exact
name of small business issuer as specified in its charter)





DELAWARE
            
            22-3326528(State
      or other jurisdiction of
              Incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      Number)





485-A  Route
      1 South, Iselin, New Jersey
            
            08830(Address
      of principal executive offices)
            
            (Zip
      Code)




Issuer's
telephone number, including area code: (732) 362-5000




Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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.




Yesx  Noo




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).





Yeso  Noo





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





Large accelerated filer  o
            Accelerated
      filer  oNon-accelerated
      filer  o
            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)





Yeso  Nox





The
number of shares of Common Stock outstanding as of October 22, 2010 is
145,250,442









INDEX





Part
      I - Financial Information
            
            2Item
      1. Financial Statements
            
            2·  
      Condensed Consolidated Balance Sheets -September 30, 2010 (Unaudited) and
      December 31, 2009
            
            2·  
      Condensed Consolidated Statements of Operations (Unaudited) -Three and
      nine months ended  September 30, 2010 and September 30,
      2009
            
            3·  
      Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine months
      ended September 30, 2010 and September 30, 2009
            
            4·  
      Notes to Unaudited Condensed Consolidated Financial
    Statements
            
            5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            8Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            12Item
      4. Controls and Procedures
            
            12Part II – Other
      Information
            
            13Item
      1. Legal Proceedings
            
            13Item
      1A. Risk Factors
            
            13Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            13Item
      3. Defaults Upon Senior Securities
            
            13Item
      4. [REMOVED AND RESERVED]
            
            13Item
      5. Other Information
            
            13Item
      6. Exhibits
            
            13Signature
            
            14










PART
I - FINANCIAL INFORMATION


ITEM
1. Financial Statements





CAREADVANTAGE,
INC AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS




September 30,
            
            
            December 31,2010
            
            
            2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            408,000
            
            
            $
            510,000Accounts
      receivable
            
            
            62,000
            
            
            
            143,000Prepaid
      expenses and other current assets
            
            
            75,000
            
            
            
            108,000Security
      deposits
            
            
            -
            
            
            
            167,000Total
      current assets
            
            
            545,000
            
            
            
            928,000Property
      and equipment, at cost net of accumulated depreciation
            
            
            62,000
            
            
            
            108,000Intangible
      assets, net of accumulated depreciation
            
            
            -
            
            
            
            2,000Total
      Assets
            
            $
            607,000
            
            
            $
            1,038,000LIABILITIES
      AND STOCKHOLDERS'(DEFICIT)/EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            120,000
            
            
            $
            82,000Accrued
      compensation and related benefits
            
            
            94,000
            
            
            
            81,000Accrued
      professional fees
            
            
            58,000
            
            
            
            65,000Other
      current liabilities
            
            
            1,000
            
            
            
            1,000Deferred
      revenue
            
            
            26,000
            
            
            
            231,000Capital
      lease obligation – current
            
            
            36,000
            
            
            
            51,000Total
      current liabilities
            
            
            335,000
            
            
            
            511,000Long
      term liabilities:Capital
      lease obligation - long term
            
            
            -
            
            
            
            23,000Deferred
      rent
            
            
            320,000
            
            
            
            340,000Total
      long term liabilities
            
            
            320,000
            
            
            
            363,000Total
      Liabilities
            
            
            655,000
            
            
            
            874,000Stockholders'
      (deficit)/equity:Preferred
      stock-par value $.10 per share; authorized 10,000,000 shares; none issued
                Common stock-par
      value $.001 per share; authorized 200,000,000 shares; 145,250,442 shares
      issued and outstanding at September 30, 2010 and 142,554,442 shares issued
      and outstanding at December 31, 2009
            
            
            145,000
            
            
            
            143,000Additional
      capital
            
            
            24,446,000
            
            
            
            24,420,000Accumulated
      deficit
            
            
            (24,639,000
            )
            
            
            (24,399,000
            )Total
      Stockholders' (Deficit)/Equity
            
            
            (48,000
            )
            
            
            164,000Total
      Liabilities and Stockholders' (Deficit))/Equity
            
            $
            607,000
            
            
            $
            1,038,000




See Notes
to Unaudited Condensed Consolidated Financial Statements.




2




CAREADVANTAGE,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





Three Months Ended
              September 30,
            
            
            Nine Months Ended
              September 30,2010
            
            
            2009
            
            
            2010
            
            
            2009License
      fees and service revenue
            
            $
            792,000
            
            
            $
            927,000
            
            
            $
            2,768,000
            
            
            $
            2,847,000Costs
      of services
            
            
            255,000
            
            
            
            343,000
            
            
            
            926,000
            
            
            
            1,040,000Gross
      profit
            
            
            537,000
            
            
            
            584,000
            
            
            
            1,842,000
            
            
            
            1,807,000Operating
      expenses:Selling,
      general and administrative
            
            
            517,000
            
            
            
            403,000
            
            
            
            1,795,000
            
            
            
            1,848,000Depreciation
      and amortization
            
            
            16,000
            
            
            
            16,000
            
            
            
            48,000
            
            
            
            49,000Total
      operating expenses
            
            
            533,000
            
            
            
            419,000
            
            
            
            1,843,000
            
            
            
            1,897,000Operating
      income/(loss)
            
            
            4,000
            
            
            
            165,000
            
            
            
            (1,000
            )
            
            
            (90,000
            )Interest
      expense
            
            
            5,000
            
            
            
            5,000
            
            
            
            15,000
            
            
            
            15,000Loss
      on building lease
            
            
            -
            
            
            
            -
            
            
            
            224,000
            
            
            
            -Net
      income/(loss)
            
            $
            (1,000
            )
            
            $
            160,000
            
            
            $
            (240,000
            )
            
            $
            (105,000
            )Net
      income/(loss) per share of common stock
            
            $
            .00
            
            
            $
            .00
            
            
            $
            .00
            
            
            $
            .00Weighted
      average number of common shares outstanding -Basic and
      diluted
            
            
            145,250,000
            
            
            
            81,685,000
            
            
            
            144,656,000
            
            
            
            68,855,000





See Notes
to Unaudited Condensed Consolidated Financial Statements.





