Advanzeon Solutions, Inc. - Annual Report: 2010 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the calendar year ended December 31, 2010

Commission File Number 1-9927

COMPREHENSIVE CARE CORPORATION

(Exact name of Registrant as specified in its charter)

3405 W. Dr. Martin Luther King, Jr. Blvd, Suite 101

Tampa, Florida 33607

(Address of principal executive offices, zip code)

(813) 288-4808

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.01 per share

7  ¹/2 % Convertible Subordinated Debentures due 2010

(Title of class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the Registrant on June 30, 2010 was approximately $1,593,227 based on the closing price of $0.10 of the common stock on June 30, 2010, as reported on the Over-The-Counter Bulletin Board. This amount excludes approximately 32.1 million shares of common stock held by officers, directors, and persons owning 5% or more of our outstanding common stock. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

On March 29, 2011, the Registrant had 55,759,784 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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PART I

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain information included in this Annual Report on Form 10-K and in our other reports, Securities and Exchange Commission (“SEC”) filings, statements, and presentations is forward looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, our anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, predictions of anticipated health care costs, growth and expansion, and the ability to obtain new behavioral healthcare contracts. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in our other reports, SEC filings, statements, and presentations. These risks and uncertainties include, among others, changes in local, regional, and national economic and political conditions, the effect of governmental regulation, competitive market conditions, varying trends in member utilization, our ability to manage healthcare operating expenses, the profitability of our capitated contracts, cost of care, seasonality, CompCare’s ability to obtain additional financing, our ability to renegotiate or extend expiring customer contracts, the risk that any definitive agreements or additional business will result from letters of intent entered into by us, and other risks detailed from time to time in our SEC reports.

OVERVIEW

GENERAL

Established in 1969, Comprehensive Care Corporation, a Tampa-based Delaware corporation (“CompCare”, “we” or the “Company”), provides managed care services in the behavioral health, substance abuse, and psychotropic pharmacy management fields. We provide these services to commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) members on behalf of employers, 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. Our managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts.

The Company prides itself on providing personalized attention, a commitment to high-quality services, and innovative approaches to behavioral health that address specific needs of clients in a changing healthcare environment. In 1999 we were awarded our first National Committee for Quality Assurance (“NCQA”) accreditation, which we have consistently maintained ever since.

The services provided through our provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), and inpatient and crisis intervention services. We have a network of over 30,000 contracted providers in the following areas: psychiatrists, psychologists, therapists, other licensed healthcare professionals, psychiatric hospitals, general medical facilities with psychiatric beds, residential treatment centers and other treatment facilities.

MARKET OPPORTUNITIES

CompCare markets to regional health maintenance organizations (“HMOs”) that do not have their own behavioral health network. These HMOs will contract with a managed behavioral healthcare organization (“MBHO”) to obtain access to behavioral healthcare professionals, claims processing, case management, better-integrated behavioral healthcare, and in some cases psychotropic pharmacy management services. The HMOs engage an MBHO on a fixed fee paid on a per-member-per-month (“PMPM”) basis. Often, the PMPM will include the costs of care, which are the costs paid out to the providers and for pharmaceuticals, if applicable. Such an arrangement is known as an at-risk contract and the MBHO bears the risk/reward of the costs associated with higher or lower utilization of care. If the PMPM excludes the cost of care, the MBHO is essentially providing administrative services only (“ASO”). In such a case, the MBHO is not at risk of over/under utilization.

Through our primary operating subsidiary, Comprehensive Behavioral Care, Inc. (“CBC”) and its subsidiaries, we provide managed behavioral healthcare, substance abuse, and psychotropic pharmacy management services. Changes in federal and state legislation have provided a new focus for CBC in specialty behavioral healthcare areas such as Autism

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Spectrum Disorders (“ASD”) and Attention Deficit Disorder (“ADD”). Additionally, CBC provides pharmacy and analytic services for its health plan customers to integrate medical claims data and pharmacy data into actionable information so patient care can be coordinated cost effectively. We coordinate and manage the delivery of our services and products to:

on behalf of:

Our customer base includes both private and governmental entities. We provide services primarily through a network of contracted providers that includes:

The services provided through our provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), inpatient programs and crisis intervention services. We do not directly provide treatment or own any provider of treatment services or treatment facility.

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

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

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The following table sets forth our managed care revenue, segregated by category, for the years ended December 31, 2010, 2009 and 2008:

Over the past several years we have experienced a trend where our clients prefer to contract for services on an at-risk basis instead of on an ASO basis.

Our largest expense is the cost of the behavioral health services that we provide, which is based primarily on our arrangements with healthcare providers. Since we are subject to increases in healthcare operating expenses based on an increase in the number and frequency of our members seeking behavioral care services, our profitability depends on our ability to predict and effectively manage healthcare operating expenses in relation to the fixed premiums we receive under capitation arrangements. Providing services on an at-risk basis exposes us to the risk that our contracts may ultimately be unprofitable if we are unable to anticipate or control healthcare costs. Estimation of healthcare operating expense is our most significant critical accounting estimate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” below.

We manage programs through which services are provided to recipients in nine states and Puerto Rico. Our objective is to provide easily accessible, high quality behavioral healthcare services and products and to manage costs through measures such as the monitoring of hospital inpatient admissions and the review of authorizations for various types of outpatient therapy. Our goal is to combine access to quality behavioral healthcare services with effective management controls in order to ensure the most cost-effective use of healthcare resources.

Our programs and services include:

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

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SOURCES OF REVENUE

The majority of our revenue is earned from at-risk contracts pursuant to which we provide managed behavioral healthcare, substance abuse, and psychotropic pharmacy management services to recipients, primarily through subcontracts with HMOs, which have historically outsourced these functions to managed behavioral healthcare organizations like us. In exchange for arranging behavioral health and substance abuse services, we generally receive a negotiated amount on a per-member per-month, or capitated, basis in exchange for providing these services. We then contract directly with behavioral healthcare providers that receive a predetermined, discounted fee-for-service rate, per case rate, or per diem rate.

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

Under at-risk behavioral contracts, our profit is a function of utilization and the amount of claims payments made to our network providers. Under at-risk pharmacy contracts, the profitability depends on how effectively we manage our members’ utilization of the pharmaceutical drug benefit. We perform periodic reviews of our current client contracts to determine profitability. In the event a contract is not profitable, we may seek to revise the terms of the contract or to terminate the agreement in accordance with its terms.

During the year ended December 31, 2010, we provided services under at-risk arrangements for Medicare and commercial patients in Louisiana, Medicaid patients in Michigan, Medicaid and CHIP patients in Missouri and Texas, Medicare patients in Puerto Rico and commercial patients in Wisconsin. Such services generated approximately 94% of our managed care operating revenue.

