We do not own any real property. We lease our Tampa corporate office and Texas office. In our Tampa office we maintain clinical operations, business development, accounting, reporting and information systems, and provider and member service functions. Provider service, account management, and certain clinical functions are also performed in our Texas office. The following table sets forth certain information regarding our leased properties as of December 31, 2009. The lease for our Texas office is a full service lease under which we bear only those costs of operations and property taxes exceeding the base-year expenses. The Florida lease monthly base rent covers all services and property taxes. We believe our current office space is suitable and adequate to meet our existing needs and that additional facilities will be available for lease to meet our future needs.
CompCare manages the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf of health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. Our managed care operations include at-risk contracts, administrative service agreements, and fee-for-service agreements. The customer base for our services includes both employers and health plans that contract with governmental entities. Our clinical services are provided primarily by unrelated contracted providers on a fee for service or subcapitated basis.
On January 20, 2009, CompCare acquired Core. This acquisition expanded CompCare’s marketing capabilities, and also provided CompCare with a substantially expanded product line to be marketed as companion products to its already existing line of healthcare offerings.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2009 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2008.
Operating revenues from at-risk contracts decreased by 67.8%, or $23.1 million, to $11.0 million for the year ended December 31, 2009 compared to $34.1 million for the year ended December 31, 2008. The decrease is primarily attributable to the expiration of two major customer contracts accounting for $23.8 million in revenue. This decrease was partially offset by $0.5 million in additional business from an existing client in Michigan and $0.3 million in business from a new Puerto Rico client. Revenue from ASO contracts increased by 131.8%, or approximately $1.3 million, to $2.3 million for the year ended December 31, 2009, compared to $1.0 million for the year ended December 31, 2008, due primarily to the addition of a new ASO contract. Pharmacy revenue increased to $0.8 million for the year ended December 31, 2009 from $31,000 for the year ended December 31, 2008, attributable primarily to a new contract that combines psychotropic drug management services with traditional behavioral managed care.
General and administrative expenses increased by $6.1 million, or 168.5%, for the year ended December 31, 2009 as compared to the year ended December 31, 2008 due primarily to costs related to increasing the size of our employee base to accommodate expected growth prospects in the near future, financial advisory and consulting fees to identify new capital sources, and litigation expenses. General and administrative expense as a percentage of operating revenue increased from 10.3% for the year ended December 31, 2008 to 68.4% for the year ended December 31, 2009. Our review at December 31, 2009 of identifiable intangible assets acquired as the result of the merger with Core resulted in the recording of an impairment loss of $0.1 million due to the loss of two contracts that existed at the time of the merger. Depreciation and amortization increased by $0.5 million from $0.2 million for the year ended December 31, 2008 to $0.7 million for the year ended December 31, 2009 due to amortization of identifiable intangible assets acquired as the result of the Core merger.
The decrease in at-risk contract revenue from $36.3 million to $34.1 million was primarily attributable to the loss of one client in Texas and two customers in Indiana, which accounted for approximately $5.7 million in revenue for the year ended December 31, 2007 compared to $37,000 for the year ended December 31, 2008. This was partially offset by additional business from existing clients in Indiana, Maryland, and Michigan, which contributed an additional $3.7 million. The decrease in ASO revenue was primarily attributable to the loss of business from customers in Indiana and Texas.
Claims expense on at-risk contracts increased approximately $177,000, or 0.6%, for the year ended December 31, 2008 as compared to the year ended December 31, 2007. Claims expense as a percentage of at-risk revenues increased from 83.5% for the year ended December 31, 2007 to 89.4% for the year ended December 31, 2008 due to a high medical loss ratio experienced with our major Indiana client. Other healthcare operating expenses, which are incurred to service both at-risk and ASO contracts, decreased approximately $471,000, or 7.3%, due to staff decreases in response to the loss of revenues in Indiana and Pennsylvania. As a percentage of total revenue, other healthcare operating expenses decreased from 17.3% for the year ended December 31, 2007 to 17.1% for the year ended December 31, 2008.
General and administrative expenses decreased by $301,000, or 7.7%, for the year ended December 31, 2008 as compared to the year ended December 31, 2007. This decrease was primarily attributable to the $416,000 severance benefit of two years salary paid in 2007 to our former Chief Executive Officer upon her resignation pursuant to her employment agreement following the January 12, 2007 change in ownership of a company that owned a controlling interest in us. General and administrative expense as a percentage of operating revenue decreased from 10.5% for the year ended December 31, 2007 to 10.3% for the year ended December 31, 2008.