3




CAREADVANTAGE,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)




Nine Months Ended
              September 30,2010
            
            
            2009Cash
      flows from operating activities:Net
      loss
            
            $
            (240,000
            )
            
            $
            (105,000
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            48,000
            
            
            
            49,000Stock
      based compensation
            
            
            5,000
            
            
            
            9,000Deferred
      revenue
            
            
            (205,000
            )
            
            
            238,000Deferred
      rent
            
            
            (77,000
            )
            
            
            (111,000
            )Loss
      on building lease – security deposit
            
            
            167,000
            
            
            
            -Loss
      on building lease – deferred rent
            
            
            57,000
            
            
            
            -Loss
      on sublease
            
            
            -
            
            
            
            90,000Gain
      on settlement of accounts payable
            
            
            -
            
            
            
            (120,000)Changes
      in:Accounts
      receivable
            
            
            81,000
            
            
            
            (75,000
            )Prepaid
      expenses and other current assets
            
            
            33,000
            
            
            
            4,000Accounts
      payable
            
            
            38,000
            
            
            
            (197,000
            )Accrued
      expenses and other current liabilities
            
            
            6,000
            
            
            
            55,000Net
      cash used in operating activities
            
            
            (87,000
            )
            
            
            (163,000
            )Cash
      flows from financing activity:Proceeds
      from sale of common stock
            
            
            -
            
            
            
            352,000Proceeds
      from exercise of stock options, net of costs
            
            
            23,000
            
            
            
            2,000Repayment
      of capital leases
            
            
            (38,000
            )
            
            
            (45,000
            )Net
      cash (used in)/provided by financing activities
            
            
            (15,000
            )
            
            
            309,000Net
      (decrease)/increase in cash and cash equivalents
            
            
            (102,000
            )
            
            
            146,000Cash
      and cash equivalents - beginning of period
            
            
            510,000
            
            
            
            88,000Cash
      and cash equivalents - end of period
            
            $
            408,000
            
            
            $
            234,000




See Notes
to Unaudited Condensed Consolidated Financial Statements.




4




CAREADVANTAGE,
INC.


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Note
A—Business:





[1]
Business:





CareAdvantage,
Inc. (the “Company”) and its direct and indirect subsidiaries, CareAdvantage
Health Systems, Inc. and Contemporary HealthCare Management, Inc., are in the
business of providing healthcare consulting services, data warehousing and
analytic services designed to enable integrated health care delivery systems,
healthcare plans, employee benefit consultants, other care management
organizations, self insured employers and unions to reduce the costs, while
improving the quality, of medical services provided to the healthcare
participants. The services include care management program enhancement services,
executive and clinical management services, training programs, risk
stratification and predictive modeling. The Company operates in one business
segment.





As part
of offering its healthcare consulting services, the Company has developed
RightPath® Navigator (“RPNavigator”), a proprietary tool to help its customers
better understand and forecast resource consumption, risk, and costs associated
with their respective populations. In providing its services, the Company
licenses RPNavigator to its customers and provides consulting services in
connection with that licensing.





[2] Basis of
Presentation:





The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”) and in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim
information.  Certain information and note disclosures normally
included in financial statements prepared in accordance with GAAP have been
omitted or condensed.  These interim condensed consolidated financial
statements should be read in conjunction with the Company’s consolidated
financial statements and notes hereto included in our Annual Report on Form 10-K
for the year ended December 31, 2009.





The
unaudited condensed consolidated financial statements reflect all adjustments
which, in the opinion of management, are necessary for a fair statement of
results of operations, financial position and cash flows for the interim periods
presented.  All such adjustments are of a normal recurring
nature.  The results for the interim periods are not necessarily
indicative of results which may be expected for any other interim period or for
the full year.





The
unaudited condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern.  The
Company generates most of its revenue from the licensing of RPNavigator and
providing consulting services in connection with that licensing. Based on cash
on hand at September 30, 2010 and a forecast prepared by management, which takes
into account executed contracts, a pipeline of prospective clients that
management believes is robust, and cost reductions, management expects the
Company to be able to meet its obligations as they become due during the next
twelve months. However, there can be no assurances that management’s plans,
including projected revenue, will be attained. For the
three and nine months ended September 30, 2010, the Company had a net loss of
$1,000 and $240,000, respectively.  Additionally, at September 30,
2010, the Company has an accumulated deficit of $24,639,000, stockholders’
deficit of $48,000 and cash and cash equivalents of $408,000.  These
factors, combined with the notice of termination of the BCBSTX Agreement
discussed in Note [A][3] below, raise doubt regarding the Company’s ability to
continue as a going concern.  The unaudited condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.





The
Company has reclassified certain 2009 balances to conform to the current period
presentation.





