We do not own any real property. We lease our corporate office and Texas office. The following table sets forth certain information regarding our leased properties as of December 31, 2008. The Texas lease is a full service lease under which we bear only those costs of operations and property taxes exceeding the base-year expenses. The Florida lease monthly base rent covers all services and property taxes. We believe our current office space is suitable and adequate to meet our existing needs and that additional facilities will be available for lease to meet our future needs. Our Indiana office, which was not subject to a written lease agreement, was closed in December 2008.
No dividends were paid during any of the periods presented above.
In January 2008, CompCare appointed John Hill as its new Chief Executive Officer and President and charged him with the responsibility of improving CompCare’s financial performance. Following a review of operations and all client contracts, Mr. Hill formulated a plan to better streamline our processes and to focus on financial objectives. We quickly implemented the plan and CompCare began to re-organize its operations in the second quarter of 2008. We completed this restructuring in the fourth quarter of 2008. As a result of the automation of some manual processes, the streamlining of workflows, and improving the sales pipeline opportunities by hiring a Senior Vice President of Business Development, we expect much better operating results in 2009 as compared to 2008.
On January 20, 2009, CompCare acquired Core. This acquisition dramatically expands CompCare’s marketing capabilities, both domestically and internationally, as well as providing CompCare with a substantially expanded product line to be marketed as companion products to its already existing line of healthcare offerings.
(1) Claims expense reflects the costs of revenue of capitated contracts, and other healthcare operating expenses reflects the cost of revenue of capitated and non-capitated contracts.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2008 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2007.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED MAY 31, 2006 AS COMPARED TO THE FISCAL YEAR ENDED MAY 31, 2005.
At December 31, 2008, we had $1.1 million in cash, a working capital deficit of $5.7 million, and a stockholders’ deficit of $9.2 million. To conserve cash during the third and fourth quarters of 2008, we instituted reductions in the usage of consultants and temporary employees and eliminated permanent staffing positions. In addition, we implemented a 10% salary reduction for employees at the vice president level and above and reduced outside directors’ fees by 10%. We also requested rate increases from several of our existing clients.
In January 2009, we underwent a merger with Core. As a combined company, we have been able to raise additional capital, as demonstrated in February 2009 with the infusion of $1.6 million in cash that will be used for working capital purposes and the reduction of accrued claims payable (see Note 19 “Subsequent Events” to the audited, consolidated financial statements included elsewhere in this report). We believe we will have access to additional capital in the future as well, if needed. We believe the addition of Core will increase our sales pipeline for selling opportunities and create additional distribution channels for products we can offer, from which we expect additional positive cash flow. Together with new managed behavioral healthcare business in Michigan and Puerto Rico, we believe we will generate sufficient working capital to sustain current operations and meet our current obligations during the next twelve months.
We believe our accounting policies specific to our revenue recognition, accrued claims payable and claims expense, premium deficiencies, goodwill and stock compensation expense involve our most significant judgments and estimates that are material to our consolidated financial statements (see Note 2 - “Summary of Significant Accounting Policies” to the audited, consolidated financial statements).
Changes in prior year claims expense were primarily due to changes in utilization patterns and changes in claim submission timeframes by providers. Management considers these changes in claims expenses to be immaterial when compared to the total claims expenses incurred in prior years.
Accrued claims payable at December 31, 2008, 2007 and 2006 is comprised of approximately $1.6 million, $1.1 million and $0.7 million, respectively, of submitted and approved claims which had not yet been paid, and $5.2 million, $4.4 million and $2.0 million for IBNR claims, respectively.
On a quarterly basis, we perform a review of our portfolio of contracts for the purpose of identifying loss contracts (as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide - Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. At December 31, 2008, we believe no contract loss reserve for future periods is necessary. At December 31, 2008 and 2007, no contract loss reserve for future periods was necessary.
