Advanzeon Solutions, Inc. - Annual Report: 2011 (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, 2011

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  x    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, 2011 was approximately $6,263,728 based on the closing price of $0.31 of the common stock on June 30, 2011, as reported on the Over-The-Counter Bulletin Board. This amount excludes approximately 35.6 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 27, 2012, the Registrant had 59,251,836 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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PART I

ITEM 1. BUSINESS

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 healthcare costs, growth and expansion, and the ability to obtain new behavioral healthcare or pharmacy management 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, our 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 (“CompCare”, “we” or the “Company”), provides managed care services in the behavioral health, substance abuse, and psychotropic pharmacy management fields. We primarily provide these services to commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) health plans. 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 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 35,000 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.

The Company prides itself on providing personalized attention, a commitment to high-quality services, and innovative approaches to behavioral health and pharmacy management 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.

MARKET OPPORTUNITIES

CompCare markets to regional health plans that do not have their own behavioral health network. These health plans will often 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 health plans typically engage an MBHO like CompCare 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. 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:

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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 treatment facilities.

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 our 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 by our contract at the beginning of its term. Under certain circumstances, these premiums may be subsequently adjusted up or down, or the contract terminated, generally at the commencement of each renewal period.

The following table sets forth our managed care revenue, segregated by category, for the years ended December 31, 2011 and 2010:

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 and pharmacy drugs that we provide, which is based primarily on our arrangements with healthcare providers. Since we are subject to increases in healthcare operating costs based primarily on an increase in the number and frequency of our members seeking behavioral care services, but also inflationary

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factors, our profitability depends on our ability to predict and effectively manage healthcare operating costs 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 control or otherwise anticipate healthcare costs. Accrued claims payable and claims expense are our most significant critical accounting estimates. 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 23 states, the District of Columbia and Puerto Rico. Our objective is to provide easily accessible, high quality behavioral healthcare and pharmacy services and products and to manage costs through measures such as the monitoring of hospital inpatient admissions, review of authorizations for various types of outpatient therapy and effective management of prescriptions for psychotropic drugs. 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.

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 health plans that have historically outsourced these functions to MBHOs 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 discounted fees at predetermined per-service, per-case or per-diem rates.

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 2011, 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, CHIP patients in Pennsylvania, and commercial patients in Wisconsin. Such services generated approximately 96% of our managed care operating revenue.

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

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Almost 68% of our operating revenue is currently concentrated in a single contract with one health plan in Puerto Rico to provide behavioral healthcare and psychotropic pharmacy management services under a Medicare plan. The term of this contract is for a two-year and three month period, as amended, and is automatically renewable for additional one-year periods unless terminated by either party. The loss of this client, without replacement by new business, may adversely impact our financial results.

A quantitative summary of our revenues by source category for 2011 and 2010 follows:

Under our at-risk contracts, we assume the financial risk for the costs of member behavioral healthcare services in exchange for a fixed, per member per month fee. Under our ASO only contracts, we may manage behavioral healthcare programs or perform various managed care functions, such as clinical care management, provider network development and claims processing without assuming financial risk for member behavioral healthcare costs. Under our pharmacy contracts, we manage behavioral pharmaceutical services for the members of health plans on an at-risk or ASO basis. Other revenues represent commissions earned through the sale of durable goods.

GROWTH STRATEGY

CBC has many years of experience in the MBHO field serving health plans with unique and innovative programs addressing behavioral wellbeing and pharmacy management. The continued consolidation of the behavioral healthcare 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 and identifying new business development partners. We have expanded our specialty management products to include management of prescription drugs on an at-risk basis for health plans. 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 and pharmacy management services, primarily to health plans. 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 $555 billion in 2011 to $903 billion in 2020. Enrollment in Medicare Advantage Plans, which comprise approximately 46% of our covered lives as of December 31, 2011, reached 25% of all Medicare beneficiaries in 2011 and is expected to increase. 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.