Historically, we have experienced increased member utilization during the months of March, April and May, and consistently low utilization by members during the months of June, July, and August. Such variations in member utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the June through August period and a negative impact on our gross margins and operating profits during the months of March through May.
During the year ended December 31, 2009, net cash and cash equivalents increased by $191,000. Net cash used in operations totaled $6.5 million, attributable in part to the payment of claims on our expired Indiana, Pennsylvania and Maryland contracts and expenditures to increase the size of our employee base to accommodate our future growth. Cash used in investing activities is comprised primarily of $978,000 for the reverse acquisition of CompCare and $167,000 in additions to property and equipment. Cash provided by financing activities consists primarily of $4.8 million in net proceeds from the issuance of common and preferred stock, $490,000 representing a capital contribution from the minority owner of our Puerto Rico subsidiary and $2.7 million in net proceeds from the issuance of note obligations.
At December 31, 2009, cash and cash equivalents were approximately $694,000. We had a working capital deficit of $13.8 million at December 31, 2009 and an operating loss of $19.3 million for the year ended December 31, 2009. We expect that our existing contracts, plus the addition of new contracts implemented as of the date of this report, will reduce our operating losses. Management believes that with the addition of new contracts expected to be awarded to us, in addition to the continued financial support from our major stockholders, we will be able to sustain current operations over the next 12 months. We are looking at various sources of financing if operations cannot support our ongoing plan; however there are no assurances that we will be able to find such financing in the amounts or on terms acceptable to us, if at all. Failure to obtain sufficient debt or equity financing and, ultimately to achieve profitable operations and positive cash flows from operations would adversely affect our ability to achieve our business objectives and continue as a going concern. There can be no assurance as to the availability of any additional debt or equity financing or that we will be able to achieve profitable operations and positive cash flows. These conditions raise doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
In January 2009, CompCare merged with Core, which had previously purchased a 49% interest in CompCare to increase our pipeline for selling opportunities and to create additional distribution channels for product
As of December 31, 2009 and 2008, the Company did not have any off-balance sheet arrangements.
The following is a schedule of our contractual commitments as of December 31, 2009, future minimum lease payments under non-cancelable operating lease arrangements, and other obligations:
(a) Excludes 7 1/2% in interest payable semi-annually in April and October (see Note 15 - “Long-term Debt” and Note 22 “Subsequent Events” to the audited, consolidated financial statements).
We believe our accounting policies specific to our revenue recognition, accrued claims payable and claims expense, premium deficiencies, goodwill and stock compensation expense involve our most significant judgments and estimates that are material to our consolidated financial statements (see Note 3 - “Summary of Significant Accounting Policies” to the audited, consolidated financial statements).
We provide managed behavioral healthcare and substance abuse services to recipients, primarily through subcontracts with HMOs. Revenue under the vast majority of these agreements is earned and recognized monthly based on the number of covered members as reported to us by our clients regardless of whether services actually provided are lesser or greater than anticipated when we entered into such contracts (generally referred to as at risk arrangements). The information regarding the number of covered members is supplied by our clients and we review membership eligibility records and other reported information to verify its accuracy in calculating the amount of revenue to be recognized. Consequently, the vast majority of our revenue is determined by the monthly receipt of covered member information and the associated payment from the client, thereby removing uncertainty and precluding us from needing to make assumptions to estimate monthly revenue amounts.
We recognize the cost of behavioral health services in the period in which an eligible member actually receives services and includes an estimate of IBNR. We contract with various healthcare providers including hospitals, physician groups and other managed care organizations either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine whether (1) the member is eligible to receive such services, (2) the service provided is medically necessary and is covered by the benefit plan’s certificate of coverage, and (3) the service has been authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for payment and the associated cost of behavioral health services is recognized. If the claim is denied, the service provider is notified and has appeal rights under its contract with us.
Accrued claims payable consists primarily of reserves established for reported claims and IBNR claims, which are unpaid through the respective balance sheet dates. Our policy is to record management’s best estimate of IBNR. The IBNR liability is estimated monthly using an actuarial paid completion factor methodology and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability as more information becomes available. In deriving an initial range of estimates, we use an industry accepted actuarial model that incorporates past claims payment experience, enrollment data and key assumptions such as trends in healthcare costs and seasonality. Authorization data, utilization statistics, calculated completion percentages and qualitative factors are then combined with the initial range to form the basis of management’s best estimate of the accrued claims payable balance.
The accrued claims payable ranges were between $4.6 and $4.7 million at December 31, 2009, between $6.4 and $6.9 million at December 31, 2008 and between $4.9 and $5.5 million at December 31, 2007. Based on the information available, we determined our best estimate of the accrued claims liability to be $4.7 million, $6.8 million and $5.5 million at December 31, 2009, 2008 and 2007, respectively. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three years.
The following table provides a reconciliation of the beginning and ending balance of accrued claims payable for the years ended December 31, 2009, 2008 and 2007:
Changes in prior year claims expense were primarily due to changes in utilization patterns and changes in claim submission timeframes by providers. We consider these changes in claims expenses to be immaterial when compared to the total claims expenses incurred in prior years.
Accrued claims payable at December 31, 2009, 2008 and 2007 is comprised of approximately $2.7 million, $1.6 million and $1.1 million, respectively, of submitted and approved claims which had not yet been paid, and $2.0 million, $5.2 million and $4.4 million for IBNR claims, respectively.
Many aspects of our business are not predictable with consistency, and therefore, estimating IBNR claims involves a significant amount of judgment by our management. Actual claims incurred could differ from the estimated accrued claims payable amount presented. The following are factors that would have an impact on our future operations and financial condition:
A five percent increase in assumed healthcare cost trends from those used in our calculations of IBNR at December 31, 2009 could increase our claims expense by approximately $40,000 as illustrated in the table below:
On a quarterly basis, we perform a review of our portfolio of contracts to identify loss contracts (as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide - Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. At December 31, 2009 and 2008, no contract loss reserve for future periods was necessary.
We issue stock-based awards to our employees and members of our Board of Directors. Effective June 1, 2006, we adopted ASC 718 Compensation - Stock Compensation and elected to apply the modified-prospective method to measure compensation cost for stock options at fair value on the grant date and recognize compensation cost on a straight-line basis over the service period for those options expected to vest. We use the Black-Scholes option pricing model, which requires certain variables for input to calculate the fair value of a stock award on the grant date. These variables include the expected volatility of our stock price, award exercise behaviors, the risk free interest rate, and expected dividends. We use significant judgment in estimating expected volatility of the stock, exercise behavior and forfeiture rates.
In May 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 164, “Subsequent Events,” which was amended in February 2010 and codified into ASC Topic 855. This guidance establishes general standards on the accounting for and reporting of events that occur after the balance sheet date but before financial statements are issued. We adopted the provisions of ASC Topic 855 upon its effective date of June 30, 2009. There was no material impact to our financial statements from the adoption of this standard.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” This statement was incorporated into ASC 805 “Business Combinations” (“ASC 805”). ASC 805 defines the acquirer and the acquisition date in a business combination and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. It also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to an acquired business. We adopted ASC 805 on January 1, 2009 and utilized its guidance in accounting for our acquisition of Core.
Year Ended December 31, 2009, Period Ended January 20, 2009 (Predecessor) (Unaudited), and Years Ended December 2008 and 2007, (Predecessor)
Consolidated Balance Sheets, December 31, 2009 and 2008, and December 31, 2008 (Predecessor)
Consolidated Statements of Operations, Year Ended December 31, 2009, Period Ended January 20, 2009 (Predecessor) (Unaudited), and Years Ended December 2008 and 2007, (Predecessor)
Consolidated Statements of Changes in Deficit, Years Ended December 31, 2009, 2008 (Predecessor) and 2007 (Predecessor)
Consolidated Statements of Cash Flows, Years Ended December 31, 2009, Period Ended January 20, 2009 (Predecessor) (Unaudited), and Years Ended December 2008 and 2007, (Predecessor)
As a result of Core being treated as the accounting acquirer, the historical financial statements of the combined entity were restated to be those of Core. Therefore, the consolidated balance sheet as of December 31, 2008 presented herein includes only the accounts of Core at historical carrying amounts. In contrast, the consolidated balance sheet as of December 31, 2009 is a combination of Core and CompCare accounts. The capital structure (common and preferred stock) of CompCare as the registrant was retained and the accumulated deficit of Core at the time of the merger was carried forward as the beginning retained deficit balance for the combined entity.