We evaluate at least annually the amount of our recorded goodwill by performing impairment tests that compare the carrying amount to an estimated fair value. Management considers both the income and market approaches in the fair value determination. In estimating the fair value under the income approach, management makes its best assumptions regarding future cash flows and applies a discount rate to the cash flows to yield a present, fair value of equity. The market approach is based primarily on reference to transactions including the Company’s common stock and the quoted market prices of the Company’s common stock. As a result of such tests, management believes there is no material risk of loss from impairment of goodwill. However, actual results may differ significantly from management’s assumptions, resulting in a potentially adverse impact to our consolidated financial statements.
Effective June 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, as previously discussed in “Critical Accounting Estimates” immediately preceding.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides that companies may elect to measure many financial instruments and certain other items at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the “fair value option,” will enable some companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. SFAS 159 did not have a significant impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. The adoption of SFAS 160 is not expected to have a material impact on our financial statements.
Consolidated Statements of Operations, Years Ended December 31, 2008 and 2007, Seven Months Ended December 31, 2006, and Fiscal Year Ended May 31, 2006
Consolidated Statements of Stockholders’ Deficit, Years Ended December 31, 2008 and 2007, Seven Months Ended December 31, 2006, and Fiscal Year Ended May 31, 2006
Consolidated Statements of Cash Flows, Years Ended December 31, 2008 and 2007, Seven Months Ended December 31, 2006, and Fiscal Year Ended May 31, 2006
Comprehensive Care Corporation (the “Company,” “CompCare,” “we”, “us,” or “our”) is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the “Company” include Comprehensive Behavioral Care, Inc. (“CBC”) and subsidiary corporations. The Company, primarily through its wholly owned subsidiary, CBC, provides managed care services in the behavioral health and psychiatric fields, which is its only operating segment. We manage the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, Medicaid and CHIP members on behalf of health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. We also provide prior and concurrent authorization for physician-prescribed psychotropic medications for a major Medicaid HMO in Michigan and a Medicare health plan in Puerto Rico. The managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. The customer base for its services includes both private and governmental entities. Our services are provided primarily by unrelated vendors on a subcontract basis.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates and assumptions are of particular importance in our accounting for revenue recognition, accrued claims payable, premium deficiencies, goodwill, and stock compensation expense. Actual results could differ from these estimates.
At December 31, 2008 and 2007, cash and cash equivalents consisted entirely of funds on deposit in savings and checking accounts at major financial institutions.
Goodwill represents the cost in excess of the fair value of net assets acquired in purchase transactions. Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but is periodically evaluated for impairment to carrying amount, with decreases in carrying amount recognized immediately. We review goodwill for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The tests for impairment of goodwill require us to make estimates about fair value, which are based on discounted projected future cash flows and the quoted market price of our common stock. We performed an impairment test as of December 31, 2008, 2007 and 2006, and determined that no impairment of goodwill had occurred as of such dates.
Under the asset and liability method of SFAS No. 109, “Accounting for Income Taxes,” deferred tax assets and liabilities are recognized for the future tax consequences attributable to net operating loss carryforwards and to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect of a change in tax rates on deferred tax assets or liabilities is recognized in the consolidated statements of operations in the period that included the enactment. A valuation allowance is established for deferred tax assets unless their realization is considered more likely than not.
Effective June 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” using the modified prospective method, which requires companies to measure compensation cost for stock options issued to employees or non-employee directors at fair value on the grant date and recognize compensation cost over the service period for those options expected to vest. We use a Black-Scholes valuation model to determine the fair value of options on the grant date, which is the same model previously utilized for footnote disclosures required under SFAS No. 148, “Accounting for Stock-Based Compensation-Transitional Disclosure.” The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS No. 123R to stock-based employee compensation.
The weighted average fair value of options granted in fiscal year 2006 was $1.42. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.
FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments for which it is practical to estimate that value.