[3] Notice
of Termination of Blue Cross and Blue Shield of Texas Agreement:





As
previously reported by the Company on the Form 8-K filed on September 3, 2010,
the Company received a letter dated August 30, 2010, from Blue Cross and Blue
Shield of Texas (“BCBSTX”), a division of Health Care Service Corporation
(“HCSC”) stating that the letter served as ninety (90) days prior written notice
of BCBSTX’s intent to terminate the Service and License Agreement between the
Company and BCBSTX (the “BCBSTX Agreement”) effective November 30,
2010.  The Company also reported in the Form 8-K that Dennis Mouras,
the Company’s President and Chief Executive Officer, met with three officers of
HCSC and/or BCBSTX (the “Officers”) on August 25, 2010, and at that meeting,
these Officers informed Mr. Mouras that BCBS would likely terminate the BCBSTX
Agreement, but because of BCBSTX’s favorable experiences with RPNavigator, the
Officers indicated to Mr. Mouras that BCBSTX desired to continue to be able to
receive ad hoc reports generated by RPNavigator and to maintain a positive
relationship with the Company.  Further, the Officers and Mr. Mouras
discussed in general terms potential uses of RPNavigator for purposes other than
health care management, including its potential use (a) in managing BCBSTX’s
provider networks, (b) in analyzing and presenting its data as a result of
certain Texas regulatory developments, and (c) in measuring the effectiveness of
its disease management programs.  The Officers invited Mr. Mouras to
submit to them a proposal for such other purposes, and the Company reported that
it anticipated submitting such proposal in September 2010.  The
Company has not yet submitted the proposal, because prior to providing this
proposal, the Company wanted to speak again with Carolyn Dawson (one of the
Officers present at the August 25, 2010 meeting), who is DSVP Enterprise Health
Care Management for HCSC, to better learn the areas of interest of HCSC and
BCBSTX and then make a formal proposal in person accompanied by 3M’s
personnel.  The Company has since spoken with Ms. Dawson, who
indicated that they are most interested in assistance with Accountable Care
Organizations and “Medical Home” (wherein the health plan uses the physician’s
office to manage care).  Also, Ms. Dawson indicated that assistance
would be required HCSC-wide and would not be limited to BCBSTX.  As of
the date of this filing, no meeting date has been scheduled to present a
proposal, however, the Company anticipates, without offering any assurances,
that a meeting will be held in the next several weeks.  The Company
recognized approximately $1,991,000 and $ 2,043,000 revenues in each of 2009 and
2008 from BCBSTX.





5




[4]     Recent
Accounting Pronouncements:





In
October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Multiple
Deliverable Revenue Arrangements” (ASU 2009-13).  ASU 2009-13 replaces
EITF 00-21, and clarifies the criteria for separating revenue between multiple
deliverables.  This statement is effective for new revenue
arrangements or materially modified arrangements in periods subsequent to
adoption.  The accounting guidance is effective for fiscal years
beginning on or after June 15, 2010, but early adoption is
allowed.  We anticipate the adoption of this pronouncement will
not have any impact on the Company’s financial position and results of
operations.





Note
B—Per share data:




Basic
loss per share is computed based on the weighted average number of outstanding
shares of common stock.  Potentially dilutive securities where the
exercise prices were greater than the average market price of the common stock
during the period were excluded from the computation of diluted income or loss
because they had an anti-dilutive impact are as follows:




Three and Nine Months Ended
              September 30,2010
            
            
            2009Total
      Potential Dilutive shares
            
            
            9,472,000
            
            
            
            12,287,000




Note
C—Stock-Based Compensation:




The
Company recognizes stock-based compensation for all equity-based payments,
including grants of stock options, in the statement of operations as a
compensation expense, based on their fair value at the date of the
grant.  The estimated fair value of options granted under the
Company's Employee Stock Option Plan and Director Stock Option Plan are
recognized as compensation expense over the option-vesting period; all
outstanding stock options are fully exercisable.





For the
nine months ended September 30, 2010, the Company included approximately $5,000
of equity-based compensation in its operating expenses (selling, general and
administrative) in the Company’s condensed consolidated statement of
operations.  This represents a one-time charge for a stock grant of
599,000 shares of the Company’s common stock to an employee in connection with
the employee’s termination of employment.  For the three and nine
months ended September 30, 2009, the Company included approximately $0 and
$9,000, respectively, of equity-based compensation in its operating expenses
(selling, general and administrative) in the Company’s condensed consolidated
statement of operations.





Cash
flows resulting from the tax benefits of tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) are to be
classified as financing cash flows.  The Company did not realize any
tax benefits from stock options during the three and nine months ended September
30, 2010 and 2009.





As of
September 30, 2010, there was no unrecognized compensation cost related to
non-vested equity-based compensation arrangements granted under existing stock
option plans.





During
the nine months ended September 30, 2010, the exercise of certain stock options
resulted in the issuance of 2,097,000 shares of common stock for proceeds of
approximately $23,000.  Proceeds of approximately $12,000 from one
exercise that were collected during the three month period ended June 30, 2010
were related to the issuance of 1,250,000 shares during the three month period
ended March 31, 2010.  The intrinsic value of the options exercised
for the nine months ended September 30, 2010 was $0.





6





Note
D—Contingencies:




Alan Fontes v. CareAdvantage,
Inc., pending in Superior Court of New Jersey, Chancery Division,
Monmouth County, was commenced in June 2004 by a former employee of the Company
seeking compensation under various legal theories.  In October 2005,
the court dismissed the claim under all theories except express
contract.  The Company believes that Mr. Fontes’s claim is without
merit and is contesting the matter vigorously.  Moreover, the Company
filed a counterclaim for damages against Mr. Fontes claiming Mr. Fontes induced
another employee to quit his employment with the Company and in October 2005,
pursuant to court order, amended its counterclaim to seek equitable relief and
damages against Mr. Fontes and Integrated eCare Solutions, LLC, claiming Mr.
Fontes misappropriated and used certain Company property.  This matter
is presently being tried before a chancery judge.