Our Medicare, Medicaid and CHIP contracts are subject to agreements with our HMO clients whose contracts with the various governmental agencies may be subject to renegotiation at the election of the specific agency.

Over 75% of our operating revenue is currently concentrated in contracts with four health plans to provide behavioral healthcare and psychotropic pharmacy management services under Medicare, Medicaid, and CHIP plans. The terms of each contract are generally for one or two-year periods and are automatically renewable for additional one-year periods unless terminated by either party. The loss of one or more of these clients, without replacement by new business, may adversely impact our financial results.

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GROWTH STRATEGY

CBC is a leader in the MBHO field with many years of experience serving health plans with unique and innovative programs addressing behavioral wellbeing, ASD, ADD and pharmacy management. The continued consolidation of the behavioral health care market through the acquisition of MBHOs by health plans offers CBC opportunities and we have become one of the few MBHOs that are not owned by a health plan and thus remain independent.

Our objective is to expand our presence in both existing and new managed behavioral healthcare markets by enhancing our product offerings, adjusting our client portfolio to better balance our at-risk-to-ASO ratio and identifying new business development partners. We have identified portions of our market to focus on health plans known as “safety net” plans, which serve populations that we believe need many of the services that we provide. We have expanded our specialty management products to include ASD, ADD, and pharmacy management for psychotropic medications. We provide data analytic services for health plan claims and pharmacy data to effectively integrate plan data so that actionable information can be utilized to address patient care.

We provide our core product, outsourced behavioral healthcare management, to health plans, government entities, and other entities. We focus on continually developing and providing innovative and cost effective solutions to our customers. We expect the demand for our services to increase in the future in response to governmental legislative changes such as the passage of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which should increase the demand for our services through the expansion of the number of people covered by health insurance. We also believe the continuing shift in demographics of the U.S. population towards an older population will increase the number of Medicare beneficiaries such that Medicare expenditures are anticipated to increase from an expected $509 billion in 2010 to $929 billion in 2020. Enrollment in Medicare Advantage Plans, which comprise approximately 27% of our covered lives as of December 31, 2010, is also expected to increase with these plans anticipated to reach a coverage level of 25% of all Medicare beneficiaries in the near future. Finally, 23 states have passed legislation requiring insurers to provide coverage of the case management of ASD. Mental health expertise continues to be critical to successful management of healthcare costs, and of particular importance to managing the care of populations with specific needs and we believe we are well positioned for the growth in this sector of the market.

PROVIDER NETWORK

As of December 31, 2010, we had approximately 30,000 behavioral healthcare practitioners in our network located in 42 states, the District of Columbia, and Puerto Rico.

Our managed behavioral healthcare services are provided by contracted providers, including behavioral healthcare professionals and facilities. Our behavioral healthcare professionals include a variety of specialized behavioral healthcare personnel, such as:

The facilities we provide our services to include:

Outpatient providers include both individual practitioners, as well as individuals who are members of group practices or other licensed centers or programs. Outpatient providers typically enter into contracts with us under which they are generally paid on a discounted fee-for-service basis.

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Our provider network also includes contractual arrangements with intensive outpatient facilities, partial hospitalization facilities, community health centers, and other community-based facilities. Our contracts with facilities are on a per diem or discounted fee-for-service basis and, in some cases, on a “case rate” basis, whereby a fixed amount is paid irrespective of the amount of services provided. To help ensure quality of care, we credential and re-credential all professional providers with whom we contract in accordance with standards of the National Committee of Quality Assurance (“NCQA”).

COMPETITION

The behavioral healthcare industry is very competitive and provides products and services that are price sensitive. Competitors include both freestanding MBHOs as well as HMOs and insurers with internal behavioral health units or subsidiaries. Many of these competitors have revenues, financial resources, and membership bases that are substantially larger than ours. The extent of competition results in significant pricing pressures which limits our revenue growth. Accordingly, we expect our future growth to come from our expansion into new states and the sale of our ancillary products to our existing and new customers.

HEALTH CARE REFORM

In March 2010 President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “2010 Acts”). We believe these laws will bring about significant changes to the American health care system and will expand the number of United States citizens covered by health insurance. Because final rules and guidance in key aspects of the legislation have not yet been promulgated by the government, the full impact of the 2010 Acts is still unknown.

SEASONALITY OF BUSINESS

Historically, we have experienced increased member utilization during the months of March, April and May and consistently low utilization by members during the months of June, July, and August. Such variations in member utilization 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.

GOVERNMENT REGULATION

At January 1, 2011, we managed approximately one million lives in connection with behavioral, substance abuse, and psychotropic pharmacy management services covered through Medicare programs in Connecticut, Louisiana, and Puerto Rico, CHIP programs in Pennsylvania, Medicaid and CHIP programs in Missouri, Medicare and Medicaid programs in California, Florida, and Michigan, and Medicare, Medicaid and CHIP programs in Texas.

We are subject to extensive and evolving state and federal regulations relating to the nation’s mental health system, as well as changes in Medicaid and Medicare reimbursement that could have an effect on our profitability. These regulations range from licensure and compliance with regulations related to insurance companies and other risk-assuming entities, to licensure and compliance with regulations related to healthcare providers. These laws and regulations may vary considerably between states. As a result, we may be subject to the specific regulatory approach adopted by each state for regulation of managed care companies and for providers of behavioral healthcare treatment services. We hold licenses or certificates to perform utilization review and/or third party administrator (“TPA”) services in:

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Some of the services provided by our managed behavioral healthcare subsidiaries may be subject to such licensing requirements in other states. There can be no assurance that additional utilization review or TPA licenses will not be required or, if required, that we will qualify to obtain or renew such licenses. In some of the states in which we provide services, entities that assume risk under contract with licensed insurance companies or health plans that retain ultimate financial responsibility have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure as either an insurer or HMO in certain states. If the regulatory positions of these states change, our business could be materially affected until such time as we meet the regulatory requirements. We cannot quantify the potential effects of additional regulation of the managed care industry, but such costs may have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.

ACCREDITATION

The NCQA provides information about the quality of national managed care plans to enable consumers to evaluate health plan performance. To develop standards that effectively evaluate the structure and function of medical and quality management systems in managed care organizations, NCQA has developed an extensive review and development process in conjunction with the managed care industry, healthcare purchasers, state regulators, and consumers. The Standards for Accreditation of MBHOs used by NCQA reviewers to evaluate an MBHO address the following areas: quality improvement, utilization management, credentialing, members’ rights and responsibilities, and preventative care. These standards validate that an MBHO is founded on principles of quality and is continuously improving the clinical care and services it provides. NCQA utilizes the Health Plan Employer Data and Information Set, which is a core set of performance measurements developed to respond to complex but clearly defined employer needs as standards for patient care and customer satisfaction.