The carrying amounts and fair values of our financial instruments at December 31, 2008 and 2007 are as follows:
During the year ended December 31, 2008, net cash and cash equivalents decreased by $5.2 million. Net cash used in continuing operations totaled $5.5 million. Cash used in investing activities is comprised of $48,000 in additions to property and equipment offset by $27,000 in proceeds from payments received on notes receivable. Cash provided by financing activities consists primarily of $158,000 in net proceeds from the issuance of common stock and $200,000 from the issuance of a convertible promissory note. Other cash flows from financing activities consist of repayment of debt of $55,000. In January 2009, the Company underwent a merger with Core, which had previously purchased a 49% interest in the Company. The addition of Core increases the Company’s sales pipeline for selling opportunities and creates additional distribution channels for product offerings from which additional positive cash flow is expected. In February 2009, the Company raised additional capital of $1.6 million for working capital purposes and the payment of accrued claims payable. Together with new managed behavioral health care business in Michigan and Puerto Rico, management believes the Company will generate sufficient working capital to sustain current operations and meet its current obligations during the next twelve months.
(2) On December 31, 2008, we experienced the loss of a major contract to provide behavioral healthcare services to approximately 278,000 Medicaid and Commercial members in Indiana. The contract generated $17.8 million, or 50.6%, and $15.0 million, or 40.2%, of our revenues for the years ended December 31, 2008 and 2007, respectively.
Accounts receivable of $1.6 million at December 31, 2008 and $35,000 at December 31, 2007 consists of trade receivables resulting from services rendered under managed care capitation contracts.
(1) Represents the current portion of a promissory note received in July 2006 as settlement of a dispute between the Company and a software vendor that had been engaged to design, but was unable to complete, a new managed care information system. The difference between the present value of the note and our investment of approximately $200,000 was recorded in the accompanying fiscal 2006 consolidated statement of operations as a “loss from software development.” The current portion of the receivable is a component of other current assets while the non-current portion of approximately $0 and 17,000 appears as a note receivable in the accompanying consolidated balance sheets at December 31, 2008 and 2007, respectively.
In June 2005, we completed a private placement transaction that constituted a “change of ownership” under IRS Section 382 rules, which impose limitations on the ability to deduct prior period net operating losses on current federal tax returns. As a result, our ability to use our net operating losses incurred prior to June 14, 2005 is limited to approximately $400,000 per year.
On January 12, 2007, the sale of Woodcliff’s majority interest in the Company to Hythiam constituted a second “change of ownership” under IRS Section 382 rules. In the event that the Company has two or more ownership changes, Section 1.382-5(d) also describes a potential impact on the limitation for any losses attributable to the period preceding the earlier ownership change. We have determined that this change of ownership does not change the limitation of approximately $400,000 per year for net operating losses incurred prior to June 14, 2005, the date of the first change in control. Furthermore, our ability to use net operating losses incurred between June 15, 2005 and January 12, 2007 is limited to approximately $490,000 per year. Net operating losses for periods prior to June 15, 2005 and for the subsequent period of June 15, 2005 to January 12, 2007 may be deducted simultaneously subject to the applicable limitations.
The purchase by Core of Hythiam’s ownership interest resulted in a third change in control of the Company. See Note 19 “Subsequent Events.” As a result, any losses incurred prior to January 20, 2009 are now subject to a lesser limitation, which approximates $361,000 per year. Any unused portion of such limitation can be carried forward to the following year. We may be subject to further limitation in the event that we issue or agree to issue substantial amounts of additional equity.
We offer a 401(k) Plan (the “Plan”), which is a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of our eligible employees. All full-time and part-time employees who have attained the age of 21 and have completed one thousand hours of service are eligible to participate in the Plan. Each participant may contribute from 2% to 50% of his or her compensation to the Plan up to the annual maximum allowed amount, which was $15,500 during 2008, subject to limitations on the highly compensated employees to ensure the Plan is non-discriminatory. Our plan year ends at May 31. Company contributions are discretionary and are determined by the Company’s management. Our employer matching contributions to the Plan were $4,316 and $8,906 in 2008 and 2007, respectively. We did not make a matching contribution during the seven months ended December 31, 2006 or during the 2006 fiscal year.