Note
E—Concentration of Credit Risk/Fair Value of Financial Instruments:




Financial
instruments that potentially subject the Company to credit risk consist of cash
and cash equivalents and accounts receivable. The Company maintains its cash and
cash equivalents balances in financial institutions. At times, the amount of
cash maintained in a given financial institution may exceed the federally
insured limits.





The fair
values of the following instruments approximate their carrying values due to the
short-term nature of such instruments:  cash and cash equivalents;
accounts receivable; accounts payable; and accrued liabilities.





Note
F—Leased Space:





On
January 10, 2005, the Company, through CAHS, entered into a Second Amendment to
Lease Agreement commencing January 1, 2005 to provide for the reduction in base
rent and the waiver of escalations based on increases in real estate taxes and
operating expenses, and to provide the landlord with the option to recapture up
to 50% of the leased premises at any time. (The landlord was granted the
recapture option because when the Company ceased providing services to Horizon
BCBSNJ, the Company no longer needed this space.)  The expiration date
of the lease, March 31, 2011, remained unchanged by this Second
Amendment.





Under the
Second Amendment to Lease Agreement, the Company was required to
meet the following conditions: (1) the Company could not assign the lease except
for an assignment of the lease or a sublet provided under the original lease;
(2) the Company could not be in default under any terms and conditions of the
original lease.  In the event the Company failed to meet these
conditions, the reduction in base rent, real estate taxes and operating expenses
would be nullified and entirely forfeited, and the Company would be immediately
required to pay the landlord additional rent for the difference in the base
rent, and additional rent for all escalations provided in the Second Amendment
to Lease Agreement and the original lease as extended. As of January 1, 2005,
the additional rent attributable to the difference in base rent was
$1,257,000.





Effective
April 19, 2007 (the “Recapture Date”), the landlord “recaptured” certain
portions of the leased premises pursuant to the provisions of the Second
Amendment to Lease Agreement. This recapture did not reduce or modify, in any
respect, the Company’s obligations to pay to the landlord monthly rent or, in
the event the Company failed to meet above conditions, additional rent.
Effective as of the Recapture Date, the premises leased by the Company under the
lease was deemed to be, and refer only to, 15,629 rentable square
feet.





As of
March 26, 2008, the Company and landlord entered into a Third Amendment of Lease
which provided that the reduction in base rent and the waiver of escalations
based on increases in real estate taxes and operating expenses shall be deemed
to be amortized on a straight line basis over the period commencing January 1,
2005 and ending March 31, 2011.





Effective
May 1, 2009 and September 1, 2009, the Company signed sublease agreements with
the same subtenant (the “Subtenant”) for approximately 3,700 and 600 square
feet, respectively, of its office space which called for monthly rental payments
of approximately $7,000 and $1,200, respectively, to the Company from the
Subtenant.  The term of the subleases ran 23 and 19 months,
respectively, through March 31, 2011.  The sublease income did not
cover the costs of the primary lease for the related
space.  Consequently, in accordance with the accounting guidance,
during the year ended December 31, 2009, the Company recognized a combined loss
of approximately $90,000, which was included in selling, general and
administrative expense.  The subleases were terminated in connection
with the entry by the Company into a new lease with the landlord, discussed
below.





On
January 18, 2010, the Company received delivery of an executed new Office Lease
with its current landlord for 6,189 square feet of space in Building A at
Woodbridge Corporate Plaza, 485 Route One South, Iselin, New Jersey, the same
office park in which the Company previously maintained its offices in Building
C.  The new lease (“New Lease”) was made as of December 28, 2009, and
its term commenced on April 15, 2010, the date the landlord delivered the new
space to the Company.  The New Lease has a term of seventy-six full
calendar months commencing May 1, 2010 (each a “Lease Month”), and a monthly
base rent for Lease Months 1 to 12 of $22,512.49, and for Lease Months 13 to 76
of $14,441.00.  (The rent for the partial calendar month of April 2010
is a prorated portion of the base rent for the first Lease Month.)  In
addition to the base rent, the Company is obligated to pay separately metered
electric charges, and commencing January 1, 2011, a ratable portion of increases
from 2010 in real estate taxes, operating expenses and certain utility
charges.  The New Lease provides the Company a credit of $10,057.13
against the monthly base rent for Lease Months 1, 2, 7 and 14.  In
addition, the New Lease provides the Company an additional credit of $8,379.67
per month for the first 12 Lease Months.  The New Lease does not
initially provide for a security deposit; however, the Company is required to
deliver to the landlord no later than January 15, 2011, the sum of $10,000 to be
held as a security deposit.  Finally, the landlord performed, at its
expense, certain work in readying the leased premises for the Company’s
occupancy.




7




In
connection with entering into the New Lease, the landlord and CAHS, entered into
a Surrender Agreement, delivered on January 18, 2010, and made as of December
28, 2009, pursuant to which the landlord agreed to terminate the prior lease as
of March 31, 2010 (or the day before the commencement date of the New Lease, if
later) (the “Surrender Date”), which existing lease would have otherwise expired
on March 31, 2011.  As of the date the New Lease commenced, the
security deposit of $167,027 under the existing lease was forfeited to the
landlord.