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. One example of developing a customer solution is our pharmacy analytics program. Sales are highly technical and complex, involving many stakeholders within an organization. The sales and implementation process of our services is lengthy and requires us to commit substantial time and other resources to our marketing efforts. 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.

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PROVIDER NETWORK

As of March 26, 2012, we had over 35,000 behavioral healthcare practitioners in our network located in 46 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.

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 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 health plans 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 such as management of prescription drugs on an at-risk basis.

EFFECTS OF INFLATION AND CHANGES IN INTEREST RATES

Our business operations are subject to the effects of inflation, particularly as to the types of healthcare costs we cover on an at risk basis. However, 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 increased periodically 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. Although currently all our debt instruments bear fixed interest rates, we have historically funded our operations with increased borrowings annually and, thus, unless we are successful in raising sufficient additional equity capital, we will be subject to the effects of changing interest rates so long as our operations are not self sustaining.

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SEASONALITY OF BUSINESS

Historically, we have experienced increased member utilization principally 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 an adverse impact on our gross margins and operating profits during the months of March through May.

GOVERNMENT REGULATION

At March 26, 2012, we managed approximately 965,000 lives in connection with behavioral, substance abuse, and psychotropic pharmacy management services covered through government programs such as Medicare, Medicaid, and CHIP programs in 22 states, the District of Columbia and Puerto Rico.

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. As of March 26, 2012, we hold licenses or certificates to perform utilization review and/or third party administrator (“TPA”) services in:

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 health maintenance organization (“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 2011, we were awarded Full Accreditation by NCQA extending until October 2014. 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.

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

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 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.

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 Puerto Rico office and by employees located in Michigan. As of March 26, 2012, we employed 122 full-time employees and 13 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

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ITEM 1A. RISK FACTORS

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, and its future financial condition, results of operations and cash flows could be harmed, the price of our common stock could decline, and future events and circumstances could differ significantly from those expected that are set forth in or underlie the forward-looking statements contained in this report.

Risks related to our industry

Adverse conditions in the U.S. and global economies could negatively affect our revenues and sources of liquidity.

The financial markets have been recovering slowly from a U.S. and worldwide recession with continued diminished liquidity and availability of credit, which has adversely affected our ability to raise additional capital. In addition, reduced economic activity has lowered the revenues of the federal and state governments which could result in reduced payments to our clients for healthcare coverage programs, including Medicare, Medicaid, and CHIP.

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 meet or net worth requirements that we may not be able to meet. Currently, we cannot quantify the potential effects of additional regulation, if any, of the managed care industry.

The status and future effect of healthcare reform in the U.S. is uncertain.

The Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 contain provisions that may, among other things, reduce government payments for healthcare services, and is currently subject to political controversy and significant uncertainty. 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 actual services rendered, in order to obtain higher reimbursement. Although 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 subject to allegations about false claims, which could, in turn, result in allegations against us as well.

Failure to adequately comply with HIPAA may result in penalties.

Our industry is subject to the security and privacy requirements of HIPAA relative to patients’ health information. Although we believe we are fully compliant with all HIPAA regulations, any assertions of lack of compliance with HIPAA regulations could 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 often subject to class action lawsuits and claims for professional liability that could increase our future costs and expenses.

In recent years, the managed care industry has been subjected to a greater number of lawsuits and claims of professional liability alleging negligence in performing utilization review and other managed care activities and for 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 in excess of the limits of our professional liability insurance.

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Healthcare organizations could be adversely affected by 2013 by costs associated with adoption of new federally mandated ICD-10 standardized coding set for diagnoses.

The federal government will require that healthcare organizations adopt updated and expanded standardized code sets (known as ICD-10) to be used by 2013 for documenting health diagnoses. These new standardized code will require us to make additional investments that could be significant.

Risks related to our business

In addition to all of the foregoing general industry-related risks that may affect our business, we are also subject to the following more particular risks:

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.