NOTE 15 - PREFERRED STOCK, COMMON STOCK, AND STOCK OWNERSHIP PLANS
Authorized shares of common stock reserved for possible issuance for convertible debentures, convertible preferred stock, convertible note payable, stock options, and warrants are as follows at December 31, 2008:
(a) The debentures are convertible into 15,873 shares of common stock at a conversion price of $141.37 per share.
(b) The Series A Convertible Preferred Stock is convertible into 4,553,136 shares of common stock at a conversion rate of 316.19 common shares for each preferred share.
(c) The note payable is convertible into 800,000 shares of common stock at a conversion price of $0.25 per share.
(e) Warrants to purchase our common stock have been issued to certain individuals or vendors in exchange for consulting services. All such warrants were issued in lieu of cash compensation and have five-year terms with an exercise price of $1.25.
We also have a non-qualified stock option plan for our non-employee directors. 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 Director’s Compensation and Stock Option Committee. Upon joining the Board, directors receive an initial grant of 25,000 options. Annually, directors are granted 15,000 options on the date of the Company’s annual meeting. As of December 31, 2008, under the directors’ plan, there were 776,668 shares available for option grants and 125,000 options outstanding and exercisable.
A summary of activity for the year ended December 31, 2008 is as follows:
At December 31, 2008, there was approximately $65,000 of total unrecognized compensation cost related to unvested options, which was recognized in January 2009 due to accelerated vesting provisions triggered by the January 20, 2009 change in control resulting from the Core transaction. See Note 19, “Subsequent Events.” Total recognized compensation costs during the year ended December 31, 2008 were approximately $130,000. No compensation cost related to employees was recognized prior to June 1, 2006. We recognized approximately $19,000 of tax benefits attributable to stock-based compensation expense recorded during the year ended December 31, 2008. This benefit was fully offset by a valuation allowance of the same amount due to the likelihood of future realization.
We lease certain office space and equipment under leases expiring in 2012. The Texas office lease contains escalation clauses based on the Consumer Price Index and provisions for payment of real estate taxes, insurance, and maintenance and repair expenses. Total rental expense for all operating leases was approximately $259,000 and $269,000, respectively, for the years ended December 31, 2008 and 2007. For the seven months ended December 31, 2006, total rental expense was $210,000. For the fiscal year ended May 31, 2006, total rental expense was $500,000.
In February 2006, CBC entered into an agreement with Hythiam whereby we would have the exclusive right to market Hythiam’s substance abuse disease management program to CBC’s current and certain mutually agreed upon prospective clients. The program is an integrated disease management approach designed to offer less restrictive levels of care in order to minimize repeat detoxifications. Under the agreement, CBC will pay Hythiam license and service fees for each enrollee who is treated. As of December 31, 2008, there had been no material transactions resulting from this agreement.
We have accelerated our Sarbanes-Oxley Act compliance efforts in order to meet management attestation requirements for financial reporting internal controls as of December 31, 2008. Hythiam has paid for consulting services to accomplish our management review of such internal controls. Because this effort has benefited us, we will reimburse Hythiam a portion of the cost. In addition, we have benefited by being included under certain of Hythiam’s insurance policies. At December 31, 2008 and 2007, $91,000 and $80,000, respectively, is included in accounts payable and accrued liabilities to cover expected reimbursements to Hythiam for these costs.
To accomplish the Merger, we acquired all of the capital stock of Core by issuing shares of our common stock and newly designated Series B-1 and Series B-2 Convertible Preferred Stock:
All 10,294,725 outstanding shares of Core’s Class A Common Stock were exchanged for shares of CompCare common stock, par value $0.01 per share, on a one-for-one basis, and
Each outstanding share of Core’s Class B Common Stock (aggregating 11,800,000 shares) was exchanged for (a) 0.000141949153 shares of CompCare’s Series B-1 Convertible Preferred Stock, par value $50.00 per share, and (b) 0.000225847458 shares of CompCare’s Series B-2 Convertible Preferred Stock, par value $50.00 per share. The exchange of Core Class B Common Stock resulted in the issuance of 1,675 CompCare Series B-1 Convertible Preferred shares and 2,665 CompCare Series B-2 Convertible Preferred shares.