Pursuant
to the Surrender Agreement, (i) CAHS released the landlord from all claims
arising out of the prior lease, and (ii) upon CAHS’s delivery of the premises
(excluding the subleased space) to the landlord in accordance with the Surrender
Agreement, and CAHS’s timely payment of rent and other expenses owed to the
Landlord under the prior lease through the Surrender Date, the landlord released
CAHS of all claims arising out of the prior lease.  Pursuant to the
Surrender Agreement, the sublease agreements with the Subtenant were terminated
effective as of the Surrender Date, and the Subtenant is currently leasing the
subleased space directly from the landlord.





As a
result of the New Lease, during three and nine months ended September 30, 2010,
the Company recorded a loss of approximately $0 and $224,000, respectively,
which included the forfeiture of the security deposit under the existing lease
as described above.





At
September 30, 2010, the Company had deferred rent of approximately $320,000,
representing the difference between the negotiated lease obligation and the fair
market rent expense on a straight-line basis over the term of the
lease.




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




Forward-Looking
Information:




Portions
of this Quarterly Report of CareAdvantage, Inc. (the “Company”) on Form 10-Q
contain “forward-looking statements” within the meaning of The Private
Securities Litigation Reform Act of 1995.  Statements that are not
historical in nature, including statements that include the words “anticipate”,
“estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions,
are expressions about management’s confidence, policies, and strategies, the
adequacy of capital levels, and liquidity and are not guarantees of future
performance.  Such forward-looking statements involve certain risks
and uncertainties, including economic conditions, competition in the geographic
and business areas in which the Company operates, inflation, fluctuations in
interest rates, legislation, and governmental regulation.  These risks
and uncertainties are described in detail in the section of the periodic reports
that the Company files with the Securities and Exchange Commission (the “SEC”)
entitled “Risk Factors” (see Item 1A of Part II of this
report).  Actual results may differ materially from such
forward-looking statements, and the Company assumes no obligation to update
forward-looking statements at any time except as required by law.




GENERAL
OVERVIEW:




The
Company is in the business of providing healthcare consulting services, data
warehousing and analytic services designed to enable integrated health care
delivery systems, healthcare plans, employee benefit consultants, other care
management organizations, self-insured employers and unions to reduce the costs,
while improving the quality of medical services provided to the healthcare
participants. The services include care management program enhancement services,
executive and clinical management services, training programs, risk
stratification and predictive modeling.  The Company operates in one
business segment.





As part
of offering its healthcare consulting services, the Company has developed
RightPath®
Navigator (“RPNavigator”), a proprietary tool to help its customers better
understand and forecast resource consumption, risk, and costs associated with
their respective populations. In providing its services, the Company licenses
RPNavigator to its customers and provides consulting services in connection with
that licensing.  The tool uses 3M’s Clinical Risk Group (CRGs), a
classification methodology that groups members according to risk related to the
individual’s clinical history and demographic information. RPNavigator, offers
customers:





•
            actionable
      financial and utilization data
analytics;





•
            clinical
      analyses of health status and medical cost
  trends;





•
            identification
      of key management and quality
opportunities;




8




•
            enhanced
      group-/segment-specific reporting;





•
            transparent
      methodology;





•
            measurement
      of performance of internal and external vendors;
  and





•
            reduced
      dependence on internal resources to develop and produce required reports
      to accomplish these tasks.





With
respect to RPNavigator license fees, most of the Company's customers that
license RPNavigator are required, as part of their agreements with the Company,
to receive consulting services from the Company. All contracts provide for
licensing of RPNavigator and consulting services at a fixed monthly or annual
fee, a per member per month fee, or a combination of both. The Company earns the
revenue from licensing and consulting services on a monthly basis and recognizes
revenue from both services on a monthly basis at either a fixed monthly fee, a
per member per month fee or a combination of both. Additionally, the Company
provides separate consulting services on a fee for service basis. Revenue for
these consulting services is recognized as the services are provided.




Management
believes that the Company must continue refining its current product offerings
in order to continue adding value to existing and potential customers.
Management intends to continue to evaluate its product offerings in light of
anticipated changes in the health care industry, as well as the availability and
timeliness of competent resources. To further expand its product offerings, the
Company may pursue alternatives to its internal product and service development
efforts by entering into strategic alliances and joint ventures.