In October 2008, we were awarded Full Accreditation by NCQA extending through September of 2011. Full Accreditation is granted for a period of three years to those plans that have, according to the NCQA, excellent programs for continuous quality improvement and that meet NCQA’s rigorous standards.

We believe our NCQA accreditation is beneficial to our clients and their members we serve. Additionally, NCQA accreditation is required by several of our client contracts and is frequently an important consideration to our prospective clients.

MANAGEMENT INFORMATION SYSTEMS

All of our health plan information technology and systems operate on a single platform. This approach avoids the costs associated with maintaining multiple systems and improves productivity. The open architecture of the systems gives us the ability to transfer data from other systems thereby facilitating the integration of new health plan business. We use our information system for claims processing, utilization management, reporting, cost trending, planning, and analysis. The system also supports member and provider service functions, including:

We are subject to the requirements of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). One of the purposes of HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and, also, to protect the security and privacy of protected health information. Entities subject to HIPAA include some healthcare providers and all healthcare plans.

We have significantly enhanced our network by installing a storage area network and virtualizing our computer servers. This implementation brought in the current best practices approach and permitted a major overhaul of our information technology infrastructure. The technology centralizes storage management, increases

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the utilization of equipment, improves redundancy of the servers, reduces the overall hardware requirements, and facilitates growth, while driving down the total cost of ownership.

MARKETING AND SALES

Our marketing and sales efforts are led by our Chief Executive Officer (“CEO”) and Senior Vice President of Corporate Development. In addition, we utilize consultants for direct sales to commercial, Medicaid, and Medicare prospective clients. We will continue to dedicate resources to expand our sales staff and marketing efforts as necessary.

CompCare’s sales strategy focuses on matching our solutions to the needs identified by our potential clients. Examples of developing customer solutions include our ASD, ADD, and pharmacy analytics programs that offer unique solutions for our customers. Sales are highly technical and complex, involving many stakeholders within an organization. The sales cycle is typically 12 to 18 months. Sales leads may be generated by our business development staff, our operations staff, consultants, cold calls, prior business relationships, or recommendations from existing clients. We attend trade shows within geographic areas in which we conduct business and reach out to contacts known to us, our consultants, and our investors. In addition, we maintain permanent marketing outreach through our website, www.compcare.com.

ADMINISTRATION AND EMPLOYEES

Our executive and administrative offices are located in Tampa, Florida, where we maintain operations, business development, accounting, reporting and information systems, and provider and member service functions. Provider management, account management, and certain clinical and utilization management functions are also performed in our Texas & Puerto Rico offices and by employees located in Michigan. As of December 31, 2010, we employed 134 full-time employees and 11 part-time employees.

AVAILABLE INFORMATION

Our stockholder website can be found at www.compcare-shareholders.com. We make available free of charge, through a link to the SEC Internet site, our annual, quarterly, and current reports, and any amendments to these reports, as well as any beneficial ownership reports of officers and directors filed electronically on Forms 3, 4, and 5. Information contained on our website or linked through our website is not part of this Annual Report on Form 10-K. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which can be found at http://www.sec.gov.

Our Board of Directors has two committees, an audit committee and a compensation and stock option committee. Each of these committees has a formal charter which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009. Any references to our stockholder website and the SEC’s website above are intended to be inactive textual references only, and the contents of those Web sites are not incorporated by reference herein.

In addition, you may request a copy of the foregoing filings and charters at no cost by writing us at the following address or telephoning us at the following telephone number:

Comprehensive Care Corporation

3405 W. Dr. Martin Luther King Jr. Blvd,

Suite 101

Tampa, Florida 33607

Attention: Investor Relations

Tel: (813) 288-4808

CODE OF ETHICS

We have adopted a code of ethics applicable to all of our employees, including our principal executive officers, principal financial officer, principal accounting officer and persons performing similar functions. The text

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of our code of ethics can be found on our website at www.compcare-shareholders.com. We intend to post notice of any waiver from, or amendment to, any provision of our code of ethics on our website.

You should carefully consider and evaluate all of the information in this Annual Report on Form 10-K, including the risk factors listed below. Risks and uncertainties in addition to those we describe below, that may not be presently known to us, or that we currently believe are immaterial, may also harm our business and operations. If any of these risks occur, our business, results of operations and financial condition could be harmed, the price of our common stock could decline, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements contained in this report.

Risks related to our business

We may not be able to accurately predict utilization of our at-risk contracts, which could result in contracts priced at levels insufficient to ensure profitability.

Managed care operations are at risk for costs incurred to provide agreed upon levels of service. Failure to anticipate or control costs could have material, adverse effects on our business. A very large percentage of our services are provided on an at-risk capitation basis, which exposes us to significant risk that contracts negotiated and entered into may ultimately be unprofitable if utilization levels require us to provide services at a cost in excess of the capitation rates we receive for the services.

We rely on the accuracy of eligibility lists provided by our clients to collect premiums and to pay claims. Any inaccuracies in those lists may cause our clients to recoup premium payments from us or for us to pay claims incorrectly, which could materially reduce our revenues and results of operations.

Premium payments that we receive and claims payments that we make are based on eligibility lists that are produced by our clients. A client will require us to reimburse it for premiums that we received based on an eligibility list that it later discovers contains individuals who were not eligible. Our review of all remittance files to identify potential duplicate members, members that should be terminated or members for which we have been paid an incorrect rate may not identify all such members and could result in repayment of premiums or claims that we paid incorrectly.

Federal regulations require entities subject to HIPAA to update their transaction formats for electronic data exchange from the current HIPAA 4010 requirement to the new HIPAA 5010 standards, which are not only burdensome and complex, but could adversely impact administrative expense and compliance.

A federal mandate known as HIPAA 5010 will require us to use new standards for conducting certain operational and administrative transactions electronically beginning in January 2012. These administrative transactions include: claims, remittance, eligibility and claims status requests and responses. The HIPAA 5010 upgrade was prompted by government and industry’s shared goal of providing higher quality, lower cost health care and the need for a comprehensive electronic data exchange environment for the ICD-10 mandate to be implemented by October 2013. Upgrading to the new HIPAA 5010 standards should increase transaction uniformity, support pay for performance and streamline reimbursement transactions. We may face significant pressure to ensure that we have installed our software and tested it for compatibility with our business partners. Because HIPAA 5010 affects electronic transactions such as patient eligibility and claim payments, we must achieve full functionality of HIPAA 5010 transactions before the deadline.

Our business could be adversely impacted by adoption of the new ICD-10 standardized coding set for diagnoses.

By 2013, the federal government will require that health care organizations upgrade to updated and expanded standardized code sets used for documenting health conditions. These new standardized code sets, known as ICD-10, will require additional investments from health care organizations, including us.