Our clients may decide to manage the behavioral healthcare benefits “in-house” and, as a result, discontinue contracting with us. Additionally, our small to medium-sized health plan clients may be acquired by larger health plans, resulting in non renewals of our contracts.

Many of our 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.

At December 31, 2011, we managed approximately 902,000 lives for 16 clients in connection with behavioral, substance abuse, and psychotropic pharmacy management services covered through Medicare, Medicaid, and CHIP programs in 18 states, the District of Columbia and Puerto Rico. Any changes in Medicare, Medicaid, and/or CHIP reimbursement could ultimately affect us adversely through contract bidding and cost structures with the health plans affected by such change, especially if we are unable to adapt to the differing needs of our Medicare members and the Medicare regulations. Also, because governmental healthcare programs account for such a large portion of state budgets, efforts to contain overall government spending could result in a significant decrease in healthcare programs.

Temporary reductions in state funding for Medicare, Medicaid and CHIP programs have previously had an adverse impact on us that could continues. In addition, states in which we operate may pass legislation that would further reduce our revenue from such sources 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.

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

A substantial portion of our services are provided on an at-risk capitation basis for costs incurred to provide agreed-upon levels of service. This exposes us to significant risk that contracts negotiated and entered into may ultimately be unprofitable if utilization levels require us to provide services at costs that exceed the capitation rates we receive for the covered services. Failure to adequately anticipate costs at contact signing or renewal or control cost increases could have material, adverse effects on our business.

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 inappropriately.

Premium payments that we receive and claims payments that we make are based on eligibility lists that are produced and maintained by our clients. We are required to reimburse our clients for premiums received based on an eligibility list that the client may later discover 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 and for which we are unable to recover.

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 healthcare services.

We must estimate the amount of claims incurred but not reported, and actual claims ultimately reported may differ materially.

Our costs of care include estimated amounts for claims incurred but not reported (“IBNR”). These estimates are subject to the effects of trends in utilization and other factors and at times may be inadequate.

We may be subject to regulatory fines and penalties.

Many of our contracts contain provisions stating that we are responsible for regulatory penalties or fines assessed to the client that is due to our noncompliance with a contractual requirement.

A failure of our information systems could 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 and other technological threats, fire, storm, flood, power loss, telecommunications failures, or physical break-ins, and similar catastrophic events. We do not have 100% redundancy for all of our computer and telecommunications facilities. 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 we are. (Our major competitors include Magellan Health Services, United Behavioral Health, ValueOptions, Psychcare, and APS Healthcare) Our smaller size and financial condition has been a deterrent to some prospective customers. Additionally, we will likely have difficulty in matching the financial resources expended by larger competitors on marketing. As a result, we may not be able to successfully compete in our industry in some respects or instances.

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

We cannot provide assurance that our available cash will be sufficient to fund our business. Although we currently expect to obtain the needed funds from operating activities, which cannot be assured and new financing, possibly including, which cannot be assured additional debt or equity or financing (which could dilute stockholder ownership interests), we also cannot provide assurance that such additional funding will be available on acceptable terms, if at all. Failure to achieve these goals may affect our ability to continue as a going concern. (See also Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources, below.)

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We may be unsuccessful in obtaining required performance bonds or other security, 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 or other factors, we may be unable to provide the security required by the client or prospect.

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 than we are willing or able to make, or take other actions which could result in higher healthcare costs. In addition, we may not have access to sufficient providers in a particular geographic area to provide adequate coverage for our members to meet our marketing objectives or contractual obligations.

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 limits or covered risks may not be sufficient to cover all judgments, settlements, or costs relating to future claims, suits or complaints. In addition, upon expiration of our insurance policies, we could find that sufficient insurance is not available on acceptable terms, if at all.

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, President, 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 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.

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.

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 and 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 $2,608,500. 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 as detailed elsewhere in this report. 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.

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

As of February 29, 2012, 76,532,496 shares of our authorized but unissued common stock were reserved for the potential conversion of our Series C and Series D Convertible Preferred Stock now outstanding or to be issued, subordinated debentures, and convertible promissory notes. In addition, 54,428,251 shares of our common stock were reserved for the possible exercise of warrants and stock options that are not outstanding or may be issued in the future under existing stock option plans.

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. Such additional financing may be dilutive to our stockholders, and debt financing, if available, may involve significant interest costs and/or restrictive covenants which may limit our operating flexibility.

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We are not subject to certain provisions of the Sarbanes-Oxley Act of 2002 and other requirements of the federal securities laws and regulations, and accordingly neither the Company nor its investors may receive the benefits and protections they were enacted to provide.

As a smaller reporting entity, and since our common stock is not listed for trading on a national securities exchange, we are not subject to certain of requirements of the federal securities laws and regulations, including, but not limited to many disclosure requirements of Regulation S-X, certain corporate governance rules and other provisions of the Sarbanes-Oxley Act of 2002 , including Section 404(b), which requires an independent auditors’ report on the Company’s internal control over financial reporting. The corporate governance 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, some of which we comply with voluntarily in some respects.

Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which, along with our small public capitalization may affect the trading price of our common stock and may subject us to securities litigation.

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. In addition, the size of our public market capitalization is relatively small, resulting in highly limited trading volume in, and high volatility in the price of, our common stock.

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. Accordingly we could be the target of similar litigation in the future. Securities litigation, if it were to occur, would likely result in substantial costs and divert management’s attention and other Company resources.

ITEM 2. PROPERTIES

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, financial and regulatory reporting and other management information systems, and provider and member service functions. Provider service, account management, and certain clinical functions are also performed in our Puerto Rico office. Our Texas office is primarily used for sales and marketing purposes. Future payments under noncancelable leases for office space are included in Note 7 to our consolidated financial statements included in Item 8 of Part II herein. 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.

ITEM 3. LEGAL PROCEEDINGS

In addition, in July 2011, the District Court awarded Mr. Katzman approximately $582,000 as reimbursement of his legal fees and costs, and payment of prejudgment interest on the damage award of $1.3 million. In response, the Company in August 2011 filed a Notice of Appeal, posted a collateralized appeal bond for approximately $582,000, and filed a motion for reconsideration. The appeal is set to be heard in May 2012.

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Management believes that the Company has made adequate provision for the minimum estimated probable losses, if any, including legal defense costs, from the litigation described above. Management also believes that the resolution of these matters will not have a material adverse effect on the Company’s future financial condition or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY. RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period October 1, 2011 to March 15, 2012, we issued options and warrants to purchase shares of our common stock in private placements not involving a public offering as follows:

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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.

ITEM 6. SELECTED FINANCIAL DATA

Not Applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes forward-looking statements, the realization of which may be affected by certain important factors discussed previously above 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, Medicaid, and CHIP members on behalf of health plans. Our managed care operations include at-risk contracts, administrative service agreements, and fee-for-service agreements. The customer base for our services is primarily health plans that contract with governmental entities. Our clinical services are provided by unrelated contracted providers on a fee for service or subcapitated basis.

Recent Developments

Rate Increase – Major Contract

On March 5, 2012, we entered into an amendment of our major Puerto Rico contract which provided approximately 68% of our operating revenue during 2011 and under which we provide mental health, substance abuse treatment, and pharmacy management services. Pursuant to the amendment, the original contract term was extended to December 31, 2012 and the current contract rate for pharmacy management services was increased by approximately 11% effective January 1, 2012.

Increase in Authorized Common Shares

Effective January 13, 2012, we increased the number of authorized shares of our common stock that we may issue from 200,000,000 to 500,000,000, based on an affirmative vote by written consent of a majority of our shareholders held in November 2011.

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New Business

On March 1, 2012, we began supplying behavioral health services on an at-risk basis to approximately 7,000 members of a Texas health plan that serves Medicaid and CHIP beneficiaries.