(b) Reflects the purchase of Hythiam’s 48.85% interest in CompCare for $1,500,000, as if it had been completed on December 31, 2008.
(c) The valuation of intangible assets such as customer contracts, provider network, and NCQA certification has not been completed yet.
(d) Represents the excess amount of the acquisition cost and the fair value of noncontrolling interest over the carrying value of CompCare’s net assets acquired, as if the purchase had been completed on December 31, 2008:
(f) Represents the estimated fair value of net assets acquired attributable to noncontrolling interest, as if the acquisition had been completed on December 31, 2008.
(i) Reflects the issuance of 10,294,725 shares of common stock at $0.01 par value and the reacquisition of 1,739,130 shares of common stock owned by Core.
(k) Cancels 1,739,130 shares of CompCare common stock reacquired during the acquisition of Core.
(c) Reflects the elimination of CompCare’s historical balances, as if the transaction had been completed on January 1, 2008.
(d) Represents the issuance of 10,294,725 shares of CompCare common stock in connection with Core acquisition, as if it had been completed on January 1, 2008.
(e) Represents the adjustment to reflect the equity structure of CompCare (Accounting Acquiree) in a reverse acquisition, as if the acquisition had been completed on January 1, 2008.
In connection with the closing of the Merger and not as the result of any disagreement with the Company, Michael Bakst, Ph.D. and Vijay Chevli resigned as directors of the Company on January 20, 2009. Mr. Chevli was the Chair of the Audit Committee and Special Committee of the Board.
On March 27, 2009 we executed a new employment agreement with our Chief Executive Officer, John M. Hill. The effective date of the contract is January 1, 2009. Mr. Hill will report directly to the Company’s Board of Directors. The material terms of his employment agreement will include a term of three years and a base salary of $390,000 per annum increased by an amount no less than an amount equal to the percentage increase in the consumer price index for the Tampa, Florida metropolitan area. This compensation may, at the election of the Company, be accrued, in whole or in part, until such time as the Company receives financing and/or generates sufficient revenues with which to pay Mr. Hill his stated compensation, after the payment by the Company of its operating expenses, but no longer than the end of each tax year. In addition, Mr. Hill will be entitled to a special bonus in the amount equal to one percent of the Company’s pre-tax profits from the preceding year (as determined by the application of generally accepted accounting principles), up to the first $1,000,000 of such profits; plus an additional sum equal to two percent of the Company’s pre-tax profits for all sums over $1,000,000. In the event Mr. Hill’s employment is terminated without cause twelve months from a change in control, the Company shall pay to Mr. Hill a lump sum amount equal to the aggregate of (i) accrued unpaid salary, if any; (ii) accrued but unpaid expenses, if any; (iii) accrued but unpaid bonuses, if any; (iv) unissued warrants, if any; and (v) the total compensation which would have been paid to Mr. Hill through five full years of compensation from the date of termination.
As a result of a corporate reorganization and not as the result of any disagreement with the Company, Robert J. Landis resigned as a director of the Company, effective February 25, 2009.
Pursuant to a resolution approved at a meeting of our Board of Directors held on February 26, 2009, we authorized our transfer agent to cancel 6,292,266 common shares held by our wholly owned subsidiary, Core Corporate Consulting Group, Inc.
We expect to mail in April 2009 an Information Statement to stockholders of record January 9, 2009 notifying shareholders of an action taken by written consent by the holders of 58.2% of our outstanding voting capital stock to amend the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the our common stock from 30,000,000 shares to 100,000,000 shares and to increase the number of authorized shares of our preferred stock from 60,000 shares to 1,000,000 shares.