Our failure to maintain accreditations could disqualify us from existing contracts, which could have a material adverse effect on our results of operations.

Several of our contracts require that we are to be accredited by independent accrediting organizations that are focused on improving the quality of health care services. There can be no assurances that we will maintain our accreditations, and the loss of, or failure to obtain accreditations required by contract could have a material adverse effect on our revenue, cash flows and results of operations.

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Because providers are responsible for claims submission, the timing of which is uncertain, we must estimate the amount of claims incurred but not reported, and actual results may differ materially.

Our costs of care include estimated amounts for claims incurred but not reported (“IBNR”). The IBNR is estimated using an actuarial paid completion factor methodology and other statistical analyses that we continually review and adjust, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. Our estimates of IBNR may be inadequate in the future, which would negatively affect results of operations. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results may differ materially from the estimated amounts reported.

We may be subject to fines and penalties being assessed to us by our clients or by a regulatory agency.

Many of our contracts contain provisions stating that if our clients are assessed penalties or fines by a regulatory agency due to our noncompliance with a contractual requirement, we will be responsible for paying the assessed fine or penalty. Though to date, no material fines have been assessed under such provisions, any future fines would have a negative impact on our results of operations.

A failure of our information systems would significantly impair our ability to serve our customers and manage our business.

An effective and secure information system, available at all times, is vital to our health plan customers and their members. We depend on our computer systems for significant service and management functions, such as providing membership verification, monitoring utilization, processing provider claims, and providing regulatory data and other client and managerial reports. Although our computer and communications hardware is protected by physical and software safeguards, it is still vulnerable to computer viruses, fire, storm, flood, power loss, telecommunications failures, physical or software break-ins, and similar events. We do not have 100% redundancy for all of our computer and telecommunications facilities. A catastrophic event could have a significant negative effect on our business, results of operations, and financial condition.

We also depend on a third-party provider of application services for our core business application. Any sustained disruption in their services to us would have a material negative effect on our business.

We are subject to intense competition that may prevent us from gaining new customers or pricing our contracts at levels sufficient to achieve gross margins to ensure profitability.

We are continually pursuing new business. Many of our competitors are significantly larger and better capitalized than us, and the smaller size and financial condition of our company has proved a deterrent to some prospective customers. Additionally, we will likely have difficulty in matching the financial resources expended on marketing characteristic of our competitors. As a result, we may not be able to successfully compete in our industry. Our major competitors include Magellan Health Services, United Behavioral Health, ValueOptions, Psychcare, and APS Healthcare.

We will require additional funding, and we cannot guarantee that we will find adequate sources of capital in the future or that we will be able to continue as a going concern.

We cannot assure you that our existing cash and cash equivalents will be sufficient to fund our business. We expect to obtain these funds from operating activities and financing activities that may include equity or debt financing, which could dilute stockholder ownership. We cannot provide assurance that additional funding will be available on acceptable terms, if at all.

Failure to achieve profitable operations and positive cash flows from operations during 2011 would adversely affect our ability to achieve our business objectives and may require us to raise additional funds that may include equity or debt financing. There can be no assurance as to the availability of needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to us. The inability or failure to raise funds before our available cash is depleted will have a material adverse effect on our business and may raise doubt as to our ability to continue as a going concern.

Our ability to utilize net operating loss carryforwards may be limited.

As of December 31, 2010, we had net operating loss carryforwards (“NOLs”), of approximately $25.0 million for federal income tax purposes that will begin to expire in 2022. These NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to

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utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percent over a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of our NOLs before utilization.

We underwent such ownership changes in each of June 2005, January 2007, and January 2009. As a result, our potential current usage of net operating loss carryforwards is limited to approximately $5.9 million. Any future ownership changes may impose the application of another Section 382 limitation on our federal NOLs and can reduce the amount of NOLs we can utilize in a year if the market value of our stock were to decline significantly prior to an ownership change. Such an event may have an adverse impact on our anticipated future cash flow if we have taxable income in the future.

Our sales cycle is long, which complicates our ability to predict our growth.

The sales and implementation process for our services is lengthy and requires us to commit substantial time and other resources to efforts that may or may not yield new business. Our sales cycle has generally ranged from 12 to 18 months from our initial contact to an executed contract. Accordingly, it may be difficult to replace lost business quickly.

We are dependent on a limited number of customers, and a loss or reduction in business of any one could have a material adverse effect on our working capital and results of operations.

For the year ended December 31, 2010, we provided behavioral healthcare services to the members of four health plans under contracts that on a combined basis represented approximately 75% of our managed care operating revenue. The terms of each contract are generally for one or two-year periods and are automatically renewable for additional one-year periods unless terminated by either party by giving the requisite written notice. The loss of one or more of these clients, unless replaced by new business, would negatively affect our financial condition. During 2010, we experienced the loss of a major customer in Michigan, which provided approximately 14% of our managed care operating revenue for 2010.

We may be unsuccessful in obtaining performance bonds or other security that is required by our existing or future clients, and consequently may lose clients.

Some of our clients may require us to maintain performance bonds, restricted cash accounts, or other security with respect to our obligations to pay IBNR claims. Due to current market conditions, we may be unable to provide the security required by our client. This could result in the loss of a client or clients which would negatively affect our financial condition.

We are dependent on our provider network to provide services to our members.

We contract with providers as a means to provide access to behavioral health services for our members. Some providers could refuse to contract with us, demand higher payments, or take other actions which could result in higher healthcare operating expenses. In addition, certain providers may have significant market position, which could cause disruption to provider access in a particular geographic area for our members. Difficulty in negotiating with providers may increase our expenses and negatively affect the contractual requirement with our customers that we maintain an adequate provider network.

Claims brought against us may exceed our insurance coverage.

We maintain a program of insurance coverage against a broad range of risks related to our business. As part of this program of insurance, we are subject to certain deductibles and self-insured retentions. Our insurance may not be sufficient to cover all judgments, settlements, or costs relating to future claims, suits or complaints. Upon expiration of our insurance policies, sufficient insurance may not be available on favorable terms, if at all. If we are unable to secure adequate insurance in the future, this may have a material adverse effect on our profitability and financial condition.

We may be unable to attract and retain qualified personnel.

The success of our business is largely dependent on the skills, experience and performance of key members of our senior management team, such as our CEO and Acting Chief Financial Officer. We believe our ability to attract and retain highly skilled and qualified technical, managerial, and marketing personnel will determine whether we meet our goals. The market for highly skilled sales, marketing and support personnel is highly competitive as a result of

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the limited availability of technically qualified personnel with the requisite understanding of the markets which we serve. The inability to hire or retain qualified personnel may hinder our ability to implement our business strategy and may harm our business.

Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Our expected growth in our operations will place a significant strain on our management, administrative, operational, and financial infrastructure. Our future success will depend in part upon the ability of our management to manage growth effectively. This may require us to hire and train additional personnel to manage our expanding operations. In addition, we will be required to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our growth, we may be unable to execute our business plan and our business and operations may be adversely impacted.

Our profitability could be adversely affected if the value of our intangible assets and goodwill is not fully realized.

Our total assets at December 31, 2010 include goodwill of approximately $12.2 million resulting from our acquisition of Core in January 2009, which represents approximately 83% of our total assets. We completed our annual impairment analysis of goodwill as of December 31, 2010 and noted no impairment.

At December 31, 2010, identifiable intangible assets (customer contracts, provider networks and NCQA accreditation) totaled approximately $0.5 million. These intangible assets are amortized over their estimated useful lives, which we have estimated at approximately three years. The amortization period used may differ from those used by other entities. In addition, we may be required to shorten the amortization period for intangible assets in future periods based on changes in our business. There can be no assurance that such goodwill or intangible assets will be realizable.

We evaluate, on a regular basis, whether for any reason the carrying value of our intangible assets and other long-lived assets may no longer be completely recoverable, in which case a charge to earnings for impairment losses could become necessary. When events or changes in circumstances occur that indicate the carrying amount of long-lived assets may not be recoverable, we assess the recoverability of long-lived assets other than goodwill by determining whether the carrying value of such intangible assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition. Any event or change in circumstances leading to a future determination requiring write-off of a significant portion of unamortized intangible assets or goodwill would adversely affect our profitability.

Changes in, or interpretations of, accounting rules and regulations, such as expensing of stock options or in the accounting for leases, could result in unfavorable accounting charges.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results, and may even retroactively affect previously reported transactions.

We may be subject to litigation by the remaining subordinated debenture holders for which we have not issued senior promissory notes in exchange for their debentures.

We were unable to repay our 7 ¹/2% convertible subordinated debentures in the amount of $2,244,000 of principal or to pay the final interest installment of $84,150 on the debentures’ maturity date of April 15, 2010. However, as of February 28, 2011, we had reached agreement with certain owners of the debentures representing approximately 75%, or $1.7 million, of the debentures to cancel such debentures in exchange for the issuance by us of senior promissory notes, warrants to purchase our common stock, and cash payments of approximately $87,000 in the aggregate. We continue to be in default with respect to approximately $569,000 of the debentures. We may be subject to litigation or other remedies as a result of this default.

Risks related to our industry

Adverse conditions in the global economy could negatively affect our revenues and sources of liquidity.

The financial markets have been recovering slowly with continued diminished liquidity and availability of credit, which has adversely affected our ability to raise additional capital. In addition, reduced economic activity has

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lowered the revenues of the federal government and state governments which could result in reduced payments to our clients for health care coverage programs, including Medicare, Medicaid, and CHIP, which in turn could result in lower revenues being paid to us and adversely affecting our results of operations.

Our existing and potential managed care clients operate in a highly competitive environment and may be subject to a higher rate of merger, acquisition, and regulation than in other industries.

We typically contract with small to medium sized HMOs that may be adversely affected by the continuing efforts of governmental and third-party payers to contain or reduce the costs of healthcare through various means. Our clients may also decide to manage the behavioral healthcare benefits “in-house” and, as a result, discontinue contracting with us. Additionally, our clients may be acquired by larger HMOs, in which case there can be no assurance that the acquiring company would renew our contract. The non-renewal of one or more contracts could adversely impact our business.

Many managed care companies, including 19 of our existing clients, provide services to groups covered by Medicare, Medicaid and/or CHIP programs. Such federal and state controlled programs are susceptible to annual changes in reimbursement rates and eligibility requirements that could ultimately affect companies such as CompCare.

At January 1, 2011, we managed approximately one million lives in connection with behavioral and psychotropic pharmacy management services covered through Medicare programs in Connecticut, Louisiana, and Puerto Rico, CHIP programs in Pennsylvania, Medicaid and CHIP programs in Missouri, Medicare and Medicaid programs in California, Florida, and Michigan, and Medicare, Medicaid and CHIP programs in Texas. Any changes in Medicare, Medicaid, and/or CHIP reimbursement could ultimately affect us through contract bidding and cost structures with the health plans first impacted by such changes. If we are unable to adapt to the differing needs of our Medicare members and the Medicare regulations, we may be unsuccessful in managing this line of business.

Because governmental health care programs account for such a large portion of state budgets, efforts to contain overall government spending could result in a significant decrease in health care programs.

Temporary reductions in state funding have previously had a negative impact on us, and if implemented in the future, could have a material, adverse impact on our operations. In addition, states in which we operate may pass legislation that would reduce our revenue or increase our claims expense through changes in the reimbursement rates, changes in the benefit covered, or in the number of eligible participants. We may be unable to reduce our costs to a level that would allow us to maintain current gross margins specific to our Medicare, Medicaid and CHIP programs.

The industry is subject to extensive state and federal regulations, as well as diverse licensure requirements varying by state. Changes in regulations could affect the profitability of our contracts or our ability to retain clients or to gain new customers.

We are required to hold licenses or certificates to perform utilization review and/or TPA services in California, Connecticut, Florida, Georgia, Indiana, Illinois, Louisiana, Maryland, Michigan, Missouri, Pennsylvania, and Texas. Additional utilization review or TPA licenses may be required in the future, and we may not qualify to obtain new licenses or renew existing licenses. In many states in which we provide services, entities that assume risk under contract with licensed insurance companies or health plans have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure as either an insurer or HMO in any state. If the regulatory positions of these states were to change, our business could be materially affected until such time as we are able to meet the regulatory requirements, if at all. Additionally, some states may decide to contract directly with companies such as ours for managed behavioral healthcare services, in which case they may also require us to maintain financial reserves or net worth requirements that we may not be able to meet. Currently, we cannot quantify the potential effects of additional regulation of the managed care industry, but such costs will have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.

Healthcare reform may significantly reduce our revenues and profitability.

The U.S. Congress passed legislation that, among other things, could limit funding to our clients. We cannot predict the effect of this legislation on our business.

We are subject to federal statutes prohibiting false claims.

The Federal False Claims Act imposes civil penalties for knowingly making or causing to be made false claims with respect to governmental programs, such as Medicare and Medicaid, for services not rendered, or for misrepresenting

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actual services rendered, in order to obtain higher reimbursement. While we do not directly provide services to beneficiaries of federally funded health programs and, accordingly, do not submit claims to the federal government, we do provide services to health plans that could become involved with false claims, which could result in allegations against us as well.

Failure to adequately comply with HIPAA may result in penalties and loss of revenues.