Effective January 1, 2012, we began providing behavioral health services integrated with a specialized pharmacy management program for psychotropic drugs to approximately 39,000 members of a Medicare Advantage population serviced by a health plan in the states of Missouri and Washington. Services will be provided on an at-risk basis.

Pharmaceutical Drug Management Initiative

We have recently launched an effort to expand our drug management program. We will offer to manage on an at-risk basis prescription drugs dispensed to members of health plans. We believe we can reduce drug costs for our clients that utilize our program.

New President

On November 6, 2011, our Board of Directors approved the appointment of Robert R. Kulbick, age 63, to serve as President of the Company. Although Mr. Kulbick has not entered into a written employment agreement with the Company, it is intended that he will receive an initial salary of $300,000 per year. In connection with his hiring, Mr. Kulbick also received a stock option to purchase 300,000 shares of the Company’s common stock and a $50,000 signing bonus. Mr. Kulbick will report to the Chairman and Chief Executive Officer, Clark A. Marcus.

Program to Address Clinical Depression Resulting from Chronic Back Pain

To address the link between chronic back pain and clinical depression, we initiated a program to make available to the members we serve lumbar traction belts designed to alleviate, or ameliorate to a substantial extent, lower back pain. We signed an agreement to function as a distributor of the braces, which are lightweight ambulatory support devices that offer a high degree of mobility and can be worn under clothing while a person progresses through their daily activities.

NCQA Accreditation

We received notice in October 2011 that CBC had earned a three-year Full Accreditation by the NCQA. According to NCQA guidelines, a three-year Full Accreditation is the highest rating that can be achieved and is granted only to those organizations that meet NCQA’s rigorous standards for continuous quality improvement. NCQA accreditation is required by several of our client contracts and is frequently an important consideration to our prospective clients. CBC’s accreditation extends until October 2014.

Financial Performance Summary

RESULTS OF OPERATIONS 2011 AS COMPARED TO 2010.

Revenues.

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Costs of revenues.

Interest Expense. Interest expense, excluding amortization of debt discount, increased by approximately $100,000 in 2011 compared to 2010 due to an increase in the weighted average amount of debt financings from $5.9 million in 2010 to $6.5 million in 2011. The effective interest rate, excluding amortization of debt discount, for both 2011 and 2010 was approximated 16.9%.

Income taxes. See Note 9 to our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

During 2011, net cash increased by $269,000. Company operations resulted in a net outflow of cash of approximately $4.0 million. Cash provided by financing activities consists primarily of approximately $1.0 million in net proceeds from the issuance of common stock, and approximately $4.0 million in proceeds from the issuance of note obligations, offset by approximately $0.4 million in debt repayments.

At December 31, 2011, we had a working capital deficiency of approximately $25.5 million, including $2.5 million of debt that was past due and, therefore, in default, and a stockholders’ equity deficiency of approximately $16.5 million resulting from a history of operating losses. In their report on our 2011 financial statements, our auditors indicated that these conditions raise substantial doubt as to our ability to continue as a going concern.

We expect that with our existing customer contracts, plus the addition of new contracts we are close to obtaining through our marketing efforts, including the launch of our new pharmacy management programs (see GROWTH STRATEGY under Item 1, above), and the expected continuing financial support from our major stockholders and bond holders, that we will be able to improve our cash flows and operating results and sustain current operations over the next year. We are looking at various alternative or additional sources of financing if operations cannot support our ongoing plan. Nevertheless, there can be no assurance that we will be able to find such financing in amounts or on terms acceptable to us, if at all, or that our stockholders and bond holders will continue to provide financial support. Although subject to the risks and uncertainties discussed previously in Item 1A “Risk Factors” and in the following paragraph, management believes that our current cash position plus the expected continued support of our major stockholders and bond holders will likely be sufficient to meet our current levels of operations. However, failure to obtain sufficient debt or equity financing, or any required support from our stockholders and bond holders, and, ultimately, to achieve profitable operations and positive cash flows from operations during 2012 would adversely affect our ability to achieve our business objectives and continue as a going concern.

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The United States and other parts of the world have been experiencing a severe and widespread recession accompanied by, among other things, instability in the financial markets and reduced credit availability, and uncertainty about the effects of prospective U.S. government action on healthcare all of which are likely to continue to have far-reaching effects on economic activity for an indeterminate period. The effects and probable duration of these conditions on our future operations and positive cash flows, including our ability to obtain continued support from our major stockholders and lenders, cannot be estimated at this time.

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 considerable reliability to be expected from these continuing contracts. However, the expiration of existing contracts or commencement of new contracts may cause our operational cash flow to vary significantly.

Company operations during 2011 resulted in a net outflow of cash of approximately $4.0 million. Cash inflows were provided by financing activities consisting of the sale of unregistered common stock of approximately $1.0 million plus $4.0 million in new borrowings. 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.

Our external sources of funds consist primarily of borrowings, and the use and sale of our unregistered common stock as a form of liquidity. Each are described below.

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, 2011, we obtained approximately $4.0 million in loans to fund our operations. Repayments of $401,000 were made during 2011, which were funded from 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 29, 2012, have converted approximately $1.7 million, or 76%, 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.

Sales of common stock. We periodically sell our unregistered common stock in private placements. The funds from such sales have been used for working capital purposes. During the twelve months ended December 31, 2011, we raised approximately $1.0 million through the sale of our common stock.

Use of common stock and warrants to purchase common stock in lieu of cash. Certain vendors and note holders have accepted our common stock and warrants as payment for services, interest and debt. During the twelve months ended December 31, 2011, we avoided cash outlays of approximately $262,000 for services, interest and debt repayment by issuing our common stock or warrants to purchase common stock.

Our business model does not require us to make extensive investments in or use of capital resources.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2011 and 2010, the Company did not have any off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of our consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements. On an on-going basis, we evaluate the

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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, premium deficiencies and claims expense, goodwill, and income taxes are critical to the preparation of our consolidated financial statements.

Revenue recognition. The majority of our managed care activities are performed under at-risk arrangements pursuant to terms of agreements primarily with health plans to provide contracted behavioral healthcare and pharmacy management services to subscribing members. For the years ended December 31, 2011 and 2010, such agreements accounted for approximately 96%, or $68.4 million and 94%, or $32.9 million, respectively, of our revenue. Revenue under these agreements is earned continuously over time regardless of services actually provided and, therefore, is recognized monthly based on the number of qualified members. The information regarding qualified members is supplied by our clients, and we review member eligibility records and other reported information to verify its accuracy and determine the amount of revenue to be recognized. The remaining balance of our revenues is earned and recognized as services are delivered on a non-risk basis.

We also manage the psychotropic drug benefit under certain behavioral health contracts for certain health plans’ subscribing members and are responsible for the cost of drugs dispensed. In accordance with the contracts, the health plan’s pharmacy benefit manager (“PBM”) performs drug price negotiation and claims adjudication. As such, payment for our pharmacy management services is withheld until a monthly or quarterly comparison of our total premium to total drug cost is made, at which time we receive or pay the difference. Accordingly, similar to our other at-risk arrangements, pharmacy drug management revenue is earned at a contracted rate per eligible member and recognized monthly.

In addition, we began providing autism treatment services in 2010 to the members of a health plan for which there was no historical claims data available upon which to base initial pricing. We therefore included cost sharing/cost savings provisions in the agreement with the health plan whereby we share in the additional cost or cost savings when comparing actual claims costs to the estimated claims costs incorporated into the contract’s pricing. Accordingly, we may adjust our monthly revenue periodically as claims data becomes available to permit a comparison of actual claims costs to targeted claims costs. Such adjustments may be the result of unforeseen fluctuations in utilization, among other factors, and in the past have not been material.

Accrued claims payable. Claims expense, a major component of cost of revenue, is recognized in the period in which an eligible plan member actually receives services and includes a provision for claims incurred but not reported (“IBNR”). We contract with various healthcare providers including hospitals, physician groups and other licensed behavioral healthcare professionals either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine whether the member is eligible to receive the service, the service provided is medically necessary and is covered by the benefit plan’s certificate of coverage, and the service is authorized by one of our employees, if required. If all of these requirements are met, the claim is entered into our claims system for payment.

The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims IBNR. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last two years.

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 estimates would increase claims expense and could adversely affect our ability to achieve and sustain improvements in profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate.

Whenever we believe it is probable that a future loss will be incurred under our managed care contracts based on a perceived contractual premium deficiency, and we expect to be unable to cancel our obligation or renegotiate, and the amount of the loss can be reasonably estimated, we also provide for such expected losses. We perform this loss accrual analysis on a contract-by-contract basis by taking into consideration various factors such as future contractual revenue, estimated future healthcare and maintenance costs, and each contract’s specific terms related to future revenue increases as compared to expected increases in healthcare costs. The estimated future healthcare and maintenance costs are based on historical trends and expected future cost increases. Our analysis at December 31, 2011 identified one contract for which it is probable that a loss will be incurred during the remaining contract term. Based on available information, we have estimated the loss at $450,000 and established an allowance for the loss on our consolidated balance sheet. At December 31, 2010, no contract loss allowance for future periods was necessary.

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Accrued claims payable consists primarily of amounts 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. However, estimating IBNR claims involves a significant amount of judgment by our management. The following are the principal factors that would have an impact on our future operations and financial condition:

The accrued claims payable ranges were between $13.9 and $14.1 million at December 31, 2011 and between $8.1 and $8.3 million at December 31, 2010. Based on the information available, we determined our best estimate of the accrued claims liability to be $14.0 million and $8.3 million at December 31, 2011 and 2010 respectively. Our accrued claims liability at December 31, 2011 and 2010 includes approximately $7.3 million and $3.4 million, respectively, of submitted and approved but unpaid claims, $6.2 million and $4.9 million for IBNR claims, respectively, and $0.5 million and $0, respectively, of contract loss allowance. A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at December 31, 2011 could increase our claims expense by approximately $132,000. Actual claims incurred could differ from estimated claims accrued.

During 2011, we reversed our remaining claims amounts of approximately $0.8 million related to two contracts which were terminated in 2008 and for which no additional claims submission was expected. We also decreased our prior year claims expense by $0.5 million for one major contract in Puerto Rico which started in the third quarter of 2010. The adjustment was primarily due to the lack of claims payment history.

Reduction of prior year claims expense in 2010 was primarily due to the reversal of $1.4 million of claims expense for an expired contract due to a legal settlement.

Except for the reasons as described above, the adjustment of prior year claims expense resulted from 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.

Goodwill. We evaluate the amount of our goodwill at least annually, typically in the fourth quarter of our fiscal year. For 2011, we began our evaluation with a qualitative assessment of our managed care business, which is the reporting unit to which goodwill relates. Our assessment examined various indicators, primarily historical operating results, cash flows, and revenue trends, and resulted in a determination that it was more likely than not that our goodwill was impaired. To further confirm or invalidate this initial conclusion, we then proceeded to perform a quantitative analysis that calculates a fair value of the reporting unit which is then compared to the estimated fair values of our assets and liabilities. We used two methods to obtain a reporting unit fair value, a market approach and an income approach, with each heavily dependent upon management’s assumptions. The market approach calculates a fair value by multiplying the estimated value of our common stock by the quantity of shares outstanding. The income approach utilizes a discounted cash flow model to estimate the fair value of the reporting unit by discounting future cash flows derived from forecasted revenues, expenses, capital expenditures. The discount rate or weighted average cost of capital incorporates both market and company-specific risk premiums determined by management. We further reduced the initial result of the income approach by 50% to reflect our current financial uncertainty. We compared the estimates of the reporting unit’s fair value produced by the market approach and the income approach to the net estimated fair values of our assets and determined that the implied value of goodwill was in excess of our recorded amount of goodwill. Accordingly, management concluded there was no impairment adjustment required. To evaluate the sensitivity of our fair value calculations, we applied a hypothetical 10% decrease to the reporting unit fair values we initially calculated and again concluded that our goodwill is not impaired. If management’s estimates of common stock value, future earnings, cash flows, and discount rates differ significantly from those used in our calculations, future impairment charges to goodwill may be required.

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Income taxes. Computing our provision for income taxes involves significant judgment and estimates particularly in relation to the determination of a valuation allowance for deferred tax assets (primarily from net operating loss carryforwards) and, to a lesser extent, uncertain income tax positions. See Note 9 to our consolidated financial statements.

Stock-based compensation. We issue various stock-based compensation awards to our employees and members of our Board of Directors. We account for the awards in accordance with ASC 718 “Compensation – Stock Compensation” and measure compensation cost for stock options at fair value on the grant date and recognize compensation cost on a straight-line basis over the service period for those options expected to vest. We use the Black-Scholes option pricing model, which requires us to use certain variable assumptions for input, to calculate the fair value of a stock award on the grant date. These assumptions, which are set forth in Note 2 to our consolidated financial statements variables include the expected volatility of our stock price, award exercise behaviors, the risk free interest rate, and expected dividends. We use significant judgment in estimating expected volatility of the stock, exercise behavior and forfeiture rates developing our assumptions as follows:

Expected Volatility

We estimate the volatility of the share price by using historical data of our traded stock in combination with our expectation of the extent of fluctuation in future stock prices. We believe our historical volatility is more representative of future stock price volatility and as such it has been given greater weight in estimating future volatility.

Expected Term

A variety of factors are considered in determining the expected term of options granted. Options granted are grouped by their homogeneity based on the optionees’ position, whether managerial or clerical, and length of service and turnover rate. Where possible, we analyze exercise and post-vesting termination behavior. For any group without sufficient information, we estimate the expected term of the options granted by averaging the vesting term and the contractual term of the options.

Expected Forfeiture Rate

We generally separate our option awards into two groups: employee and non-employee awards. The historical data of each group are analyzed independently to estimate the forfeiture rate of options at the time of grant. These estimates are revised in subsequent periods if actual forfeitures differ from estimated forfeitures.

Risk-free interest rate

We estimate the risk-free interest rate by reference to the interest rate for a U.S. Treasury constant maturity security with the same estimated term as the stock based award being issued.

Expected dividends No dividends are expected to be paid for the expected life of the instruments, therefore, we assume a dividend rate of zero.

RECENT ACCOUNTING PRONOUNCEMENTS

No recent accounting pronouncements have been issued that are not yet effective and have not been early adopted that we believe will have a significant effect on our consolidated financial in future periods.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material exposure to changing interest rates as the interest rates on our short term and long-term debt are fixed. Additionally, we do not use derivative financial instruments for investment or trading purposes and our investments are generally limited to cash deposits.

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TABLE OF CONTENTS

Years Ended December 31, 2011 and 2010

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Comprehensive Care Corporation

We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation and Subsidiaries (the Company) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders’ equity deficiency, and cash flows for each of the two years in the period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Comprehensive Care Corporation and Subsidiaries as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the two years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 7 to the consolidated financial statements, the Company has suffered recurring losses from operations and has not generated sufficient cash flows from operations to fund its working capital requirements. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Notes 1 and 7. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Mayer Hoffman McCann P.C.

March 30, 2012

Clearwater, Florida

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

See accompanying notes to consolidated financial statements.

27

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY DEFICIENCY

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

28

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)