For comparative purposes, the predecessor company’s financial activity for the years ended December 31, 2008 and 2007 is provided in the consolidated statement of operations and consolidated statement of cash flows presented herein. To facilitate comparison, the pre-acquisition results for CompCare for the period January 1 to January 20, 2009 are shown in the consolidated statements of operations and consolidated statements of cash flows. Earnings per share for periods prior to the merger did not require restatement because CompCare common and convertible preferred stock (on an as-converted basis) were exchanged on a one-for-one basis for Core common stock.
Our Board of Directors approved on May 21, 2007 a change in the Company’s fiscal year end from May 31 to December 31, effective December 31, 2006. The seven months ended December 31, 2006 was our transition period for financial reporting purposes.
We accrue losses under our managed care contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We perform this loss accrual analysis on a contract-by-contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance costs, and each contract’s specific terms related to future revenue increases as compared to expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate of future cost increases.
At December 31, 2009 and 2008, 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 Accounting Standards Codification (“ASC”) 350-20, “Intangibles - Goodwill and Other,” goodwill is not amortized but is periodically evaluated for impairment to carrying amount, with decreases in carrying amount recognized immediately. We review goodwill for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The tests for impairment of goodwill require us to make estimates about fair value, which are based on discounted projected future cash flows and the quoted market price of our common stock. We performed an impairment test as of December 31, 2009, 2008 and 2007, and determined that no impairment of goodwill had occurred as of such dates.
Other liabilities include accrued reinsurance claims payable liabilities representing amounts payable to providers under state reinsurance programs.
ASC 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820-10 also establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques and creates the following three broad levels, with Level 1 being the highest priority:
ASC 825-10, “Financial Instruments” (“ASC 825-10”), provides that companies may elect to measure many financial instruments and certain other items at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the “fair value option,” will enable some companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently. We chose not to measure at fair value our eligible financial assets and liabilities existing at December 30, 2009. Consequently, ASC 825-10 has had no impact on our consolidated financial statements.
ASC 825-10 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, 2009 and 2008 are as follows:
The following is an asset measured at fair value on a nonrecurring basis to determine whether impairment exists at December 31, 2009. We use a discounted cash flow technique in valuing the asset. Inputs used to develop future cash flows derive from our own data and assumptions. We use the discount rate that reflects systematic and unsystematic risk.
Under the asset and liability method of ASC 740-10, “Income Taxes” (“ASC 740-10”), deferred tax assets and liabilities are recognized for the future tax consequences attributable to net operating loss carryforwards and to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10, the effect of a change in tax rates on deferred tax assets or liabilities is recognized in the consolidated statements of operations in the period that included the enactment. A valuation allowance is established for deferred tax assets unless their realization is considered more likely than not.
Prior to being acquired by CompCare, Core had purchased in January 2009 a 48.85% ownership interest in CompCare from Hythiam, Inc. (“Hythiam”). The purchase by Core of Hythiam’s ownership interest resulted in a change in control of the Company. As a result, our ability to carryforward and deduct losses incurred prior to January 20, 2009 on current federal tax returns is subject to a limitation of approximately $361,000 per year. Any unused portion of such limitation can be carried forward to the following year. We may be subject to further limitation in the event that we issue or agree to issue substantial amounts of additional equity.
ASC 740-10 also clarifies the accounting for uncertainty in income taxes and requires that companies recognize in their consolidated financial statements the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. ASC 740-10 additionally provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of ASC 740-10 are effective for fiscal years beginning after December 15, 2006. Our adoption of ASC 740-10 had no impact on our consolidated financial statements.
behavioral healthcare programs or perform various managed care functions, such as clinical care management, provider network development, and claims processing without assuming financial risk for member behavioral healthcare costs. Under our pharmacy contracts, we manage behavioral pharmaceutical services for the members of health plans on an at-risk or ASO basis. Other revenues represent commissions earned through the sale of durable goods.
(1) We currently furnish behavioral healthcare services to approximately 219,000 members of a health plan providing Medicaid and Medicare benefits. Services are provided on an at-risk and ASO basis. The contract accounted for 23.1%, or $3.3 million, of our revenues for the year ended December 31, 2009, and 9.0%, or $3.2 million, of our revenues for the year ended December 31, 2008. The health plan has been a customer since June of 2002. The initial contract was for a one-year period and has been automatically renewed on an annual basis. Termination by either party may occur with 90 days written notice to the other party.