We are subject to the requirements of HIPAA. The purpose of HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and to protect the security and privacy of protected health information. We have implemented policies and practices to achieve compliance with HIPAA, and believe we are fully compliant with all HIPAA regulations. However, any lack of compliance with HIPAA regulations may result in penalties and have a material adverse effect on our ability to retain our customers or to gain new business.

The managed care industry is subject to class action lawsuits and claims for professional liability that could increase our expenditures and have an adverse effect on our profitability and financial condition.

In recent years the managed care industry has been subject to a greater number of lawsuits and claims of professional liability alleging negligence in performing utilization review and other managed care activities and in the denial of payment for services. Such incidents may result in professional negligence or other claims against us causing us to incur fees and expend substantial resources in defense of such actions. Although we maintain professional liability insurance, there can be no assurance that future claims will not have a material effect on our profitability and financial position.

Risks related to our common and preferred stock

Our Series C Convertible Preferred stockholders have significant rights and preferences over the holders of our common stock.

Our Series C Convertible Preferred stockholders are entitled to receive dividends when declared by our Board of Directors before dividends are paid on our common stock. The holders also have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up. The aggregate amount of that senior claim is approximately $3,600,000, which will increase as our preferred stock accrues dividends or if we issue additional shares of such preferred stock. In addition, each Series C Convertible Preferred stockholder is entitled to vote together with the holders of our common stock on an “as converted” basis. The holders of our Series C Convertible Preferred Stock have other rights and preferences, including the following:

These rights and preferences could adversely affect our ability to finance future operations, satisfy capital needs or engage in other business activities that may be in our interest.

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If issued, holders of our Series D Convertible Preferred Stock would have significant rights and preferences over the holders of our common stock.

As of December 31, 2010, warrants were outstanding and exercisable allowing the purchase of 390 shares of our Series D Convertible Preferred Stock. If exercised, the holders of our Series D Convertible Preferred stock would have rights and preferences subordinate to the holders of our Series C Preferred Stock but senior to the holders of our common stock. Such preferences would include the right to receive dividends prior to the holders of the common stock, paid at an amount equal to 50% of the dividend declared with respect to each common share and multiplied by 100,000, the number of common shares into which each Series D Convertible Preferred share is entitled to convert. In addition, the Series D Convertible Preferred Stock will have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up. Each Series D Convertible Preferred stockholder would additionally be entitled to vote together with the holders of our common stock. If issued, each Series D Convertible Preferred share (which is convertible into 100,000 shares) 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 common shares. As of December 31, 2010, no shares of our Series D Convertible Preferred Stock were issued.

The price of our common stock may be adversely affected by our small public capitalization.

The size of our public market capitalization is relatively small, and the volume of our shares that are traded is low. These factors could cause significant fluctuation in the trading of our stock, which may adversely affect the price and volatility of our common stock.

We may experience fluctuations in our quarterly operating results, which would cause our stock price to decline.

Our quarterly operating results have varied in the past and may fluctuate significantly in the future due to seasonal changes in utilization levels, changes in estimates regarding IBNR claims, the timing of implementation of new contracts, the termination of existing contracts, and enrollment changes. These factors may affect our quarterly and annual net revenue, expenses, and profitability in the future, and consequently we may fail to meet market expectations, causing our stock price to decline.

Shares reserved for future issuance upon the conversion of our preferred stock, subordinated debentures, options, warrants, and convertible promissory notes will cause dilution to our common stockholders.

As of December 31, 2010, 54,387,172 shares of our common stock were reserved for the potential conversion of our Series C and Series D Convertible Preferred Stock, subordinated debentures, and convertible promissory notes. In addition, 39,140,918 shares of our common stock were reserved for the possible exercise of stock options and warrants and for the future issuance of options under existing stock option plans. Given that 54,359,784 shares of our common stock were outstanding at December 31, 2010, our stockholders would experience significant dilution of their investment upon conversion or exercise of these securities.

Errors in estimates may have a significant negative impact on our financial condition and results of operations.

Assumptions relating to certain business, accounting and financial estimates involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our budgets which may in turn affect our results. In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

We incur costs as a result of being a publicly-traded company.

As a publicly-traded company, we incur legal, accounting, and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, and other rules implemented by the SEC and the Financial Industry Regulatory Authority.

We may raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.

To fund acquisitions, sales expansions and our operations, we may raise additional capital in the future through sales of shares of our common stock or securities convertible into shares of our common stock, as well as issuances of

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debt. Such additional financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuances of shares of our common stock or securities convertible into shares of our common stock, the ownership of existing stockholders will be diluted. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.

We are not subject to certain of the corporate governance provisions of the Sarbanes-Oxley Act of 2002 and, without voluntary compliance with such provisions, neither you nor the Company will receive the benefits and protections they were enacted to provide.

Since our common stock is not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance rules established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002. These rules relate to independent director standards, director nomination procedures, audit and compensation committees standards, the use of an audit committee financial expert and the adoption of a code of ethics.

While we intend to file an application to have our securities listed for trading on a national securities exchange in the future that would require us to fully comply with those obligations, we cannot assure you that we will file such an application, that we will be able to satisfy applicable listing standards, or, if we do satisfy such standards, that we will be successful in receiving approval of our application by the governing body of the applicable national securities exchange.

Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price of our common stock.

Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock may be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

Our common share price may subject us to securities litigation.

The market for our common stock is characterized by significant price volatility when compared to other issuers, and we expect that our share price will continue to be volatile for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

Our stock price may be volatile, which may result in losses to our stockholders.

Stock markets are susceptible to significant price and trading volume fluctuations, and the market prices of companies listed on the OTC Bulletin Board® (“OTCBB”) have been especially volatile in the past. The trading price of our common stock is likely to be volatile and could fluctuate widely in response to many of the following factors, some of which are beyond our control:

Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock.

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A significant portion of our total outstanding shares of common stock may be sold in the market in the near future.

As of December 31, 2010, approximately 39.7 million or 73% of our registered securities are beneficially owned by eight persons. Sales of substantial amounts of these securities, when sold, could reduce the market price of our common stock. This could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market of such sales, may have a material adverse effect on the market price of our common stock.

We do not own any real property. We lease our Tampa corporate office, Puerto Rico 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 & Puerto Rico offices. The following table sets forth certain information regarding our leased properties as of December 31, 2010. 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.

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PART II

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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period November 15, 2010 (the filing date of our filing with the SEC within which unregistered sales were previously reported) to March 15, 2011, we sold and issued shares of our common stock and issued warrants to purchase shares of our common stock in private placements not involving a public offering as follows:

Based on certain representations and warranties of the purchasers in their respective subscription agreements, we relied on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), for an exemption from the registration requirements of the Securities Act for the sales and issuances described above. These shares, and the shares underlying the warrants, have not been registered under the Securities Act and may not be sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. No underwriting discounts or commissions were given or paid in connection with the sales described above. We intend to use the net proceeds from the sales and issuances described above for product and sales expansion and for working capital purposes.

