RESULTS OF OPERATIONS - SEVEN MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO THE SEVEN MONTHS ENDED DECEMBER 31, 2005.
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 capitation 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.
Accrued claims payable at December 31, 2007 and 2006 and May 31, 2006 is comprised of approximately $1.1 million, $0.7 million and $1.1 million, respectively, of submitted and approved claims which had not yet been paid, and $4.4 million, $2.0 million and $1.7 million for IBNR claims, respectively.
Healthcare operating expense is recognized in the period in which an eligible member actually receives services and includes an estimate of the cost of behavioral health services that have been incurred but not yet reported. See “Accrued Claims Payable” for a discussion of claims incurred but not yet reported. We contract with various healthcare providers including hospitals, physician groups and other licensed behavioral healthcare professionals either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine that the member is eligible to receive such services, the service provided is medically necessary and is covered by the benefit plan’s certificate of coverage, and the service is authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for payment.
The carrying amounts and fair values of our financial instruments at December 31, 2007 and 2006 are as follows:
During the year ended December 31, 2007, our cash and cash equivalents increased by $770,000. Net cash provided by continuing operations amounted to $826,000. Cash used in investing activities is comprised primarily of $58,000 in additions to property and equipment offset by $58,000 in proceeds from sales of available-for-sale securities, sales of equipment and payments received on notes receivable. Cash used in financing activities consists primarily of $19,000 in net proceeds from the issuance of common stock less payment of other liabilities of $55,000. At December 31, 2007, cash and cash equivalents amounted to $6.3 million. We believe we have sufficient working capital to sustain current operations and meet our current obligations during the next twelve months.
We lease certain office space and equipment. 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 $269,000 for the year ended December 31, 2007. For the seven months ended December 31, 2006 total rental expense was $210,000. For the fiscal years ended May 31, 2006 and 2005, total rental expense was $0.5 million and $0.6 million, respectively.
(5) Two class action lawsuits and a complaint have been filed against us in the Delaware Court of Chancery. 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 or other fees, the amounts of which are not estimable. See Part I, Item 3, “Legal Proceedings” for a description of these matters.
(a) Includes $418,000 of expenses related to the proposed merger with Hythiam.