(3) Effective December 31, 2009, we ceased providing behavioral health services on an ASO basis to approximately 237,000 members of a Medicaid health plan in Michigan. Services provided accounted for 10.2%, or $1.4 million, of our operating revenues for the year ended December 31, 2009. The health plan had been a customer since January 2009.
We valued customer contracts with an income approach based on a discounted cash flow analysis utilizing management’s best estimates of inherent assumptions such as the discount rate and expected life of the contract.
We used a cost approach that estimated the average cost to recruit a provider derived from historical external costs and multiplied by the number of providers existing at acquisition.
The following table presents intangible assets, net as at December 31, 2009 and 2008.
Note obligations due within one year consists of the following: (amounts in thousands):
(1) The debentures are due on April 15, 2010 and accordingly have been reclassified from long term debt at December 31, 2008 to note obligations due within one year at December 31, 2009. The debentures are convertible into 40,133 shares of common stock at a conversion price of $55.91 per share at December 31, 2009. See Note 22 “Subsequent Events.”
(5) In December 2009 we issued $100,000 promissory notes to each of three individuals. The notes had no stated maturity date but were callable by the note holder with five days notice. Two of the notes were repaid by the Company in January 2010 at the request of the note holder. The notes each bore interest at the rate of 10% and were convertible into common stock of the Company at any time at a conversion price of $0.25 per share. In conjunction with the loans, each note holder received a warrant to purchase 200,000 shares of the Company’s common stock at $0.25 per share. The warrants were vested upon issuance and have terms of three years. We allocated the proceeds from the notes into two components, debt and warrants, based on their relative fair values. The warrants were valued at approximately $89,000 in the aggregate using the Black-Scholes option valuation model. We also determined that the promissory notes contained beneficial conversion features valued at $84,000 in the aggregate. The values of the warrants and beneficial conversion features were recorded as discount on notes payable which will be amortized over the expected life of the notes using the effective interest method. For the year ended December 31, 2009, there was no discount amortization since these notes were issued at the end of the year.
As of December 31, 2009, there were 995,660 shares of Preferred Stock authorized and 14,400 shares issued and outstanding. The outstanding shares consist of Series C Convertible Preferred Stock, $50.00 par value, which are convertible into Common Stock at the initial rate of approximately 316.28 shares of Common Stock for each share of Series C Convertible Preferred Stock. The conversion rate is adjustable for any dilutive issuances of Common Stock occurring in the future. The rights and preferences of the Series C Convertible Preferred Stock include, among other things, the following:
the right to vote with the common stockholders on matters submitted to the Company’s stockholders, and
the right, voting as a separate class, to elect five directors of the Company.
Authorized shares of common and preferred stock outstanding and reserved for possible issuance for convertible debentures, convertible preferred stock, convertible notes payable, stock options, and warrants are as follows at December 31, 2009:
(a) The debentures are convertible into 40,133 shares of common stock at a conversion price of $55.91 per share.
(e) The Series C Convertible Preferred Stock is convertible directly into 4,554,379 common shares. This class controls five out of the nine seats on our Board of Directors.
(g) During 2009, Board of Director members and certain members of senior management were issued warrants to purchase an aggregate of 390 shares of Series D Convertible Preferred Stock. One warrant for the purchase of 100 shares of Series D
Under our Non-employee Directors’ Stock Option Plan, we are authorized to issue 1,000,000 shares pursuant to non-qualified stock options to 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 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 December 31, 2009, there were 801,668 shares available for option grants and 100,000 options outstanding under the directors’ plan, none of which were exercisable.
A summary of activity for the year ended December 31, 2009 is as follows:
Approximately 1,835,000 options granted during the year ended December 31, 2009 were for employees and non-employee directors. Total recognized compensation costs during the year ended December 31, 2009 were approximately $112,000. As of December 31, 2009, there was approximately $628,000 of unrecognized compensation cost which is expected to be recognized over a weighted-average period of 3 years. We recognized approximately $4,000 of tax benefits attributable to stock-based compensation expense recorded during the year ended December 31, 2009. This benefit was fully offset by a valuation allowance of the same amount due to the likelihood of future realization.
A summary of options outstanding and exercisable as of December 31, 2009 is as follows:
The number of shares of Series D Convertible Preferred Stock for which a warrant is exercisable is subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting the Series D Convertible Preferred Stock. In the event of a Change of Control (as defined in the warrants) of the Company, the holder has the right to require us to redeem the warrant in exchange for an amount equal to the value of the warrant determined using the Black-Scholes pricing model.
Each holder of shares of Series D Convertible Preferred Stock is entitled to notice of any stockholders’ meeting and to vote on any matters on which the Company’s common stock may be voted. Each share of Series D Convertible Preferred Stock is entitled to the number of votes that the holder of 500,000 shares of common stock would be entitled to by virtue of holding such shares of common stock. Unless otherwise required by applicable law, holders of Series D Convertible Preferred Stock will vote together with holders of common stock as a single class on all matters submitted to a vote of the Company’s stockholders.
The following table summarizes information about warrants granted, exercised and vested for the years ended December 31, 2009, 2008 and 2007:
We recognized approximately $2.4 million of tax benefits attributable to equity-based expense recorded for warrants issued to employees and non-employee directors during the period from January 21st to December 31, 2009. This benefit was fully offset by a valuation allowance of the same amount due to the uncertainty of future realization.
We periodically issue warrants to purchase common stock in exchange for the services of consultants. In accordance with ASC 505-50, “Equity” (“ASC 505-50”), the transaction is measured at the fair value of the goods and services received or the fair value of the warrants issued, whichever is more reliably measurable. We estimate the fair value of warrants issued using the Black-Scholes pricing model.
A summary of the activity of our warrants issued to non-employees for the year ended December 31, 2009 is as follows:
For vested warrants issued as compensation to non-employees for their services for the years ended December 31, 2009, valuation was based on the following information:
(3) A complaint entitled “MDwise, Inc. vs. Comprehensive Behavioral Care, Inc.” was filed against us in April 2009 in the Marion County Superior Court in Indiana by MDwise, Inc. (“MDwise”), our former Indiana client. The complaint seeks unspecified damages and a declaratory judgment requiring us to pay outstanding provider claims that are allegedly the Company’s responsibility under the expired contract with the contract. On May 8, 2009, we successfully filed a motion to remove the case to federal court. On September 18, 2009, MDwise filed a counterclaim seeking damages, interest and cost of suit related to claims of fraud, estoppel and breach of contract. We intend to vigorously defend the claims alleged by MDwise. Until the actions are withdrawn or settled, we may incur further legal defense fees and may be subject to awards of plaintiff’s attorney fees.
During 2007, CBC contracted with Integra Health Management, Inc. (“IHM”), a company that provides behavioral and medical health management and consultative services to healthcare payers. IHM was founded by one of our former directors, Michael Yuhas, who also serves as its current Chief Executive Officer. During the year ended December 31, 2008, CBC paid IHM $94,620 for monitoring and care coordination of intensive case management patients. In addition, IHM provided $115,967 of information technology consulting services to CBC for the year ended December 31, 2008.
During the period in which Hythiam held a 48.85% ownership interest in us, we accelerated our Sarbanes-Oxley Act compliance efforts in order to meet Hythiam’s management attestation requirements for financial reporting internal controls. Hythiam paid for consulting services to accomplish our management review of such internal controls. Because this effort benefited us, we recorded a liability to Hythiam for a portion of the cost. In addition, we benefited by being included under certain of Hythiam’s insurance policies.
In connection with employment agreements executed with our Chairman and Co-CEO, our President and Co-CEO, and our CFO, we have deferred compensation payments to these individuals of approximately $207,000, $61,000 and $111,000, respectively, as of December 31, 2009.
Summary financial information for our two reportable segments and Corporate and Other is as follows (amounts in thousands):
(a) Includes $589,000 of merger expenses and $4.4 million of equity based expenses.
(d) Includes $325,000 of accrued legal expenses attributable to a stockholder lawsuit filed in objection to our proposed merger with Hythiam, Inc.
(e) Includes $418,000 of expenses related to the proposed merger with Hythiam.
(f) Includes $ 416,000 of severance benefits due the Company’s former Chief Executive Officer.
For the purpose of this disclosure we have evaluated potential subsequent events through the date the financial statements were issued.
On February 28, 2010, Core agreed to sell DVI, a Core subsidiary, to its former owner in exchange for 2.1 million shares of CompCare stock. The reacquired shares will be cancelled once the sale is completed. The former owner will take possession of all assets and assume certain liabilities as of February 28, 2010. An expected gain of approximately $0.5 million will be recognized and credited directly to the retained earnings of Core.