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The selected consolidated financial data that follows should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report.

No dividends were paid during any of the periods presented above.

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This report includes forward-looking statements, the realization of which may be impacted by certain important factors discussed previously under Item 1A, “Risk Factors.”

OVERVIEW

CompCare manages the delivery of a continuum of behavioral healthcare, substance abuse, and psychotropic drug management 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 by unrelated contracted providers on a fee for service or subcapitated basis.

RESULTS OF OPERATIONS

Recent Developments

New Business

During the first three months of 2011, we added approximately 124,000 lives to our managed behavioral health care membership through the addition of one new client and by way of our existing clients’ expansion. Services will be provided on an at-risk and ASO basis to health plans serving Medicare and Healthy Kids members.

Contract Termination

On March 22, 2011, we provided notice of early contract termination to a customer for which we are currently furnishing behavioral healthcare services on an at-risk basis to approximately ninety-two thousand (92,000) CHIP and Medicaid members. We exercised our right to terminate without cause as contained in our agreement with the customer. We believe that termination without cause was in the best interest of the Company. This contract began in April 2010 and accounted for 11.7%, or $4.1 million, of our revenues during the year ended December 31, 2010. However, it also accounted for a gross margin loss of approximately $1.1 million. Although the customer has increased benefits to its members, it has thus far refused our request for a capitated rate adjustment. We do not believe that the termination of this contract will have an adverse effect on our ability to achieve overall profitability. The contract provides that when the contract is terminated without cause prior to twelve (12) months from the initial effective date, we are entitled to a “breakage fee equivalent to two months capitation costs,” or approximately $1 million. We have notified the customer that we expect the “breakage fee” to be paid by April 10, 2011.

Financial Performance Summary

The following table sets forth our operating results from continuing operations comparing the combined operating results of Core and CompCare for the year ended December 31, 2010 and 2009 to the operating results of the predecessor company, CompCare, for the year 2008 (amounts in thousands):

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RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31, 2010 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2009.

Operating revenues from at-risk contracts increased by 114.3%, or $12.5 million, to $23.5 million for the year ended December 31, 2010 compared to $11.0 million for the year ended December 31, 2009. The increase is primarily attributable to the addition of three major customer contracts accounting for $10.1 million in revenue, as well as additional business from two existing customers of approximately $1.7 million. Revenue from ASO contracts decreased by 3.3%, or approximately $78,000, to $2.3 million for the year ended December 31, 2010, due primarily to the loss of one ASO contract with revenues of approximately $1.4 million, offset by the addition two new ASO clients with associated revenues of approximately $1.1 million. Pharmacy revenue increased to $9.4 million for the year ended December 31, 2010 from $0.8 million for the year ended December 31, 2009, attributable primarily to the Puerto Rico contract that started September 18, 2010, which combines psychotropic drug management services with traditional behavioral managed care.

Claims expense on at-risk contracts increased by approximately 114.3%, or $9.6 million, for the year ended December 31, 2010 as compared to the year ended December 31, 2009, due to the addition of three major customer contracts described above. Claims expense as a percentage of at-risk revenues was 76.5% for each of the years ended December 31, 2010 and 2009. Pharmacy expense of $9.7 million for the year ended December 31, 2010 represents the cost of behavioral prescription drugs attributable to contracts in Puerto Rico. Pharmacy expense as a percentage of pharmacy revenue was 101.5% for 2010 compared to 102.7% for 2009. Other healthcare operating expenses, attributable to servicing both at-risk contracts and ASO contracts, increased by 41.3%, or approximately $1.7 million, due primarily to the costs associated with contracts added in 2010, such as salaries, employee benefits and external medical case review fees. Other healthcare operating expenses as a percentage of total operating revenues was 16.8% for 2010 compared to 29.6% for 2009. Overall, gross margin increased by $0.9 million from $0.7 million for the year ended December 31, 2009 to a gross profit of $1.6 million for the year ended December 31, 2010 due to the expiration of contracts with high utilization of behavioral services.

General and administrative expenses incurred in 2010 did not change materially when compared to those of 2009. However, general and administrative expense as a percentage of total operating revenues decreased from 68.4% for the year ended December 31, 2009 to 27.8% for the year ended December 31, 2010 due to the higher revenues in 2010. Depreciation and amortization increased by $84,000 from $0.7 million for the year ended December 31, 2009 to $0.8 million for the year ended December 31, 2010 due to expenditures for software, hardware, furniture and equipment to establish an office in Puerto Rico.

Equity based expenses of $2.1 million are comprised of $0.9 million of expense recognized upon the issuance of stock and warrants to executive and non-executive employees, $0.9 million of expense for the issuance of a warrant to a customer, and $0.3 million of expense related to the issuance of stock, options and warrants to outside consultants.

Overall, our operating loss decreased approximately 42.5%, or $8.2 million, for the year ended December 31, 2010 compared to the year ended December 31, 2009.

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.

Claims expense on at-risk contracts decreased by approximately 72.5%, or $22.1 million, for the year ended December 31, 2009 as compared to the year ended December 31, 2008, due to the expiration of the two major customer contracts described above. Claims expense as a percentage of at-risk revenues decreased from 89.4% for the year ended December 31, 2008 to 76.5% for the for the year ended December 31, 2009 due to high medical loss

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ratios experienced from serving the members of these expired contracts. Other healthcare operating expenses, attributable to servicing both at-risk contracts and ASO contracts, decreased by 30.1%, or approximately $1.8 million, due primarily to the elimination of costs associated with contracts that expired in 2008, such as salaries and external medical case review fees. Pharmacy expense of $0.8 million for the year ended December 31, 2009 represents the cost of behavioral prescription drugs attributable to a new contract. Overall, gross margin increased by $2.1 million from a loss of $1.3 million for the year ended December 31, 2008 to a gross profit of $0.7 million for the year ended December 31, 2009 due to the expiration of contracts with high utilization of behavioral services.

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.

During the year ended December 31, 2009, we incurred $0.6 million of merger related costs, consisting mainly of financial advisory fees and legal fees. Equity based expenses of $8.9 million are comprised of $8.1 million of expense recognized upon the issuance of the warrants to executive employees, $0.1 million of expense related to the issuance of common stock to an employee pursuant to an employment agreement, $0.1 million of expense due to the early vesting of stock options as a result of the change in control, and $576,000 of expense related to the issuance of stock and warrants to outside consultants.

In summary, our operating loss increased to $19.3 million for the year ended December 31, 2009, an increase of $14.1 million over that for the year ended December 31, 2008.