As
previously reported by the Company on the Form 8-K filed on September 3, 2010,
the Company received a letter dated August 30, 2010, from Blue Cross and Blue
Shield of Texas (“BCBSTX”), a division of Health Care Service Corporation
(“HCSC”) stating that the letter served as ninety (90) days prior written notice
of BCBSTX’s intent to terminate the Service and License Agreement between the
Company and BCBSTX (the “BCBSTX Agreement”) effective November 30,
2010.  The Company also reported in the Form 8-K that Dennis Mouras,
the Company’s President and Chief Executive Officer, met with three officers of
HCSC and/or BCBSTX (the “Officers”) on August 25, 2010, and at that meeting,
these Officers informed Mr. Mouras that BCBS would likely terminate the BCBSTX
Agreement, but because of BCBSTX’s favorable experiences with RPNavigator, the
Officers indicated to Mr. Mouras that BCBSTX desired to continue to be able to
receive ad hoc reports generated by RPNavigator and to maintain a positive
relationship with the Company.  Further, the Officers and Mr. Mouras
discussed in general terms potential uses of RPNavigator for purposes other than
health care management, including its potential use (a) in managing BCBSTX’s
provider networks, (b) in analyzing and presenting its data as a result of
certain Texas regulatory developments, and (c) in measuring the effectiveness of
its disease management programs.  The Officers invited Mr. Mouras to
submit to them a proposal for such other purposes, and the Company reported that
it anticipated submitting such proposal in September 2010.  The
Company has not yet submitted the proposal, because prior to providing this
proposal, the Company wanted to speak again with Carolyn Dawson (one of the
Officers present at the August 25, 2010 meeting), who is DSVP Enterprise Health
Care Management for HCSC, to better learn the areas of interest of HCSC and
BCBSTX and then make a formal proposal in person accompanied by 3M’s
personnel.  The Company has since spoken with Ms. Dawson, who
indicated that they are most interested in assistance with Accountable Care
Organizations and “Medical Home” (wherein the health plan uses the physician’s
office to manage care).  Also, Ms. Dawson indicated that assistance
would be required HCSC-wide and would not be limited to BCBSTX.  As of
the date of this filing, no meeting date has been scheduled to present a
proposal, however, the Company anticipates, without offering any assurances,
that a meeting will be held in the next several weeks.  See
“Liquidity, Financial Condition and Capital Resources—Significant Development”
in this report for a discussion of the Company’s prospective business in light
of the foregoing disclosures.





Critical
Accounting Policies:





The
Company’s financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. These estimates may change as new events occur, as
additional information is obtained and as the Company’s operating environment
changes. These changes have historically been minor and have been included in
the consolidated financial statements as soon as they became known. In addition,
management is periodically faced with uncertainties, the outcomes of which are
not within the Company’s control and will not be known for prolonged periods of
time. Actual results may differ from these estimates under different assumptions
or conditions.





Certain
accounting policies have a significant impact on amounts reported in financial
statements.  The Company’s most critical accounting policies are
discussed in Note B to the audited financial statements presented in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and
relate to revenue recognition and equity-based
compensation.  Management continuously monitors the Company’s
application of these policies to its operations and makes changes as
necessary.




9




A
critical accounting policy is one that is both important to the portrayal of the
Company's financial condition or results of operations and requires significant
judgment or a complex estimation process. The Company believes the following
meet that definition:





Revenue
recognition





With
respect to RPNavigator license fees, most of the Company’s customers that
license RPNavigator are required, as part of their agreements with the Company,
to receive consulting services from the Company. All contracts provide for
licensing of RPNavigator and consulting services at a fixed monthly or annual
fee, a per member per month fee, or a combination of both. The Company
recognizes revenue from licensing RPNavigator and consulting services ratably as
such services are performed. Additionally, the Company provides separate
consulting services on a fee for service basis. Revenue for these consulting
services is recognized as the services are provided.





Accounting
for stock-based compensation





The
Company accounts for stock-based compensation in accordance with ASC Topic 718 ,
“Share Based Payment”, which requires that all equity-based payments, including
grants of stock options, be recognized in the statement of operations as
compensation expense, based on their fair values at the date of grant. Under the
provisions of ASC Topic 718, the estimated fair value of options granted under
the Company’s Employee Stock Option Plan and Director Stock Option Plan are
recognized as compensation expense over the service period which is generally
the same as the option-vesting period.





For the
purposes of determining estimated fair value under ASC Topic 718, the Company
has computed the fair values of all equity-based compensation using the
Black-Scholes option pricing model. This model requires the Company to make
certain estimates and assumptions. The Company calculated expected volatility
based on the Company’s historical stock volatility. The computation of expected
life is determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting
schedules and expectations of future employee behavior. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of grant.
Under ASC Topic 718, forfeitures are estimated at the time of valuation and
reduce expense ratably over the vesting period. This estimate is adjusted
periodically based on the extent to which the actual forfeitures differ, or are
expected to differ, from the previous estimate.





Recent
Accounting Pronouncements





In
October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Multiple
Deliverable Revenue Arrangements” (ASU 2009-13).  ASU 2009-13 replaces
EITF 00-21, and clarifies the criteria for separating revenue between multiple
deliverables.  This statement is effective for new revenue
arrangements or materially modified arrangements in periods subsequent to
adoption.  The accounting guidance is effective for fiscal years
beginning on or after June 15, 2010, but early adoption is
allowed.  We anticipate the adoption of this pronouncement will not
have any impact on the Company’s financial position and results of
operations.




RESULTS
OF OPERATIONS:




The
following discussion compares the Company’s results of operations for the three
and nine months ended September 30, 2010, with those for the three and nine
months ended September 30, 2009. The discussion should be read in conjunction
with the unaudited consolidated financial statements and related notes presented
in this report, as well as the audited consolidated financial statements and
related notes included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009.





Three
Months Ended September 30, 2010, Compared to Three Months Ended September 30,
2009




Revenues:




The
Company's total operating revenues for the three-month periods ended September
30, 2010 and September 30, 2009 were approximately $792,000 and $927,000,
respectively. The revenue was generated primarily from license and consulting
fees earned during these periods. The decrease in revenue for the three months
ended September 30, 2010 over the same period last year was primarily
attributable to termination of certain care management services for one customer
of approximately $190,000, offset by an increase of approximately $55,000 in
current customer business.





Cost
of services:




The Company’s total direct cost of
services for the three-month periods ended September 30, 2010 and September 30,
2009 was approximately $255,000 and $343,000, respectively. The Company’s direct
costs of services represented approximately 32% and 37% of revenues for the
three-month periods ended September 30, 2010 and September 30, 2009,
respectively.  The decrease in the cost of services for the
three-month period ended September 30, 2010 when compared to the same period
last year was primarily due to decreases in personnel costs largely due to
employee terminations arising out Blue Cross Blue Shield of Vermont's assuming
for itself the performance of certain consulting functions that had previously
been performed by the Company as more fully described in Part II, Item 9B of our
Annual Report on Form 10-K for the year ended December 31,
2009.




10




Selling,
general and administrative expenses:




The
Company’s total selling, general and administrative costs for the three-month
periods ended September 30, 2010 and September 30, 2009 were approximately
$517,000 and $403,000, respectively. The increase for the three-month period
ended September 30, 2010 when compared to the same period last year is primarily
due to increases in professional costs of approximately $155,000, which is due to
timing of a settlement during the three month period ended September 30, 2009
related to a claim for previously expensed legal fees, increases of
approximately $10,000 in personnel costs largely due to employee seminars and an
increase of approximately $5,000 in travel and communication costs, offset by
decreases in facility costs of approximately $38,000 largely relating to a new
lease, other general and administrative costs of approximately $7,000 and a
decrease of approximately $11,000 relating to a loss on the sublease effective
September 1, 2009.





Nine
Months Ended September 30, 2010, Compared to Nine Months Ended September 30,
2009




Revenues:




The
Company's total operating revenues for the nine-month periods ended September
30, 2010 and September 30, 2009 were approximately $2,768,000 and $2,847,000,
respectively. The revenue was generated primarily from license and consulting
fees earned during these periods. The decrease in revenue for the nine months
ended September 30, 2010 over the same last year was primarily attributable to
termination of certain care management services for one customer of
approximately $580,000 and one-time engagements of approximately $36,000 that
did not reoccur in 2010, offset by an increase of approximately $54,000 due to a
one-time engagements and $483,000 in current customer business.  The
increase in current customer business is largely due to the recognition of
deferred revenue for one customer of approximately $198,000 and fluctuations in
membership for certain customers.





Cost
of services:




The Company’s total direct cost of
services for the nine-month periods ended September 30, 2010 and September 30,
2009 was approximately $926,000 and $1,040,000, respectively. The Company’s
direct costs of services represented approximately 33% and 37% of revenues for
the three-month periods ended September 30, 2010 and September 30, 2009,
respectively.  The decrease in the cost of services for the nine-month
period ended September 30, 2010 when compared to the same period last year is
primarily due to decreases in personnel costs largely due to employee
terminations arising out Blue Cross Blue Shield of Vermont's assuming for itself
the performance of certain consulting functions that had previously been
performed by the Company as more fully described in Part II, Item 9B of our
Annual Report on Form 10-K for the year ended December 31, 2009 and decreases in
professional costs of approximately $19,000 relating to termination of certain
care management services for one customer.





Selling,
general and administrative expenses:




The
Company’s total selling, general, and administrative costs for the nine-month
periods ended September 30, 2010 and September 30, 2009 were approximately
$1,795,000 and $1,848,000, respectively. The decrease for the nine-month period
ended September 30, 2010 when compared to the same period last year is primarily
due to a loss of approximately $90,000 on certain subleases that occurred during
the nine-month period ended September 30, 2009, decreases in facility costs of
approximately $109,000 largely due to a new lease, decreases in personnel costs
of approximately $2,000, offset with increases of approximately $144,000 in
professional costs, largely due to timing of a settlement during the third
quarter of 2009 related to a claim for previously expensed legal fees, and
increases in travel and communication costs of approximately
$4,000.




LIQUIDITY, FINANCIAL CONDITION AND
CAPITAL RESOURCES:




General
overview:




At
September 30, 2010, the Company had working capital of approximately $210,000,
stockholders’ deficit of approximately $48,000 and an accumulated deficit of
approximately $24,639,000.




11




Financial
condition:




Significant
Development:





As stated
above, in August 2010, BCBSTX notified the Company of its intent to terminate
the existing services agreement with the Company, effective November 30,
2010.  The Company recognized approximately $1,991,000 and $ 2,043,000
revenues in each of 2009 and 2008 from BCBSTX.  The termination of
this services arrangement may have a significant impact on the Company's
business.  As discussed above, management is currently in discussions
with HCSC for other uses of RPNavigator and expects to have another meeting with
representatives of HCSC in the next several weeks.  The Company is
optimistic that it will be able to enter into an arrangement with HCSC; however
no meeting with HCSC has been scheduled as of the date of this filing, and the
Company cannot make any assurances that it will enter into a new relationship
with HCSC and its subsidiaries.  If the Company does not replace the
revenue that will be lost upon the termination of the BCBSTX Agreement by
establishing a new relationship with HCSC and its subsidiaries and/or obtaining
other business from its pipeline of other prospective clients, the Company will
be required to significantly reduce its operations to match its remaining
revenues.  Management believes that the Company must continue refining
its current product offerings in order to continue adding value to existing and
potential customers.  Management intends to continue to evaluate its
product offerings in light of anticipated changes in the health care industry,
as well as the availability and timeliness of competent resources.  To
further expand its product offerings, the Company may pursue alternatives to its
internal product and service development efforts by entering into strategic
alliances and joint ventures.  If the Company cannot expand its
product offerings and otherwise mitigate the effect of the loss of the BCBSTX
Agreement the Company may need to pursue other alternatives to enable it to fund
continuing operations, including, but not limited to, exploring strategic
arrangements, which may include a merger, asset sale, joint venture or another
comparable transaction, loans, salary deferrals, staff reductions or other cost
cutting mechanisms, or raising additional capital by private placements of
equity or debt securities or through the establishment of other funding
facilities. None of these potential alternatives may be available to the
Company, or may only be available on unfavorable terms.  The Company
does not currently have in place a credit facility with a bank or other
financial institution.





General
Condition:





At
September 30, 2010, the Company had cash of $408,000 as compared to $510,000 as
of December 31, 2009.  The decrease in cash was primarily due to net
cash used in operating activities of $87,000 and net cash used in financing
activities of $15,000.  The net cash used in operating activities was
largely due to the write off of the lease security deposit of $167,000, an
adjustment to deferred rent relating to loss on building lease, non-cash charges
of approximately $48,000, a decrease in deferred revenue of approximately
$205,000, a decrease in deferred rent of approximately $77,000, increases in
accounts payable and accrued expenses of approximately $44,000, an increase in
accounts receivable of approximately $81,000 and increases in prepaid expenses
and other assets of approximately $33,000, offset with a net operating loss of
$240,000 for the nine months ended September 30, 2010.





The
Company had working capital at September 30, 2010 of approximately $210,000 as
compared to working capital of approximately $417,000 at December 31, 2009. The
decrease in working capital was primarily due to the write off of the $167,000
security deposit pursuant to the new building lease agreement and loss from
operations.





There
were no cash flows from investing activity for the nine-month period ended
September 30, 2010.





During
the nine months ended September 30, 2010, the Company recorded a loss of
approximately $224,000 in connection with the entry into a new building lease,
which included the forfeiture of the security deposit under the prior lease as
described in Note F in the Notes to Unaudited Condensed Consolidated Financial
Statements included in this report.




The
Company generates most of its revenue from the licensing of RPNavigator and
providing consulting services in connection with that
licensing.  Based on cash on hand at September 30, 2010 and cash flow
from operations based on a forecast prepared by management, which takes into
account executed contracts, a pipeline of prospective clients that management
believes is robust, and cost reductions, management expects the Company to be
able to meet its obligations as they become due during the next twelve months,
subject to the discussion above under “Significant Development.”  Such
executed contracts include contracts with new customers as well as expanding
business with current customers.  However, there can be no assurances
that management’s plans, including projected revenue, will be
attained.  If the Company is not successful with the measures
described above under “Significant Development,” it may not be able to
continue its operations as a going concern.  No adjustments have been
made to the accompanying financial statements with respect to such
uncertainty.




ITEM 3.
Quantitative and Qualitative Disclosures About Market
Risk





The
Company is a smaller reporting company and is not required to provide the
information contemplated by this item.





ITEM
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




Senior
management maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods provided in
the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive Officer, who is
also currently the acting Principal Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.  In designing and
evaluating the disclosure controls and procedures, senior management has
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and therefore has been required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.




12




In
accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the quarter
ended September 30, 2010, the Company evaluated, under the supervision and with
the participation of management, including the Chief Executive Officer, who is
also the acting Principal Financial Officer, the effectiveness of the design and
operation of our disclosure controls and procedures as defined in Rule 13a-15(e)
and 15d-15(e) under the Exchange Act.  Based on that evaluation, the
Chief Executive Officer has concluded that our disclosure controls and
procedures are, in fact, effective at the reasonable assurance
level.





Internal
Control Over Financial Reporting





There
were no changes in our internal controls over financial reporting during the
quarter ended September 30, 2010 that have materially affected, or are
reasonably likely to materially affect the Company’s internal control over
financial reporting.




PART
II—OTHER INFORMATION




Item
1.  Legal Proceedings





In March
2010, the Company commenced an action in United States District Court, District
of New Jersey, against Rosario Noto, a former employee of the Company and a
member of Integrated eCareSolutions, LLC (see Part 1, Item 1, Note D), alleging
Noto’s breach of his employee confidentiality agreement, breach of his implied
covenant of good faith and fair dealing and unfair competition.  Noto
has denied liability and asserted certain affirmative defenses.  This
action is in the preliminary stages of discovery.





For a
description of additional legal proceedings, see Note D to the unaudited
condensed consolidated financial statements presented elsewhere in this report.
With the exception of such proceedings and the proceeding described in this Item
1, there are no material pending legal proceedings other than ordinary routine
litigation incidental to the business of the Company.





Item
1A.  Risk Factors





The risks
and uncertainties to which the Company’s financial condition and results of
operations are subject are discussed in detail in Item 1A of Part I of the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.  Management does not believe that any material changes in such
risk factors have occurred since they were last disclosed.





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




None.




Item
3.  Defaults Upon Senior Securities




None.




Item 4.  (REMOVED AND
RESERVED)




Item
5.  Other Information




None.




Item
6. Exhibits




The
exhibits that are filed or furnished with this report are listed in the Exhibit
Index which immediately follows the signatures to this report, which Exhibit
Index is incorporated herein by reference.





13




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.




CareAdvantage,
      IncNovember
      15, 2010
            /s/
      Dennis J. MourasDennis
      J. MourasChief
      Executive Officer andActing
      Principal Financial Officer




14




EXHIBIT
INDEX





10.1
            Letter
      dated August 30, 2010 from Blue Cross and Blue Shield of Texas
      (incorporated by reference to the Form 8-K filed by the Company on
      September 2, 1010)31
            Certifications
      pursuant to Rule 13a-14(a), promulgated under the Securities Exchange Act
      of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002
      (filed herewith)





32
            Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (furnished
  herewith)





15