EFFECTS OF INFLATION

To minimize the effect of inflation, some of our multi-year revenue contracts contain provisions for annual rate increases that average approximately three percent per year. Our largest expense, the cost of care provided by our contracted providers, is frequently tied to standard Medicaid, CHIP, and Medicare reimbursement rates set by governmental entities. To the extent these standard rates are periodically increased to reflect the effects of inflation, we may be adversely affected by rising prices, absent a sufficient compensating increase in our revenues from our customers.

SEASONALITY OF BUSINESS

Historically, we have experienced increased member utilization during the months of March, April and May, and consistently low utilization by members during the months of June, July, and August. Such variations in member utilization 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.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

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

Our external sources of funds consist primarily of borrowings, lease financing, and the use of our common stock as a form of liquidity:

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Borrowings. We have used on an as-needed basis unsecured loans from individuals and companies to meet on-going working capital needs. The duration of the borrowings has ranged from one week to three years, with stated interest rates ranging from 7% to 24%. Certain of the loans have contained features such as the ability to convert all or a portion of the loan into our common stock, or have had a warrant for the purchase of our common stock issued in conjunction with the loan, or both. During the twelve months ended December 31, 2010, we obtained approximately $3.6 million in loans to fund our operations, of which $1.7 million had been repaid at December 31, 2010. Repayments of borrowings were made with cash generated from operations and new borrowings. Future repayments are expected to be made from similar sources.

A further source of liquidity via borrowing is the renegotiation of a portion of our convertible subordinated debentures that were due in full on April 15, 2010. We were not able to repay the debentures on the due date, but as of February 28, 2011, have converted approximately $1.7 million, or 75%, of the outstanding debentures to three-year senior promissory notes with a fixed interest rate of 10%. In connection with issuing the senior promissory notes, we also issued warrants to purchase an aggregate of approximately 7.0 million shares of our common stock, each exercisable at a price of $0.25 and with a five year term.

Lease Financing. Liquidity has also been provided by the use of lease financing to acquire capital equipment. The leases are secured by the equipment acquired, have implied interest rates ranging from 13.4 to 18.6% and have 36 and 48 month terms. During the twelve months ending December 31, 2010, we financed through capital leases the acquisition of approximately $424,000 of software and equipment.

Sales of common stock. We periodically sell our common stock in private placements. The funds from such sales have been used for working capital purposes. During the twelve months ended December 31, 2010, we raised approximately $1.5 million through the sale of our common stock.

Use of common stock in lieu of cash. Certain vendors and note holders have accepted our common stock as payment for services, interest and debt. During the twelve months ended December 31, 2010, we avoided cash outlays of approximately $2.4 million for services, interest and debt repayment by issuing our common stock.

Our ability to continue to borrow funds on an unsecured basis or on a secured basis is unknown, as well as our ability to sell our common stock in private placements. With the exception of contracted maturities of debt, there are no other known future liquidity commitments or events. We do not have any off-balance sheet financing arrangements.

LIQUIDITY AND MANAGEMENT PLANS REGARDING GOING CONCERN

During the year ended December 31, 2010, net cash and cash equivalents decreased by $131,000. Net cash used in operations totaled $3.0 million, attributable in part to expenditures to increase the size of our employee base to accommodate our growth and anticipated growth. Cash used in investing activities is comprised primarily of $135,000 for the acquisition of the non-controlling interest of our Puerto Rico subsidiary and $294,000 in additions to property and equipment. Cash provided by financing activities consists primarily of approximately $1.5 million in net proceeds from the issuance of common stock, and approximately $3.6 million in proceeds from the issuance of note obligations, offset by approximately $1.8 million in debt repayments.

At December 31, 2010, cash and cash equivalents were approximately $563,000. We had a working capital deficit of approximately $18.3 million at December 31, 2010 and an operating loss of approximately $11.1 million for the year ended December 31, 2010. We believe that with our existing contracts plus the addition of expected new contracts we are seeking, we will be able to reduce our operating losses and sustain our current operations over the next 12 months. We are also looking at various sources of financing for expansion purposes and to also cover the possibility that operations cannot support our ongoing plan; however, there can be no assurances that we will be able to obtain such new contracts or obtain financing. Failure to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during 2011 would adversely affect and jeopardize our ability to achieve our business objectives and continue as a going concern. Although management believes that our current cash position plus the expected new contracts will be sufficient to meet our current levels of operations, additional cash resources may be required if we do not meet our sales targets, cannot refinance our debt obligations, exceed our projected operating costs, incur unanticipated expenses, or wish to accelerate sales or complete one or more acquisitions. We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution. There are no assurances that we will not require additional financing or that we will be able to refinance our existing debt obligations in the event such refinancing should be needed or advisable.

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Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and may impact our ability to achieve and sustain profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results could differ from the $7.9 million claims payable amount reported as of December 31, 2010.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2010 and 2009, the Company did not have any off-balance sheet arrangements.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The following is a schedule of our contractual commitments as of December 31, 2010, future minimum lease payments under non-cancelable operating lease arrangements, and other obligations:

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements, most notably our estimate for claims IBNR. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe our accounting policies specific to our revenue recognition, accrued claims payable 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).

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REVENUE RECOGNITION

We provide managed behavioral healthcare, substance abuse, and psychotropic pharmacy management 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 may experience adjustments to our revenues to reflect changes in the number and eligibility status of members subsequent to when revenue is recognized. Subsequent adjustments to our revenue have not been material in the past.

ACCRUED CLAIMS PAYABLE AND CLAIMS EXPENSE

Our cost of care consists of three components: claims expense, pharmacy expense, and healthcare operating expense. Claims expenses are amounts paid to hospitals, physician groups and other managed care organizations under at-risk contracts. Pharmacy expense represents the costs of psychotropic drugs. Healthcare operating expense includes the costs of information systems, case management and quality assurance, which are attributable to both at-risk and ASO contracts.

We do not need to make significant estimates in recognizing pharmacy expense or healthcare operating expense in our financial statements as this information is readily available to us on a monthly basis.

Claims expense is recognized 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, per diem, 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 $7.8 and $7.9 million at December 31, 2010, between $4.6 and $4.7 million at December 31, 2009 and between $6.4 and $6.9 million at December 31, 2008. Based on the information available, we determined our best estimate of the accrued claims liability to be $7.9 million, $4.7 million and $6.8 million at December 31, 2010, 2009 and 2008, respectively. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three years.

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The following table provides a reconciliation of the beginning and ending balance of accrued claims payable for the years ended December 31, 2010, 2009 and 2008:

Changes in prior year claims expense were primarily due to the reversal in 2010 of $1.4 million of claims expense for an expired contract due to a legal settlement, as well as 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, 2010, 2009 and 2008 is comprised of approximately $3.0 million, $2.7 million and $1.6 million, respectively, of submitted and approved claims which had not yet been paid, and $4.9 million, $2.0 million and $5.2 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: