10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

Commission File Number 1-9927

COMPREHENSIVE CARE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	95-2594724
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

3405 W. Dr. Martin Luther King Jr. Blvd, Suite 101, Tampa, FL 33607

(Address of principal executive offices and zip code)

(813) 288-4808

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 (Section 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 whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller reporting company	x

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

As of August 9, 2012, there were 59,251,836 shares of the registrant’s common stock, $0.01 par value, outstanding.

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

			PAGE
PART I  –  FINANCIAL INFORMATION
	ITEM 1  –	CONSOLIDATED FINANCIAL STATEMENTS
		Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011		3
		Consolidated Statements of Operations for the three months and six months ended June 30, 2012 and 2011 (unaudited)		4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)		5
		Notes to Consolidated Financial Statements		6-12
	ITEM 2  –	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13-21
	ITEM 3  –	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		22
	ITEM 4  –	CONTROLS AND PROCEDURES		22
PART II  –  OTHER INFORMATION
	ITEM 1  –	LEGAL PROCEEDINGS		22-23
	ITEM 1A  –  RISK FACTORS			23
	ITEM 2  –	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		23
	ITEM 3  –	DEFAULTS UPON SENIOR SECURITIES		23
	ITEM 4  –	MINE SAFETY DISCLOSURES		23
	ITEM 5  –	OTHER INFORMATION		23
	ITEM 6  –	EXHIBITS		24
	SIGNATURES			25
	CERTIFICATIONS

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	June 30, 2012			December 31, 2011
	(unaudited)
ASSETS
Current assets:
Cash	$	1,491		$	832
Accounts receivable		1,204			834
Other		559			699
		3,254			2,365
Property and equipment, net		265			392
Goodwill		12,150			12,150
Other intangible assets, net of accumulated amortization of $1,560 in 2011		—			28
Other		352			381
	$	16,021		$	15,316
LIABILITIES AND STOCKHOLDERS’ EQUITY DEFICIENCY
Current liabilities:
Notes payable:
Related parties	$	2,040		$	2,090
Other		2,021			580
Current portion of long-term debt:
Related parties		1,000			—
Other		3,584			2,467
Accounts payable		1,176			1,323
Accrued claims payable		14,593			14,036
Other accrued expenses		5,745			7,399
		30,159			27,895
Long-term liabilities:
Long-term debt, net of current portion:
Related parties		—			1,000
Other		408			2,903
Total liabilities		30,567			31,798
Stockholders’ equity deficiency:
Preferred stock, $50 par value:
Series C Convertible; 14,400 shares authorized; 10,434 shares issued and outstanding		522			522
Series D Convertible; 7,000 shares authorized; 250 shares issued and outstanding in 2012; none vested		—			—
Other series; 974,260 shares authorized; none issued		—			—
Common stock, $0.01 par value; authorized shares: 500,000,000 and 200,000,000; issued and outstanding 59,251,836		592			592
Additional paid-in capital		25,704			25,455
Deficit		(41,364	)		(43,051	)
Total stockholders’ equity deficiency		(14,546	)		(16,482	)
	$	16,021		$	15,316

See accompanying notes to consolidated financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenues:
Managed care revenues	$	18,124		$	18,557		$	36,014		$	36,839
Costs and expenses:
Costs of revenues		13,765			18,794			30,409			35,323
General and administrative		2,226			2,982			2,741			4,143
Depreciation and amortization		60			218			156			434
		16,051			21,994			33,306			39,900
Operating income (loss)		2,073			(3,437	)		2,708			(3,061	)
Other income (expense):
Interest expense, including $159, $126, $319 and $244, respectively, to related parties, and amortization of debt discount of $75, $221, $270 and $410, respectively		(465	)		(468	)		(1,028	)		(902	)
Other non-operating income (loss), net		1			(29	)		12			107
Income (loss) before income taxes		1,609			(3,934	)		1,692			(3,856	)
Income taxes		2			36			5			73
Net income (loss)	$	1,607		$	(3,970	)	$	1,687		$	(3,929	)
Net income (loss) attributable to common stockholders	$	1,607		$	(3,970	)	$	1,687		$	(3,929	)
Earnings (loss) per common share:
Basic	$	0.03		$	(0.07	)	$	0.03		$	(0.07	)
Diluted	$	0.02			n/a		$	0.02			n/a
Weighted average common shares outstanding:
Basic		59,252			55,784			59,252			55,217
Diluted		88,434			n/a			81,787			n/a

See accompanying notes to consolidated financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2012			2011
Net cash provided by operating activities	$	812		$	548
Cash flows from investing activities:
Additions to property and equipment		(2	)		(22	)
Cash flows from financing activities:
Net proceeds from sale of common stock		—			300
Proceeds from borrowings:
Related parties		—			200
Other		100			—
Debt issuance costs		(8	)		—
Repayment of debt:
Related parties		(50	)		(100	)
Other		(193	)		(199	)
Net cash (used in) provided by financing activities		(151	)		201
Net increase in cash		659			727
Cash at beginning of period		832			563
Cash at end of period	$	1,491		$	1,290
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, including related party interest of $11 and $2, respectively		405			227
Property acquired under capital leases		—			37
Common stock and warrants issued for outside services		—			84

See accompanying notes to consolidated financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 1 – DESCRIPTION OF THE COMPANY’S BUSINESS AND BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements for Comprehensive Care Corporation (referred to herein as the “Company,” or “CompCare”) and its subsidiaries have been prepared in accordance with the Securities and Exchange Commission (“SEC”) rules for interim financial information and do not include all information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Interim results for the current period are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the consolidated financial statements and the notes thereto in our most recent annual report on Form 10-K. Certain minor reclassifications of prior period amounts have been made to conform to the current period presentation.

Our consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, Comprehensive Behavioral Care, Inc. (“CBC”) and Core Corporate Consulting Group, Inc. (“Core”), each with their respective subsidiaries (collectively referred to herein as “we,” “us” or “our”). Through CBC, we provide managed care services in the behavioral health, substance abuse, and psychotropic pharmacy management fields for commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) members on behalf of health plans. We also provide behavioral pharmaceutical management services for two health plans in Puerto Rico. Our managed care operations include at-risk behavioral health contracts, at-risk pharmacy management contracts, and administrative service agreements. The customer base for our services includes both private and governmental entities. Our services are provided by unrelated vendors on a subcontract basis.

NOTE 2 – NOTES PAYABLE

In May 2012, a zero coupon promissory note in the amount of $230,000 matured and was replaced by a new note of similar terms with a face value of $230,000 and a maturity date of August 31, 2012.

In April 2012, a 14%, $100,000 convertible promissory note matured and was renewed on the same terms until July 31, 2012, at which time the note was again renewed. The new note utilizes the same terms as the previous note and has a maturity date of October 31, 2012.

A 24% convertible promissory note in the amount of $2 million issued to a related party, a major stockholder, was not repaid on its maturity date of June 4, 2011, and is currently in default. As of June 30, 2012, interest of approximately $1.0 million was also due and in default on this promissory note. We continue to accrue interest at the rate of 24% and include these obligations in current liabilities (Note 4).

NOTE 3 – LONG-TERM DEBT

Our senior promissory notes payable to unrelated parties in the total amount of approximately $1.8 million matured on April 15, 2012, but were not repaid. However, during June, July, and August of 2012, we reached agreement with holders of approximately $1.7 million of the notes, or approximately 98%, to renew the notes for an additional year. The notes will mature April 15, 2013 and bear interest at 14% effective from April 15, 2012. Although we expect to negotiate the same note modifications with the remaining senior note holders in the near future, we cannot provide any assurance of the ultimate success of these negotiations.

NOTE 4 – CONTINGENCIES

Economic conditions and related risks, concentrations and uncertainties:

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, 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 ability to obtain continued support from our major stockholders and other lenders, success in our marketing efforts, and ultimately, profitable operations and positive cash flows, cannot be estimated at this time.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

We occasionally carry cash and equivalents on deposit with financial institutions in excess of federally-insured limits, and the risk of losses related to such concentrations may be increasing as a result of recent economic developments discussed in the foregoing paragraph. The extent of a loss to be sustained as a result of uninsured deposits in the event of a future failure of a financial institution, if any, however, is not subject to estimation at this time.

Going concern uncertainty:

At June 30, 2012, we had a working capital deficiency of approximately $26.9 million and a stockholders’ equity deficiency of approximately $14.5 million resulting from a history of operating losses. Approximately $2.8 million of debt was past due and in default. As a result of these conditions, and the aforementioned economic conditions and related risks, our ability to continue as a going concern will be dependent upon the success of management’s plans, as set forth in the following paragraph, and is subject to significant uncertainty. Management has determined that these conditions have not contributed to any impairment of the Company’s goodwill at this time, and the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty, except for the consideration afforded this matter in determining the valuation allowance for deferred tax assets from net operating loss carryforwards (Note 7).

Although we cannot provide any assurance in this respect, we believe that subject to the general economic conditions, risks and uncertainties discussed in the preceding paragraphs, (a) with our existing customer contracts, plus the addition of new contracts we believe we are close to obtaining through our marketing efforts, and the launch of new pharmacy management programs, and (b) the expected continuing financial support from our major stockholders and bondholders, that we will be able to improve our cash flows and operating results in the near term and sustain current operations over the next year. However, we do not currently maintain a line of credit or other financing arrangement with any financial institution and have not made any arrangements to obtain any additional financing but are looking at various alternative sources of financing if operations cannot support our ongoing plan. Nevertheless, there also 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 we will be able to achieve the expected profitable operations and positive operating cash flows in the near term. Accordingly, our ability to achieve our business objectives and continue as a going concern is dependent upon the success of the foregoing plans to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during the next year.

Concentration, major customer contract:

We currently provide mental health, substance abuse, and pharmacy prescription drugs management services to approximately 212,000 members of a health plan in Puerto Rico on an at-risk basis pursuant to a contract that expires in September 2012. The contract accounted for 76.5%, or $27.6 million, of our revenues for the six months ended June 30, 2012. The contract provided for automatic renewals for additional one year terms unless either party provides 90 days prior written notice of its intention not to renew the agreement. However, on March 5, 2012, the contract with the aforementioned health plan in Puerto Rico was amended to extend the contract term to December 31, 2012, and to increase the rate to be paid to the Company for pharmacy management services by approximately 11% retroactively effective January 1, 2012.

In addition, we resolved a contract interpretation dispute for $2.2 million with the health plan against the cost of pharmacy drugs for which it was agreed that we are not responsible under the contract. The contract dispute resolution removes the cost of pharmacy drugs prescribed for non-mental health conditions charged to us by the health plan’s pharmacy benefit manager from the contract’s inception to April 2012. The contract resolution reduced our pharmacy cost by $2.2 million during the three months ended June 30, 2012. Additionally, the dispute resolution required us to establish a designated bank account in the name of our client for the payment of claims associated with this client.

The aforementioned health plan in Puerto Rico has the ability to cancel the contract without cause by providing at least 90 days prior written notice, and in the event of a material breach of the contract, each party has the right to terminate after 60 days prior written notice, except that a breach involving either party’s financial obligations requires only 30-day notice. The foregoing notwithstanding, the breaching party would have 30 days to cure the breach to prevent termination of the contact. The loss of this customer, without replacement by new business, would adversely affect our future financial results and jeopardize our ability to continue as a going concern.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Legal matters:

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Aside from the litigation described below, as of the date of this report, we are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business, financial condition or operating results.

(1) We are subject to a pending judgment of damages to a former director of approximately $1.9 million including an award for reimbursement of legal fees and payment of interest. The judgment and award are under appeal, and motions for reconsideration by the Company are pending.

(2) A subsidiary is subject to a suit for trademark infringement, among other things, in connection with its proposal to obtain a managed behavioral healthcare services contract in Puerto Rico. The complaint is seeking monetary damages in the amount of $600,000 and certain injunctive relief. We believe the suit is without merit and intend to vigorously defend ourselves against the allegations asserted.

(3) In addition, we and a former customer are being sued for damages of approximately $1.7 million for allegedly unpaid claims for behavioral health professional services rendered in 2007 and 2008. We filed a counterclaim for breach of a settlement agreement that we believe previously resolved many of the claims that are the subject of the complaint, which we believe is without merit and are vigorously opposing.

During the six months ended June 30, 2012, we re-evaluated the adequacy of our provision for possible litigation settlements and legal defense costs and made adjustments to reduce the provision by the amount of approximately $1.6 million, which resulted in an equal reduction of our first quarter general and administrative expense. The reduction is due to the Company obtaining an offsetting judgment against an individual that also has pending judgments against us described in item (1) above. With regard to this matter, we obtained a letter of credit in 2011 for approximately $1.9 million to collateralize two surety bonds that permit our appeal of these judgments against us. Management believes that the remaining provision is adequate for the estimated probable minimum losses, including legal defense costs, to be incurred from the litigation described above.

Other:

In connection with a new customer agreement for us to provide mental health, substance abuse and pharmacy prescription drugs management services in Puerto Rico, we obtained a letter of credit from a bank in the amount of $4.0 million to assure the customer of our compliance with our obligations under the agreement. Under such agreement, the customer may draw on all or part of the letter of credit under certain defined circumstances. Collateral for the letter of credit was provided by a major stockholder of the Company. If the client draws upon the letter of credit, we may become liable to our major stockholder for the amount of collateral accessed by the bank to fulfill its obligations under the letter of credit.

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, accounts receivable and accounts payable approximate their estimated fair value due to the short-term nature of these instruments. Since our other financial liabilities are not traded in an open market, we generally use a present value technique, which is a level 3 input, as defined in generally accepted accounting principles, to measure the estimated fair value of these financial instruments, except for valuing stock options and warrants. The rate used for discounting expected cash flows is a risk-free rate adjusted for systematic and unsystematic risk.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

The carrying amounts and estimated fair values of these financial instruments (all are liabilities) at June 30, 2012, are as follows (in thousands):

	Carrying Amount			Estimated Fair  Value
Promissory notes	$	3,290		$	3,273
Zero-coupon promissory notes		230			224
Debentures		549			528
Senior promissory notes		1,758			1,746
Long-term promissory note		100			96
Less unamortized discount		(175	)		—
Net liabilities	$	5,752		$	5,867

Due to the inherent nature of related party transactions, we have not attempted to estimate the fair value of liabilities payable to related parties of the Company. As such, promissory notes payable with a carrying value of $3,040,000 are excluded from the table above.

NOTE 6 – EQUITY INSTRUMENTS

Our Series C preferred stock is currently convertible into common stock at the rate of approximately 316.28 common shares for each share of Series C preferred, adjustable for any dilutive issuances of common occurring in the future. Series C preferred shares vote with the common stockholders on an as-converted basis. The shares are nonparticipating except that dividends, when declared by our Board of Directors on the common stock, must be paid on the Series C stock on an as-converted basis before any dividends are paid on our common stock. The Series C is also cumulative with respect to dividends on common stock and junior series of preferred stock. Other significant rights and preferences of the Series C preferred include:

• the right to vote as a separate class to appoint five directors of the Company, and

• liquidation preferences, whereby the Series C holders 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 value of the liquidation preference is $250 per share, or approximately $2.6 million at June 30, 2012).

We also have a class of convertible preferred stock, Series D, for which 7,000 shares are authorized and 250 shares were issued during the six months ended and outstanding as of June 30, 2012. The shares, which were granted in January 2012, do not vest until the tenth anniversary of the grant date. Such shares were issued in exchange for the cancelation of 120 previously granted warrants to purchase Series D shares. Once vested, a Series D preferred share will be convertible at any time into 100,000 shares of common stock, subject to adjustment in the event of any common stock dividend, split, combination thereof or other similar recapitalization, without additional consideration. Prior to vesting and thereafter, each Series D convertible preferred share is entitled to all voting, dividend, liquidation and other rights accorded a share of Series D convertible preferred stock. As to dividends, the Series D stock is noncumulative. If a dividend is declared on the common stock, each share of Series D stock is entitled to receive a dividend equal to 50% of the dividend declared for the common stock as if the Series D stock had been converted. Despite their nonvested status, voting rights of each share nevertheless consist of the right to cast the number of votes equal to those of 500,000 shares of common stock. Unless otherwise required by applicable law, holders of shares of Series D have the right to vote together with holders of common stock as a single class on all matters submitted to a vote of our stockholders. At June 30, 2012, approximately $3.6 million of compensation expense remained to be recognized over the next 9.5 years related to the Series D shares.

STOCK INCENTIVE COMPENSATION PLANS

WARRANTS:

To Purchase Common Stock

We periodically issue warrants to purchase shares of our common stock for the services of employees and non-employee directors.

Due to employee and director resignations, we derecognized net compensation costs of approximately $32,000 and $24,000, respectively, related to warrants to purchase common stock during the three and six months ended June 30, 2012. Total unrecognized compensation costs related to warrants as of June 30, 2012, was approximately $204,000 which is expected to be recognized over a weighted-average period of 37 months. The total fair value of warrants vested during the three and six months ended June 30, 2012, was $5,708.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

A summary of our warrant activity for the three and six months ended June 30, 2012 and 2011 follows:

Warrants	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term
Outstanding at January 1, 2012		41,057,583		$	0.35		4.86 years
Granted		25,000		$	0.25
Forfeited or expired		(100,000	)	$	0.53
Outstanding at March 31, 2012		40,982,583		$	0.35		4.61 years
Forfeited or expired		(2,300,000	)	$	0.32
Outstanding at June 30, 2012		38,682,583		$	0.35		4.58 years
Exercisable at June 30, 2012*		37,615,583		$	0.33		4.62 years
Outstanding at January 1, 2011		27,209,750		$	0.38		4.25 years
Granted		1,291,500		$	0.89
Reclassified		500,000		$	0.55
Forfeited, expired, or cancelled		(650,000	)	$	0.51
Outstanding at March 31, 2011		28,351,250		$	0.40		4.05 years
Granted		433,000		$	0.25
Forfeited or expired		(1,000,000	)	$	1.00
Outstanding at June 30, 2011		27,784,250		$	0.37		3.77 years
Exercisable at June 30, 2011*		25,459,250		$	0.34		3.76 years

* No aggregate intrinsic value.

To Purchase Series D Convertible Preferred Stock

During the three months ended June 30, 2012, warrants to purchase up to 100 shares of our Series D convertible preferred stock expired. All such warrants have now expired unexercised.

OPTIONS:

From time-to-time, we grant stock options as compensation for services to our employees, non-employee directors and certain consultants (“grantees”) allowing grantees to purchase our common stock pursuant to stockholder-approved stock option plans. We currently have three active incentive qualified option plans, the 1995 Incentive Plan, the 2002 Incentive Plan and the 2009 Equity Compensation Plan (collectively, the “Plans”), that provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, restricted preferred stock, and common stock grants to grantees. Grants issued under the Plans may qualify as incentive stock options (“ISOs”) under Section 422A of the Internal Revenue Code of 1986, as amended. Options for ISOs may be granted for terms of up to ten years. The vesting of options issued under the 1995 and 2002 plans generally occurs after six months for one-half of the options and after 12 months for the remaining options. For the 2009 Equity Compensation Plan, the vesting period is determined by the Compensation and Stock Option Committee. The exercise price for ISOs must equal or exceed the fair market value of the underlying shares on the date of grant. The Plans also provide for the full vesting of all outstanding options under certain change of control events. The maximum number of common shares authorized for issuance under the Plans is 52,000,000. As of June 30, 2012, there were a total of 43,938,100 shares available for grant and 7,030,900 options outstanding, 6,413,000 of which were exercisable, under the Plans.

In addition, under our Non-employee Directors’ Stock Option Plan, we are authorized to issue non-qualified stock options to our non-employee directors for up to 1,000,000 common shares. Each non-qualified stock option is exercisable at a price equal to the average of the closing bid and asked prices of the common stock in the over-the-counter market for the most recent preceding day there was a sale of the stock prior to the grant date. Grants of options

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

vest in accordance with vesting schedules established by our Board of Directors’ Compensation and Stock Option Committee. Upon joining our Board of Directors, directors receive an initial grant of 25,000 options. Annually, directors are granted 15,000 options on the date of our annual meeting. As of June 30, 2012, there were 796,668 shares available for option grants and 105,000 options outstanding under the non-qualified directors’ plan, 65,000 of which were exercisable.

As of June 30, 2012, we also had 1,500,000 options outstanding and exercisable. These options were issued outside the option plans described above.

A summary of our option activity for the three and six months ended June 30, 2012 and 2011 follows:

Options	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term
Outstanding at January 1, 2012		8,795,400		$	0.33		7.74 years
Forfeited or expired		(40,000	)	$	0.38
Outstanding at March 31, 2012		8,755,400		$	0.33		7.49 years
Forfeited or expired		(119,500	)	$	0.35
Outstanding at June 30, 2012		8,635,900		$	0.33		7.24 years
Exercisable at June 30, 2012*		7,978,000		$	0.33		7.15 years
Outstanding at January 1, 2011		2,611,100		$	0.50		8.09 years
Granted		25,000		$	0.23		9.82 years
Forfeited or expired		(464,750	)	$	0.30
Outstanding at March 31, 2011		2,171,350		$	0.54		7.77 years
Forfeited or expired		(116,500	)	$	0.38
Outstanding at June 30, 2011		2,054,850		$	0.55		7.47 years
Exercisable at June 30, 2011*		1,125,650		$	0.68		6.70 years

* No aggregate intrinsic value.

Total recognized compensation costs during the three and six months ended June 30, 2012 were approximately $73,000 and $168,000, respectively. As of June 30, 2012, there was approximately $112,000 of unrecognized compensation cost related to options expected to be recognized over a weighted-average period of 13 months. We might have recognized approximately $15,000 and $34,000 of tax benefits attributable to stock-based compensation expense recorded during the three and six ended June 30, 2012. However, this potential benefit was fully offset by our valuation allowance due to the aforementioned significant uncertainty of future realization. The total fair value of options vested during the three and six months ended June 30, 2012, was $11,148.

NOTE 7 – INCOME TAXES

We are subject to the income tax jurisdictions of the U.S., Puerto Rico, as well as multiple state tax jurisdictions. Our provisions for income taxes for the three and six months ended June 30, 2012 and 2011, represented solely certain state income tax expenses. The effective income tax rates for the three and six months ended June 30, 2012 were 0.1% and 0.3%, respectively. Our income before income taxes for the three and six months ended June 30, 2012, was attributable to the net profit of a subsidiary in Puerto Rico, which is currently not subject to the U.S. federal tax jurisdiction. For the three months ended June 30, 2012, our subsidiary in Puerto Rico utilized approximately $1.0 million of deferred tax assets from net operating loss carryforwards. At June 30, 2012, we have federal net operating loss carryforwards of approximately $38.4 million, the deductibility of $29.3 million of which is presently limited to approximately $361,000 annually under Section 382 of the Internal Revenue Code due to recent changes in control of the Company.

Management has evaluated our tax positions taken or to be taken on income tax returns that remain subject to examination (i.e., tax years 2008 and thereafter federally, earlier for certain other jurisdictions), and has concluded that there are no uncertain tax positions, as defined in generally accepted accounting principles, that require recognition or disclosure in the consolidated financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 8 – PER SHARE DATA

For the periods presented, the following table sets forth the computation of basic and, where applicable,* diluted earnings per share attributable to common stockholders (dollars in thousands, except per share data):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Numerator:
Net income (loss) attributable to common stockholders	$	1,607	$	(3,970	)	$	1,687	$	(3,929	)
Add: Impact of assumed conversions Interest on convertible debts		231		—			223		—
Net income (loss) attributable to common stockholders after assumed conversions	$	1,838	$	(3,970	)	$	1,910	$	(3,929	)
Denominator:
Weighted average common shares – basic		59,252		55,784			59,252		55,217
Effect of dilutive securities:
Series C convertible preferred stock		3,300		—			3,300		—
Series D convertible preferred stock		5,182		—			6,551		—
Stock options		—		—			—		—
Warrants		—		—			—		—
Convertible debts		20,700		—			12,684		—
Weighted average common shares – diluted		88,434		55,784			81,787		55,217
Earnings per share:
Basic	$	0.03	$	(0.07	)	$	0.03	$	(0.07	)
Diluted	$	0.02		n/a		$	0.02		n/a

* No diluted per share data is presented for loss periods because to do so would be anti-dilutive.

NOTE 9 – SUBSEQUENT EVENTS

Other than the changes in our outstanding debt instruments described in Notes 2 and 3, no events were identified that in our opinion require accounting recognition or disclosure in these financial statements.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, the following information contains forward-looking statements as defined under federal securities laws. Such statements include, but are not limited to, statements about the expected future overall performance of the healthcare market, our expected future financial resources and operating results, including increases in revenues, profitability, interest expense, and our expected growth and expansion, and our expectations regarding our ability to obtain new and maintain existing behavioral healthcare contracts and the profitability, if any, of such behavioral healthcare contracts. These statements are based on current estimates and predictions by management about the industry and markets in which we operate, the customers we serve and management’s beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those related to 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, our ability to achieve expected results from new business, the profitability of our capitated contracts, cost of care, seasonality, our ability to obtain additional financing, and other risks detailed herein and from time to time in our filings with the SEC.

The following discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto of CompCare and subsidiaries appearing elsewhere in this report.

OVERVIEW

The Company provides health care services and products through its primary operating subsidiaries, Comprehensive Behavioral Care, Inc. (“CBC”) and Core Corporate Consulting Group, Inc. (“Core.”)

Through CBC and its subsidiaries, we provide managed behavioral healthcare, substance abuse, and psychotropic pharmacy management services. We provide these services primarily to commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) health plans. 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. Our managed care operations include at-risk behavioral health contracts, at-risk pharmacy management contracts, and administrative service agreements.

SOURCES OF REVENUE

Our revenue can be segregated into the following significant categories (dollars in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
At-risk behavioral contracts	$	7,490	$	9,526	$	14,966	$	19,095
Administrative services only contracts		853		749		1,670		1,451
At-risk pharmacy contracts		9,781		8,282		19,378		16,293
	$	18,124	$	18,557	$	36,014	$	36,839

Our customer base primarily includes regional health plans that do not have their own behavioral network. We provide services primarily through a network of contracted providers that includes:

• psychiatrists;

• psychologists;

• therapists;

• other licensed healthcare professionals;

• psychiatric hospitals;

• general medical facilities with psychiatric beds;

• residential treatment centers; and

• other treatment facilities.

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 facility.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

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

• At-risk arrangements under which our clients pay us a fixed fee per member in exchange for our assumption of the financial risk of providing services; and

• ASO arrangements where we manage behavioral healthcare programs or perform various managed care services, such as clinical care management, provider network development, and claims processing without assuming financial risk for member behavioral healthcare costs.

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 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 our contract 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.

Our largest expense is the cost of 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 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 at-risk 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 critical accounting estimates. See “Critical Accounting Policies and 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 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:

• management of prescription drugs on an at-risk basis for health plans;

• fully integrated behavioral healthcare and psychotropic pharmacy management services;

• analytic services for medical and pharmacy claims for medical integration of behavioral and medical care coordination;

• case management/utilization review services;

• administrative services management;

• preferred provider network development;

• management and physician advisor reviews; and

• overall care management services.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

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.

RECENT DEVELOPMENTS

Senior Promissory Note Renegotiation

We were unable to repay our 10% senior promissory notes in the amount of approximately $1.8 million on the maturity date of April 15, 2012. However, during June, July, and August of 2012, we reached agreement with holders of approximately $1.7 million, or approximately 98%, of these notes to renew them for an additional year. The notes will mature April 15, 2013 and bear interest at 14% effective retroactively from April 15, 2012. Although we expect to negotiate the same note modifications with the remaining senior note holders in the near future, we cannot provide any assurance of the ultimate success of these negotiations.

Contract Amendment

In June 2012, we resolved a contract interpretation dispute for $2.2 million, which reduced the cost of psychotropic drugs for which we are not responsible related to our major contract in Puerto Rico. The contract dispute resolution removes a portion of the cost of drugs prescribed for non-mental health conditions charged to us by the health plan’s pharmacy benefit manager from the contract’s inception to April 2012. The effect of the contract dispute resolution was to reduce our pharmacy cost by $2.2 million for the three months ended June 30, 2012.

Contract Terminations

In June 2012, we received a letter from our Louisiana client informing us that our contract to provide at-risk behavioral healthcare services to approximately 52,000 of its Medicare members would be terminated effective July 31, 2012. The contract accounted for 5.4% or $2.0 million, and 4.6%, or $1.7 million, of our revenues for the six months ended June 30, 2012 and 2011, respectively. As this contract resulted in an operating loss during 2012, its elimination is likely to improve our overall operating results.

On March 26, 2012, we received a letter from a customer terminating its contract with us effective July 1, 2012. Under the contract we provided behavioral healthcare services on an at-risk and ASO basis to approximately 209,000 Medicaid and Medicare members. The contract accounted for 5.1% or $1.8 million, and 5.3%, or $1.9 million, of our revenues for the six months ended June 30, 2012 and 2011, respectively. However, since this contract produced an operating loss for 2011 and for the six months ended June 30, 2012, its elimination is likely to improve our overall operating results.

Expense Reduction Initiative

In May 2012, we announced that we had implemented cost-saving measures beginning in the first quarter of this year to reduce our general and administrative expenses and increase our operating income. The measures included salary reductions for mid-level staff and senior management, as well as the layoff of 26 employees, among others.

Rate Increase – Major Contract

On March 5, 2012, we amended our major Puerto Rico contract that provided approximately 76.5% of our operating revenue during the six months ended June 30, 2012, and under which we provide mental health, substance abuse treatment, and pharmacy management services. Pursuant to the amendment, the contract term was extended to December 31, 2012 and the contract rate for pharmacy management services was increased by approximately 11% effective retroactively to January 1, 2012.

New or Increased Business

On March 1, 2012, we began supplying behavioral health services on an at-risk basis to approximately 6,000 members of a Texas health plan that serves Medicaid and CHIP beneficiaries.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

In February 2012, we added approximately 40,000 individuals to our covered membership through the increased business of a previously existing customer. As a result, we will provide behavioral health care services on an ASO basis to participants of the In-home Support Services Workers Health Care Program in Los Angeles County, California.

Effective January 1, 2012, we began providing behavioral health services to approximately 39,000 members of a Medicare Advantage population serviced by a health plan in the states of Missouri and Washington. Services are provided on an at-risk basis.

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 million to 500 million, based on an affirmative vote by written consent of a majority of our shareholders.

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 drug programs for health plans and self insured entities. We believe we can generally reduce drug costs for our clients that utilize our program.

RESULTS OF OPERATIONS

Three months ended June 30, 2012 vs. 2011

Revenues: Total managed care revenues decreased slightly for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. However, we experienced various increases and decreases in the categories of such revenues as described below.

At-risk behavioral health contracts: Operating revenues from at-risk contracts decreased by 21.4%, or approximately $2.0 million, to $7.5 million for the three months ended June 30, 2012, compared to $9.5 million for the three months ended June 30, 2011. The decrease was primarily attributable to the loss of customers in Missouri, Texas and Wisconsin during the fourth quarter of 2011 that had accounted for $3.2 million of revenue for the three months ended June 30, 2011. This decrease was offset by approximately $1.2 million in additional revenues in 2012 from new and previously existing customers.

ASO contracts: Revenue from ASO contracts increased by 13.9%, or approximately $0.1 million, to $0.9 million for the three months ended June 30, 2012, primarily consisting of additional revenue from the expansion of business of previously existing ASO customers.

Pharmacy management contracts: Pharmacy revenue increased by 18.1%, or approximately $1.5 million, to $9.8 million for the three months ended June 30, 2012, from approximately $8.3 million for the three months ended June 30, 2011, attributable primarily to a 6.5% increase in membership and a 11% contract rate increase effective January 1, 2012 from our major customer in Puerto Rico.

Costs of revenues: Total costs of revenues decreased approximately 26.8%, or approximately $5.0 million, in 2012 as compared to 2011 for reasons set forth in the following four paragraphs.

Claims costs, at-risk behavioral health contracts: Claims expense on at-risk contracts decreased by 24.2%, or approximately $1.9 million, to $6.1 million for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The decrease was primarily attributable to a lack of claims for three contracts that were terminated during the fourth quarter of 2011 described above as compared to $2.9 million of claims costs for these contracts for the comparable prior period. The claims costs decrease was offset by increases of $0.7 million and $0.3 million, respectively, from expansion of existing contracts and the addition of new at-risk business. Claims costs as a percentage of at-risk revenues decreased to 81.1% for the three months ended June 30, 2012, from 84.2% for the three months ended June 30, 2011, attributable to lower utilization.

Pharmacy drug costs: Pharmacy costs decreased by 28.8%, or approximately $2.5 million, to $6.2 million for the three months ended June 30, 2012, as compared to $8.7 million for the three months ended June 30, 2011. The decrease is primarily attributable to a $2.2 million resolution of a contract interpretation dispute relating to the

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

removal of non-psychotropic drugs charged to us by the health plan’s pharmacy benefit manager from the contract’s inception to April 2012. Pharmacy costs as a percentage of pharmacy revenue decreased from 104.7% for the three months ended June 30, 2011, to 63.2% for the three months ended June 30, 2012, due to an increase in the contract rate effective January 1, 2012, for our major Puerto Rico customer and the aforementioned $2.2 million contract dispute resolution.

Contract loss allowance: During the three months ended June 30, 2012, we reversed $0.3 million of an excess contract loss allowance that we had established at December 31, 2011 for our Louisiana contract. The allowance was no longer needed due to the early termination of the contract.

Other healthcare operating costs: Other healthcare costs, which consist of the costs of care administration, such as salaries, employee benefits and external medical case review fees, decreased 12.5%, or approximately $0.3 million, due primarily to salary reductions and cost savings from employee headcount reductions that occurred during the three months ended June 30, 2012. Total healthcare costs as a percentage of total operating revenue decreased to 10.1% for the three months ended June 30, 2012, compared to 11.3% for the three months ended June 30, 2011.

General and administrative expense: General and administrative expense decreased by 25.1%, or approximately $0.7 million, for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The decrease was primarily attributable to a $0.7 million reduction in legal expense as compared to the same period of the previous year. As a percentage of total operating revenue, general and administrative expense decreased to 12.3% for the three months ended June 30, 2012, compared to 16.0% for the three months ended June 30, 2011, attributable to the aforementioned.

Interest expense. Interest expense, excluding amortization of debt discount, increased by approximately 57.9%, or approximately $143,000, for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011 due to an increase in the weighted average amount of debt outstanding from $5.8 million to $9.3 million. The average effective interest rate, excluding amortization of debt discount, approximated 17% for both periods.

Income taxes. Our provisions for income taxes for the quarters ended June 30, 2012 and 2011 represented solely income tax expense for certain states. Our effective income tax rate for the three months ended June 30, 2012, was 0.1%. During the current quarter, our subsidiary in Puerto Rico utilized approximately $1.0 million of deferred tax assets from net operating loss carryforwards, as compared to none in the comparable period of the prior year.

Six months ended June 30, 2012 vs. 2011

Revenues: Total managed care revenues remained substantially the same for both periods; however, we experienced various increases and decreases in the various categories of such revenues as follows.

At-risk behavioral health contracts: Operating revenues from at-risk contracts decreased by 21.6%, or approximately $4.1 million, to $15.0 million for the six months ended June 30, 2012, compared to $19.1 million for the six months ended June 30, 2011. The decrease was primarily attributable to the loss of customers in Missouri, Texas and Wisconsin during the fourth quarter of 2011 that accounted for $6.3 million of revenue for the six months ended June 30, 2011. The decrease was offset by approximately $2.3 million in additional revenues from new and previously existing customers.

ASO contracts: Revenue from ASO contracts increased by 15.1%, or approximately $0.2 million, to $1.7 million for the six months ended June 30, 2012, due primarily to additional revenue from the expansion of business of previously existing ASO customers.

Pharmacy management contracts: Pharmacy revenue increased by 18.9%, or approximately $3.1 million, to $19.4 million for the six months ended June 30, 2012, from approximately $16.3 million for the six months ended June 30, 2011, attributable primarily to a 3.6% increase in membership and a 11% contract rate increase effective January 1, 2012 from our major customer in Puerto Rico.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Costs of revenues: Total costs of revenues decreased approximately 13.9%, or $5.0 million, in 2012 as compared to 2011 for reasons set forth in the following four paragraphs.

Claims costs, at-risk behavioral health contracts: Claims expense on at-risk contracts decreased by 22.5%, or approximately $3.2 million, to $11.1 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The decrease was primarily attributable to a lack of claims for three contracts that were terminated during the fourth quarter of 2011 described above as compared to $5.4 million of claims costs for these contracts for the comparable period. The claims costs decrease was offset by increases of $1.4 million and $0.6 million resulting from the expansion of existing contracts and the addition of new at-risk business, respectively. Claims costs as a percentage of at-risk revenues decreased to 74.2% for the six months ended June 30, 2012, from 75.0% for the six months ended June 30, 2011, attributable to lower utilization.

Pharmacy drug costs: Pharmacy costs decreased by 6.5%, or approximately $1.1 million, to $15.8 million for the six months ended June 30, 2012 as compared to $16.9 million for the six months ended June 30, 2011, due to a $2.2 million resolution of the aforementioned contract interpretation dispute relating to the removal of non-psychotropic drugs charged to us by the health plan’s pharmacy benefit manager, offset by higher drug costs attributable to a 3.6% increase in membership. Pharmacy costs as a percentage of pharmacy revenue decreased from 103.9% for the six months ended June 30, 2011 to 81.6% for the six months ended June 30, 2012, due to an increase in the contract rate effective January 1, 2012 for one major customer in Puerto Rico and the previously mentioned $2.2 million adjustment.

Contract loss allowance: During the six months ended June 30, 2012, we reversed $0.3 million of an excess contract loss allowance that we had established at December 31, 2011 for our Louisiana contract. The allowance was no longer needed due to the early termination of the contract.

Other healthcare operating costs: Other healthcare costs, which consist of the costs of care administration, such as salaries, employee benefits and external medical case review fees, decreased $0.3 million to $3.8 million for the six month period ended June 30, 2012, as compared to $4.1 million for the six month period ended June 30, 2011. The decrease is primarily attributable to salary reductions and cost savings from employee reductions in 2012. Total healthcare costs as a percentage of total operating revenue decreased to 10.6% for the six months ended June 30, 2012 compared to 11.1% for the six months ended June 30, 2011.

General and administrative expense: General and administrative expense decreased by 33.7%, or approximately $1.4 million, to $2.7 million for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The decrease was primarily attributable to a $1.6 million reduction in legal expense due to an adjustment of an estimated legal settlement provision. As a percentage of total operating revenue, general and administrative expense decreased to 7.6% for the six months ended June 30, 2012, compared to 11.2% for the six months ended June 30, 2011, attributable to the aforementioned.

Interest expense: Interest expense, excluding amortization of debt discount, increased by approximately 54.1%, or approximately $266,000, for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011 due to an increase in the weighted average amount of debt outstanding to $9.3 million for the six months ended June 30, 2012, from $5.8 million for the comparable prior period net of a decline in the average effective interest rate, excluding amortization of debt discount, for the six months ended June 30, 2012, to approximately 16.2% from 17.0% for the same period in 2011, which was the result of adding $3.5 million in debt at 14% during the second half of 2011.

Income taxes: Our provisions for income taxes for the six months ended June 30, 2012 and 2011 represented solely income tax expenses for certain states. Our effective income tax rate for the six months ended June 30, 2012 was 0.3%. Our subsidiary in Puerto Rico utilized approximately $1.0 million of deferred tax assets from net operating loss carryforwards for the six months ended June 30, 2012.

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 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.

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

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. 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.

Accrued claims payable. Claims expense, a major component of cost of care, is recognized in the period in which an eligible plan member actually receives services and includes incurred but not reported (“IBNR”) claims. 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 a managed care contract based on an expected premium deficiency and we are unable to cancel our obligation or renegotiate the contract, we record a loss in the amount of the expected future losses. We perform our 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 June 30, 2012 did not identify any loss contracts other than a contract previously identified at December 31, 2011.

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:

• Changes in the number of employee plan members due to economic factors;

• Other changes in utilization patterns;

• Changes in healthcare costs;

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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

• Changes in claims submission timeframes by providers;

• Success in renegotiating contracts with healthcare providers;

• Occurrence of catastrophes;

• Changes in benefit plan design; and

• The impact of present or future state and federal regulations.

The accrued claims payable ranges were between $14.3 and $14.7 million at June 30, 2012 and between $13.9 and $14.1 million at December 31, 2011. Based on the information available, we determined our best estimate of the accrued claims liability to be $14.6 million at June 30, 2012 and $14.0 million at December 31, 2011. Our accrued claims liability at June 30, 2012 and December 31, 2011 includes approximately $11.0 million and $7.3 million, respectively, of submitted and approved but unpaid claims, $3.5 million and $6.2 million for IBNR claims, respectively, and $0.1 million and $0.5 million, respectively, of contract loss allowance. A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at June 30, 2012 could increase our claims expense by approximately $112,000. Actual claims incurred could differ from estimated claims accrued.

Goodwill. We periodically evaluate the amount of our recorded goodwill by performing impairment tests that compare the carrying amount to an estimated fair value, based on level 3 inputs as defined in generally accepted accounting principles. Management considers both the income and market approaches in the fair value estimation. In estimating the fair value under the income approach, management makes its best assumptions regarding future cash flows and applies a discount rate to the cash flows to yield a present, fair value of equity. The market approach is based primarily on reference to transactions including our common stock and the quoted market prices of our common stock. However, actual results may differ significantly from management’s assumptions, resulting in a potentially adverse impact to our consolidated financial statements. Since our last detailed evaluation as of December 31, 2011, there had been no changes in the conditions affecting goodwill.

Income taxes. Computing our provision for income taxes involves significant judgment and estimates particularly in relation to the realization of deferred tax assets from net operating loss carryforwards, uncertain income tax positions, and in estimating the probable annual effective income tax rates for interim financial reporting periods.

We are particularly vulnerable to additional changes in control in the near term due to probable future equity dilution or possible takeover resulting in further loss of our ability to utilize the remaining carryforwards pursuant to Section 382. In addition, as of June 30, 2012, the Company continues to be in a deficit position. Based on this evidence, and the uncertainty as to our ability to continue as a going concern and current economic conditions discussed under LIQUIDITY AND CAPITAL RESOURCES below, we determined that based on our judgment, we cannot conclude at this time that it is more likely than not that the Company’s deferred tax assets (which relate primarily to the federal net operating losses) will be realizable within the carryforward period. Accordingly, the Company continues to maintain an effective 100% valuation allowance against the balance of these deferred tax assets at this time. Our judgments regarding future taxable income may change in the future due to many factors, including changes in operating results from changing economic or market conditions, or changes in tax laws, operating results or other factors.

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 statements in future periods.

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 affect our costs of care incurred during these months, having a generally positive impact on our operations during June through August and a negative impact from March through May.

20

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2012, we had a working capital deficiency of approximately $26.9 million and a stockholders’ equity deficiency of approximately $14.5 million net of a deficit of approximately $41.4 million resulting from a history of operating losses. Approximately $2.8 million of debt was past due and, therefore, in default. As a result of these conditions, and the economic conditions and related risks discussed in the second paragraph, below, our ability to continue as a going concern will be dependent upon the success of management’s plans, as set forth in the following paragraphs, and is subject to significant uncertainty. In their report on our most recent audited financial statements as of and for the year ended December 31, 2011, our independent auditors expressed substantial doubt as to our ability to continue as a going concern. Except for its consideration in establishing our valuation allowance for deferred tax assets, the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

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, 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 ability to obtain continued support from our major stockholders and other lenders, success in our marketing efforts, and ultimately, profitable operations and positive cash flows, cannot be estimated at this time.

We are negotiating with lenders and expect to establish payment plans in the near future to cure certain debt defaults. Although we cannot provide any assurance in this respect, we believe that subject to the general economic conditions, risks and uncertainties discussed in the preceding paragraphs, (a) with our existing customer contracts, plus the addition of new contracts we believe we are close to obtaining through our marketing efforts, and the launch of new pharmacy management programs, and (b) the expected continuing financial support from our major stockholders and bondholders, that we will be able to improve our cash flows and operating results in the near term and sustain current operations over the next year. However, we do not currently maintain a line of credit or term loan with any commercial bank or other financial institution and have not made any arrangements to obtain such additional financing but are looking at various alternative sources of financing if operations cannot support our ongoing plan. Nevertheless, there also 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 we will be able to achieve the expected profitable operations and positive operating cash flows in the near term. Accordingly, our ability to achieve our business objectives and continue as a going concern is dependent upon the success of the foregoing plans to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during the next year.

Our primary internal source of liquidity on an on-going basis is from operations and 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 or termination of existing contracts, whether expected or not, or the commencement of new contracts may cause our operational cash flow to vary significantly.

Our external sources of liquid funds consist primarily of borrowings and the use of equity instruments. Our ability to continue to borrow funds on an unsecured basis is unknown, as well as our ability to sell shares of our common stock in private placement offerings. With the exception of contracted maturities of debt, there are no other known future liquidity demands due to commitments or events. We do not have any off-balance sheet financing arrangements. The duration of our borrowings has typically 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 detachable warrant for the purchase of our common stock issued in conjunction with the loan, or both.

As evident in our statement of cash flows, during the six months ended June 30, 2012, our cash balance increased by $659,000 due primarily to managing our cash outflows relating to our cost of care and from our cost reduction initiatives. We also obtained additional debt financing in the amount of $100,000 and repaid existing debt, including capitalized leases, in the amount of $243,000.

21

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

While we currently have market risk sensitive instruments, we have no significant exposure to changing interest rates, as the interest rates on our short-term debt is fixed. Additionally, we do not use derivative financial instruments for investment or trading purposes.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

(b) Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary conduct of our business, we are subject to periodic lawsuits and claims. Although we cannot predict with certainty the ultimate resolution of lawsuits and claims asserted against us, we do not believe that any currently pending legal proceedings to which we are a party could have a material adverse effect on our business, or our future results of operations, cash flows or financial condition except as described below:

(1) We initiated an action against Jerry Katzman, a former director, in July 2009 alleging that Mr. Katzman fraudulently induced us to enter into an employment agreement and, alternatively, that Mr. Katzman breached that alleged employment agreement and was rightfully terminated. In September 2010, the matter proceeded to a trial by jury. The jury found that Mr. Katzman did not fraudulently induce CompCare to enter into the contract. The jury also found that Mr. Katzman was not entitled to damages. On defendant’s motion to amend the verdict due to inconsistency, the trial court set aside the jury verdict and awarded Mr. Katzman damages of approximately $1.3 million. In February 2011, the Company filed a Notice of Appeal, posted a collateralized appeal bond for approximately $1.3 million, and filed a motion for reconsideration. The appeal, originally scheduled to be heard in May 2012, was removed from the court’s oral argument docket. We are awaiting a new oral argument date or an opinion.

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, originally scheduled to be heard in May 2012, was removed from the court’s oral argument docket. We are awaiting a new oral argument date or an opinion.

(2) On September 21, 2010, a complaint entitled “InfoMC, Inc. v. Comprehensive Behavioral Care, Inc. and CompCare de Puerto Rico, Inc.” was filed against us alleging, among other things, that the Company improperly used InfoMC, Inc.’s trademarks in connection with CompCare de Puerto Rico Inc.’s proposal to obtain a managed behavioral healthcare services contract in Puerto Rico. The complaint asserts claims for federal trademark infringement, false advertising, unfair competition, conversion, promissory estoppel and unjust enrichment. The plaintiff is seeking monetary damages in the amount of $600,000 and certain

22

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

injunctive relief. We filed a motion to dismiss the complaint which was denied on March 30, 2012, but our motion to transfer the case to the District of Puerto Rico was granted effective April 30, 2012. We believe the suit is without merit and if the case proceeds, we intend to vigorously defend ourselves against the allegations asserted.

(3) On January 5, 2011, a complaint entitled “Community Hospitals of Indiana, Inc. vs. Comprehensive Behavioral Care, Inc. and MDwise, Inc.” was filed against us. The complaint claims damages of approximately $1.7 million from us and MDwise, Inc., a former client, for allegedly unpaid claims for behavioral health professional services rendered between 2007 and 2008. The complaint alleges, among other things, breach of contract and unjust enrichment, and requests recovery of alleged losses despite the absence of a contract between us and complainant. We believe the suit against the Company is without merit and are vigorously opposing the litigation.

Management believes that the Company has made adequate provision for any estimated probable losses, 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 1A. RISK FACTORS

The risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2011 have not materially changed.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period May 1, 2012 through August 9, 2012, we sold or issued our common shares or securities convertible into common stock in private placements not involving a public offering as follows:

- On August 1, 2012, in exchange for cash proceeds of $25,000, we issued a $25,000 convertible promissory note to an investor. The note bears interest at the rate of 12% per annum payable quarterly and has a term of two years. At maturity, any or all of the principal plus the accrued but unpaid interest may be convertible at the investor’s option into our common stock at a conversion price of $0.25 per share. At any time prior to the maturity date of the note, the investor may elect to convert the outstanding balance, or any portion thereof, of the note plus any accrued but unpaid interest into shares of the Company’s common stock at $0.25 per share. In conjunction with the note issuance, the investor received a warrant with a two year term that may be used to purchase 100,000 shares of our common stock at an exercise price of $0.25 per share. The warrant was vested in full at issuance.

Based on certain representations and warranties of the recipients referenced above, we relied on Section 3(a)(9) and 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) as applicable, for an exemption from the registration requirements of the Securities Act. The shares purchased have not been registered under the Securities Act and may not be sold in the United States absent registration or an applicable exemption from registration requirements.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

We were unable to repay our 10% senior promissory notes in the amount of approximately $1.8 million on the maturity date of April 15, 2012. However, during June, July, and August of 2012 we reached agreement with holders of approximately 98%, or $1.7 million of the notes to renew the notes for an additional year. The notes will mature April 15, 2013 and bear interest at 14% effective from April 15, 2012. Although we expect to negotiate the same note modifications with the remaining senior note holders in the near future, we cannot provide any assurance of the ultimate success of these negotiations.

We remain in default of $549,000 of our 7 ¹/₂% convertible subordinated debentures that were due April 15, 2010, and for which we have not been able to contact the holders. Approximately $91,000 in interest is unpaid related to these debentures.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

23

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

ITEM 6. EXHIBITS

EXHIBIT NUMBER	DESCRIPTION
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.1	Third Amendment to the Agreement for the Provision of Services with an effective date of May 1, 2012, by and between CompCare de Puerto Rico, Inc. and MSO of Puerto Rico, Inc. incorporated by reference to Exhibit 10.1 to our Form 8-K Current Report dated June 20, 2012 and filed June 25, 2012.
101	The following materials from Comprehensive Care Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

24

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMPREHENSIVE CARE CORPORATION
August 14, 2012
	By	/s/ CLARK A. MARCUS
		Clark A. Marcus
		Chief Executive Officer and Chairman
		(Principal Executive Officer)
	By	/s/ ROBERT J. LANDIS
		Robert J. Landis
		Chief Financial Officer and Chief Accounting Officer
		(Principal Financial and Accounting Officer)

25

EX-31.1

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Clark A. Marcus, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Comprehensive Care Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 14, 2012	/s/ CLARK A. MARCUS
	Clark A. Marcus
	Chief Executive Officer and Chairman (Principal Executive Officer)

26

EX-31.2

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert J. Landis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Comprehensive Care Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 14, 2012	/s/ ROBERT J. LANDIS
	Robert J. Landis
	Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer)

27

EX-32.1

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Exhibit 32.1

Certification of CEO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report of Comprehensive Care Corporation (the “Company”) on Form 10-Q for the quarter ending June 30, 2012 as filed with the Securities and Exchange Commission on August 14, 2012 (the “Report”), Clark A. Marcus, as Chief Executive Officer and Chairman of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    CLARK A. MARCUS

Clark A. Marcus

Chief Executive Officer and Chairman

August 14, 2012

28

EX-32.2

COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Exhibit 32.2

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report of Comprehensive Care Corporation (the “Company”) on Form 10-Q for the quarter ending June 30, 2012 as filed with the Securities and Exchange Commission on August 14, 2012 (the “Report”), Robert J. Landis, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    ROBERT J. LANDIS

Robert J. Landis

Chief Financial Officer and Chief Accounting Officer

August 14, 2012

29

XML

Equity Instruments (Details) (Warrant [Member], USD $)	3 Months Ended				6 Months Ended		12 Months Ended
	Jun. 30, 2012	Mar. 31, 2012	Jun. 30, 2011	Mar. 31, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	Dec. 31, 2010
Warrant [Member]
Schedule of Warrant activity
Share-based compensation arrangement by share-based payment award, options, outstanding, beginning balance	40,982,583	41,057,583	28,351,250	27,209,750	41,057,583	27,209,750	27,209,750
Share-based compensation arrangement by share-based payment award, options, outstanding, weighted average exercise price, beginning balance	$ 0.35	$ 0.35	$ 0.40	$ 0.38	$ 0.35	$ 0.38	$ 0.38
Weighted-average remaining contractual term outstanding beginning balance	4 years 6 months 29 days	4 years 7 months 10 days	3 years 9 months 7 days	4 years 18 days			4 years 10 months 10 days	4 years 3 months
Shares granted		25,000		1,291,500	433,000
Weighted-average exercise price granted		$ 0.25		$ 0.89	$ 0.25
Shares forfeited or expired		(100,000)	(1,000,000)	(650,000)	(2,300,000)
Weighted-average exercise price forfeited		$ 0.53		$ 0.51	$ 0.32	$ 1.00
Share-based compensation arrangement by share-based payment award, options, outstanding, ending balance	38,682,583	40,982,583	27,784,250	28,351,250	38,682,583	27,784,250	41,057,583	27,209,750
Share-based compensation arrangement by share-based payment award, options, outstanding, weighted average exercise price, ending balance	$ 0.35	$ 0.35	$ 0.37	$ 0.40	$ 0.35	$ 0.37	$ 0.35	$ 0.38
Weighted-average remaining contractual term outstanding ending balance	4 years 6 months 29 days	4 years 7 months 10 days	3 years 9 months 7 days	4 years 18 days			4 years 10 months 10 days	4 years 3 months
Shares exercisable ending balance	37,615,583		25,459,250		37,615,583	25,459,250
Weighted-average exercise price exercisable ending	$ 0.33		$ 0.34		$ 0.33	$ 0.34
Weighted average remaining contractual term exercisable ending					4 years 7 months 13 days	3 years 9 months 4 days
Shares reclassified				500,000
Weighted-average exercise price reclassified				$ 0.55

XML

Notes Payable

6 Months Ended

Jun. 30, 2012

Notes Payable [Abstract]

NOTES PAYABLE

NOTE 2 – NOTES PAYABLE

In May 2012, a zero coupon promissory note in the amount of $230,000 matured and was replaced by a new note of similar terms with a face value of $230,000 and a maturity date of August 31, 2012.

In April 2012, a 14%, $100,000 convertible promissory note matured and was renewed on the same terms until July 31, 2012, at which time the note was again renewed. The new note utilizes the same terms as the previous note and has a maturity date of October 31, 2012.

A 24% convertible promissory note in the amount of $2 million issued to a related party, a major stockholder, was not repaid on its maturity date of June 4, 2011, and is currently in default. As of June 30, 2012, interest of approximately $1.0 million was also due and in default on this promissory note. We continue to accrue interest at the rate of 24% and include these obligations in current liabilities (Note 4).

XML

Per Share Data (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Numerator:
Net income (loss) attributable to Company common stockholders	$ 1,607	$ (3,970)	$ 1,687	$ (3,929)
Add: Impact of assumed conversions Interest on convertible debts	231		223
Net income (loss) attributable to common stockholders after assumed conversions	$ 1,838	$ (3,970)	$ 1,910	$ (3,929)
Denominator:
Weighted average number of shares issued, basic	59,252	55,784	59,252	55,217
Weighted average common shares diluted	88,434	55,784	81,787	55,217
Convertible debts	20,700		12,684
Earnings per share:
Basic	$ 0.03	$ (0.07)	$ 0.03	$ (0.07)
Diluted	$ 0.02		$ 0.02
Series C Convertible Preferred Stock [Member]
Denominator:
Effect of dilutive securities	3,300		3,300
Series D Convertible Preferred Stock [Member]
Denominator:
Effect of dilutive securities	5,182		6,551
Stock Options [Member]
Denominator:
Effect of dilutive securities, warrants and options
Warrant [Member]
Denominator:
Effect of dilutive securities, warrants and options

XML

Income Taxes (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012 Rate	Jun. 30, 2012 Rate
Income Taxes (Textual) [Abstract]
Effective income tax rates	0.10%	0.30%
Deferred tax assets from net operating loss carryforwards	$ 1,000,000	$ 1,000,000
Federal net operating loss carryforwards	38,400,000	38,400,000
Deductibility	29,300,000	29,300,000
Federal net operating loss carryforwards at present	$ 361,000	$ 361,000

XML

Description of the Company's Business and Basis of Presentation

6 Months Ended

Jun. 30, 2012

Description of the Company's Business and Basis of Presentation [Abstract]

DESCRIPTION OF THE COMPANY'S BUSINESS AND BASIS OF PRESENTATION

NOTE 1 – DESCRIPTION OF THE COMPANY’S BUSINESS AND BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements for Comprehensive Care Corporation (referred to herein as the “Company,” or “CompCare”) and its subsidiaries have been prepared in accordance with the Securities and Exchange Commission (“SEC”) rules for interim financial information and do not include all information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Interim results for the current period are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the consolidated financial statements and the notes thereto in our most recent annual report on Form 10-K. Certain minor reclassifications of prior period amounts have been made to conform to the current period presentation.

Our consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, Comprehensive Behavioral Care, Inc. (“CBC”) and Core Corporate Consulting Group, Inc. (“Core”), each with their respective subsidiaries (collectively referred to herein as “we,” “us” or “our”). Through CBC, we provide managed care services in the behavioral health, substance abuse, and psychotropic pharmacy management fields for commercial, Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) members on behalf of health plans. We also provide behavioral pharmaceutical management services for two health plans in Puerto Rico. Our managed care operations include at-risk behavioral health contracts, at-risk pharmacy management contracts, and administrative service agreements. The customer base for our services includes both private and governmental entities. Our services are provided by unrelated vendors on a subcontract basis.

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Current assets:
Cash	$ 1,491	$ 832
Accounts receivable	1,204	834
Other	559	699
Total current assets	3,254	2,365
Property and equipment, net	265	392
Goodwill	12,150	12,150
Other intangible assets, net of accumulated amortization of $1,560 in 2011		28
Other	352	381
Total assets	16,021	15,316
Notes payable:
Related parties	2,040	2,090
Other	2,021	580
Current portion of long-term debt:
Related parties	1,000
Other	3,584	2,467
Accounts payable	1,176	1,323
Accrued claims payable	14,593	14,036
Other accrued expenses	5,745	7,399
Total current liabilities	30,159	27,895
Long-term debt, net of current portion:
Related parties		1,000
Other	408	2,903
Total liabilities	30,567	31,798
Stockholders equity deficiency:
Common stock, $0.01 par value; authorized shares: 500,000,000 and 200,000,000 respectively; issued and outstanding 59,251,836	592	592
Additional paid-in capital	25,704	25,455
Deficit	(41,364)	43,051
Total stockholders' equity deficiency	(14,546)	(16,482)
Total liabilities and deficiency	16,021	15,316
Preferred stock, series C convertible
Stockholders equity deficiency:
Preferred stock	522	522
Preferred stock, series D convertible
Stockholders equity deficiency:
Preferred stock
Preferred stock, other series
Stockholders equity deficiency:
Preferred stock

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows from operating activities:
Net cash provided by operating activities	$ 812	$ 548
Cash flows from investing activities:
Additions to property and equipment	(2)	(22)
Cash flows from financing activities:
Net proceeds from sale of common stock		300
Proceeds from borrowings, Related Party		200
Proceeds from borrowings, other	100
Debt issuance costs	(8)
Repayment of debt, Related Party	(50)	(100)
Repayment of debt, other	(193)	(199)
Net cash (used in) provided by financing activities	(151)	201
Net increase in cash	659	727
Cash at beginning of period	832	563
Cash at end of period	1,491	1,290
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, including related party interest of $11 and $2, respectively	405	227
Property acquired under capital leases		37
Common stock and warrants issued for outside services		$ 84

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Contingencies (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012 Bonds	Jun. 30, 2012 D Person Bonds	Mar. 05, 2012	Dec. 31, 2011
Contingencies (Textual) [Abstract]
Working capital deficiency		$ 26,900,000
Stockholders Equity Deficiency		14,500,000
Debt past due				2,800,000
Members of health plan		212,000
Percent of revenue accounted for by contract		76.50%
Revenue accounted for by contract		27,600,000
Additional renewal term		1 year
Prior written notice to cancel contract		90
Amendments in health plan extension of the contract term date			Dec. 31, 2012
Pharmacy management services, rate effective January 1, 2012		11.00%
Contract Interpretation Dispute from Health Plan		2,200,000
Contract resolution reduced cost	2,200,000
Written Notice to Terminate in Event of Material Breach of Contract		60
Notice period for breach involving financial obligations		30
Period for cure breach to prevent termination of contact		30 days
Pending judgment of damages	1,900,000	1,900,000
Monetary damages		600,000
Unpaid claims		1,700,000
Adjustment to provision for possible litigation settlements and legal defense costs net	1,600,000
Letter of credit	4,000,000	4,000,000
Line of credit facility to collateralize surety bonds	$ 1,900,000	$ 1,900,000
Number of surety bonds	2	2

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Fair Value of Financial Instruments (Details Textual) (USD $)	Jun. 30, 2012
Fair Value of Financial Instruments (Textual) [Abstract]
Promissory Notes payable	$ 3,040,000

XML

Consolidated Statements of Cash Flows (Parenthetical) (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Consolidated Statements of Cash Flows [Abstract]
Interest paid to related party	$ 11	$ 2

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Jun. 30, 2012
Other intangible assets, accumulated amortization	$ 1,560
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	200,000,000	500,000,000
Common stock, shares issued	59,251,836	59,251,836
Common stock, shares outstanding	59,251,836	59,251,836
Preferred stock, series C convertible
Preferred stock, par value	$ 50	$ 50
Preferred stock, shares authorized	14,400	14,400
Preferred stock, shares issued	10,434	10,434
Preferred Stock, shares outstanding	10,434	10,434
Preferred stock, series D convertible
Preferred stock, par value		$ 50
Preferred stock, shares authorized		7,000
Preferred stock, shares issued		250
Preferred Stock, shares outstanding		250
Preferred stock, other series
Preferred stock, par value	$ 50	$ 50
Preferred stock, shares authorized	974,260	974,260
Preferred stock, shares issued	0	0

XML

Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value of Financial Instruments [Abstract]

Schedule of estimated fair values of financial instruments

The carrying amounts and estimated fair values of these financial instruments (all are liabilities) at June 30, 2012, are as follows (in thousands):

	Carrying Amount			Estimated Fair  Value
Promissory notes	$	3,290		$	3,273
Zero-coupon promissory notes		230			224
Debentures		549			528
Senior promissory notes		1,758			1,746
Long-term promissory note		100			96
Less unamortized discount		(175	)		—
Net liabilities	$	5,752		$	5,867

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 09, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	COMPREHENSIVE CARE CORP
Entity Central Index Key	0000022872
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		59,251,836

XML

Equity Instruments (Tables)

6 Months Ended

Jun. 30, 2012

Equity Instruments [Abstract]

Schedule of warrant activity

A summary of our warrant activity for the three and six months ended June 30, 2012 and 2011 follows:

Warrants	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term
Outstanding at January 1, 2012		41,057,583		$	0.35		4.86 years
Granted		25,000		$	0.25
Forfeited or expired		(100,000	)	$	0.53
Outstanding at March 31, 2012		40,982,583		$	0.35		4.61 years
Forfeited or expired		(2,300,000	)	$	0.32
Outstanding at June 30, 2012		38,682,583		$	0.35		4.58 years
Exercisable at June 30, 2012*		37,615,583		$	0.33		4.62 years
Outstanding at January 1, 2011		27,209,750		$	0.38		4.25 years
Granted		1,291,500		$	0.89
Reclassified		500,000		$	0.55
Forfeited, expired, or cancelled		(650,000	)	$	0.51
Outstanding at March 31, 2011		28,351,250		$	0.40		4.05 years
Granted		433,000		$	0.25
Forfeited or expired		(1,000,000	)	$	1.00
Outstanding at June 30, 2011		27,784,250		$	0.37		3.77 years
Exercisable at June 30, 2011*		25,459,250		$	0.34		3.76 years

* No aggregate intrinsic value.

Schedule of Option activity

A summary of our option activity for the three and six months ended June 30, 2012 and 2011 follows:

Options	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term
Outstanding at January 1, 2012		8,795,400		$	0.33		7.74 years
Forfeited or expired		(40,000	)	$	0.38
Outstanding at March 31, 2012		8,755,400		$	0.33		7.49 years
Forfeited or expired		(119,500	)	$	0.35
Outstanding at June 30, 2012		8,635,900		$	0.33		7.24 years
Exercisable at June 30, 2012*		7,978,000		$	0.33		7.15 years
Outstanding at January 1, 2011		2,611,100		$	0.50		8.09 years
Granted		25,000		$	0.23		9.82 years
Forfeited or expired		(464,750	)	$	0.30
Outstanding at March 31, 2011		2,171,350		$	0.54		7.77 years
Forfeited or expired		(116,500	)	$	0.38
Outstanding at June 30, 2011		2,054,850		$	0.55		7.47 years
Exercisable at June 30, 2011*		1,125,650		$	0.68		6.70 years

* No aggregate intrinsic value.

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Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenues:
Managed care revenues	$ 18,214	$ 18,557	$ 36,014	$ 36,839
Costs and expenses:
Costs of revenues	13,765	18,794	30,409	35,323
General and administrative	2,226	2,982	2,741	4,143
Depreciation and amortization	60	218	156	434
Total expenses	16,051	21,994	33,306	39,900
Operating income (loss)	2,073	(3,437)	2,708	(3,061)
Other income (expense):
Interest expense, including $159, $126, $319 and $244, respectively, to related parties, and amortization of debt discount of $75, $221, $270 and $410, respectively	(465)	(468)	(1,028)	(902)
Other non-operating income (loss), net	1	(29)	12	107
Income (loss) before income taxes	1,609	(3,934)	1,692	(3,856)
Income taxes	2	36	5	73
Net income (loss)	1,607	(3,970)	1,687	(3,929)
Net income (loss) attributable to common stockholders	$ 1,607	$ (3,970)	$ 1,687	$ (3,929)
Earnings (loss) per common share:
Basic	$ 0.03	$ (0.07)	$ 0.03	$ (0.07)
Diluted	$ 0.02		$ 0.02
Weighted average common shares outstanding:
Basic	59,252	55,784	59,252	55,217
Diluted	88,434	55,784	81,787	55,217

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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2012

Fair Value of Financial Instruments [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, accounts receivable and accounts payable approximate their estimated fair value due to the short-term nature of these instruments. Since our other financial liabilities are not traded in an open market, we generally use a present value technique, which is a level 3 input, as defined in generally accepted accounting principles, to measure the estimated fair value of these financial instruments, except for valuing stock options and warrants. The rate used for discounting expected cash flows is a risk-free rate adjusted for systematic and unsystematic risk.

The carrying amounts and estimated fair values of these financial instruments (all are liabilities) at June 30, 2012, are as follows (in thousands):

	Carrying Amount			Estimated Fair  Value
Promissory notes	$	3,290		$	3,273
Zero-coupon promissory notes		230			224
Debentures		549			528
Senior promissory notes		1,758			1,746
Long-term promissory note		100			96
Less unamortized discount		(175	)		—
Net liabilities	$	5,752		$	5,867

Due to the inherent nature of related party transactions, we have not attempted to estimate the fair value of liabilities payable to related parties of the Company. As such, promissory notes payable with a carrying value of $3,040,000 are excluded from the table above.

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Contingencies

6 Months Ended

Jun. 30, 2012

Contingencies [Abstract]

CONTINGENCIES

NOTE 4 – CONTINGENCIES

Economic conditions and related risks, concentrations and uncertainties:

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, 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 ability to obtain continued support from our major stockholders and other lenders, success in our marketing efforts, and ultimately, profitable operations and positive cash flows, cannot be estimated at this time.

We occasionally carry cash and equivalents on deposit with financial institutions in excess of federally-insured limits, and the risk of losses related to such concentrations may be increasing as a result of recent economic developments discussed in the foregoing paragraph. The extent of a loss to be sustained as a result of uninsured deposits in the event of a future failure of a financial institution, if any, however, is not subject to estimation at this time.

Going concern uncertainty:

At June 30, 2012, we had a working capital deficiency of approximately $26.9 million and a stockholders’ equity deficiency of approximately $14.5 million resulting from a history of operating losses. Approximately $2.8 million of debt was past due and in default. As a result of these conditions, and the aforementioned economic conditions and related risks, our ability to continue as a going concern will be dependent upon the success of management’s plans, as set forth in the following paragraph, and is subject to significant uncertainty. Management has determined that these conditions have not contributed to any impairment of the Company’s goodwill at this time, and the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty, except for the consideration afforded this matter in determining the valuation allowance for deferred tax assets from net operating loss carryforwards (Note 7).

Although we cannot provide any assurance in this respect, we believe that subject to the general economic conditions, risks and uncertainties discussed in the preceding paragraphs, (a) with our existing customer contracts, plus the addition of new contracts we believe we are close to obtaining through our marketing efforts, and the launch of new pharmacy management programs, and (b) the expected continuing financial support from our major stockholders and bondholders, that we will be able to improve our cash flows and operating results in the near term and sustain current operations over the next year. However, we do not currently maintain a line of credit or other financing arrangement with any financial institution and have not made any arrangements to obtain any additional financing but are looking at various alternative sources of financing if operations cannot support our ongoing plan. Nevertheless, there also 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 we will be able to achieve the expected profitable operations and positive operating cash flows in the near term. Accordingly, our ability to achieve our business objectives and continue as a going concern is dependent upon the success of the foregoing plans to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during the next year.

Concentration, major customer contract:

We currently provide mental health, substance abuse, and pharmacy prescription drugs management services to approximately 212,000 members of a health plan in Puerto Rico on an at-risk basis pursuant to a contract that expires in September 2012. The contract accounted for 76.5%, or $27.6 million, of our revenues for the six months ended June 30, 2012. The contract provided for automatic renewals for additional one year terms unless either party provides 90 days prior written notice of its intention not to renew the agreement. However, on March 5, 2012, the contract with the aforementioned health plan in Puerto Rico was amended to extend the contract term to December 31, 2012, and to increase the rate to be paid to the Company for pharmacy management services by approximately 11% retroactively effective January 1, 2012.

In addition, we resolved a contract interpretation dispute for $2.2 million with the health plan against the cost of pharmacy drugs for which it was agreed that we are not responsible under the contract. The contract dispute resolution removes the cost of pharmacy drugs prescribed for non-mental health conditions charged to us by the health plan’s pharmacy benefit manager from the contract’s inception to April 2012. The contract resolution reduced our pharmacy cost by $2.2 million during the three months ended June 30, 2012. Additionally, the dispute resolution required us to establish a designated bank account in the name of our client for the payment of claims associated with this client.

The aforementioned health plan in Puerto Rico has the ability to cancel the contract without cause by providing at least 90 days prior written notice, and in the event of a material breach of the contract, each party has the right to terminate after 60 days prior written notice, except that a breach involving either party’s financial obligations requires only 30-day notice. The foregoing notwithstanding, the breaching party would have 30 days to cure the breach to prevent termination of the contact. The loss of this customer, without replacement by new business, would adversely affect our future financial results and jeopardize our ability to continue as a going concern.

Legal matters:

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Aside from the litigation described below, as of the date of this report, we are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business, financial condition or operating results.

(1) We are subject to a pending judgment of damages to a former director of approximately $1.9 million including an award for reimbursement of legal fees and payment of interest. The judgment and award are under appeal, and motions for reconsideration by the Company are pending.

(2) A subsidiary is subject to a suit for trademark infringement, among other things, in connection with its proposal to obtain a managed behavioral healthcare services contract in Puerto Rico. The complaint is seeking monetary damages in the amount of $600,000 and certain injunctive relief. We believe the suit is without merit and intend to vigorously defend ourselves against the allegations asserted.

(3) In addition, we and a former customer are being sued for damages of approximately $1.7 million for allegedly unpaid claims for behavioral health professional services rendered in 2007 and 2008. We filed a counterclaim for breach of a settlement agreement that we believe previously resolved many of the claims that are the subject of the complaint, which we believe is without merit and are vigorously opposing.

During the six months ended June 30, 2012, we re-evaluated the adequacy of our provision for possible litigation settlements and legal defense costs and made adjustments to reduce the provision by the amount of approximately $1.6 million, which resulted in an equal reduction of our first quarter general and administrative expense. The reduction is due to the Company obtaining an offsetting judgment against an individual that also has pending judgments against us described in item (1) above. With regard to this matter, we obtained a letter of credit in 2011 for approximately $1.9 million to collateralize two surety bonds that permit our appeal of these judgments against us. Management believes that the remaining provision is adequate for the estimated probable minimum losses, including legal defense costs, to be incurred from the litigation described above.

Other:

In connection with a new customer agreement for us to provide mental health, substance abuse and pharmacy prescription drugs management services in Puerto Rico, we obtained a letter of credit from a bank in the amount of $4.0 million to assure the customer of our compliance with our obligations under the agreement. Under such agreement, the customer may draw on all or part of the letter of credit under certain defined circumstances. Collateral for the letter of credit was provided by a major stockholder of the Company. If the client draws upon the letter of credit, we may become liable to our major stockholder for the amount of collateral accessed by the bank to fulfill its obligations under the letter of credit.

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012
Schedule of Estimated Fair Values of Financial Instruments
Less: unamortized discount	$ (175)
Net liabilities carrying amount	5,752
Net liabilities fair value disclosure	5,867
Promissory Notes [Member]
Schedule of Estimated Fair Values of Financial Instruments
Financial Instrument Carrying Amount	3,290
Debt instrument, fair value disclosure	3,273
Zero Coupon Notes [Member]
Schedule of Estimated Fair Values of Financial Instruments
Financial Instrument Carrying Amount	230
Debt instrument, fair value disclosure	224
Debentures [Member]
Schedule of Estimated Fair Values of Financial Instruments
Financial Instrument Carrying Amount	549
Debt instrument, fair value disclosure	528
Senior Promissory Notes [Member]
Schedule of Estimated Fair Values of Financial Instruments
Financial Instrument Carrying Amount	1,758
Debt instrument, fair value disclosure	1,746
Long Term Promissory Notes [Member]
Schedule of Estimated Fair Values of Financial Instruments
Financial Instrument Carrying Amount	100
Debt instrument, fair value disclosure	$ 96

XML

Per Share Data (Tables)

6 Months Ended

Jun. 30, 2012

Per Share Data [Abstract]

Schedule of basic and diluted earnings per share attributable common stockholders

For the periods presented, the following table sets forth the computation of basic and, where applicable,* diluted earnings per share attributable to common stockholders (dollars in thousands, except per share data):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Numerator:
Net income (loss) attributable to common stockholders	$	1,607	$	(3,970	)	$	1,687	$	(3,929	)
Add: Impact of assumed conversions Interest on convertible debts		231		—			223		—
Net income (loss) attributable to common stockholders after assumed conversions	$	1,838	$	(3,970	)	$	1,910	$	(3,929	)
Denominator:
Weighted average common shares – basic		59,252		55,784			59,252		55,217
Effect of dilutive securities:
Series C convertible preferred stock		3,300		—			3,300		—
Series D convertible preferred stock		5,182		—			6,551		—
Stock options		—		—			—		—
Warrants		—		—			—		—
Convertible debts		20,700		—			12,684		—
Weighted average common shares – diluted		88,434		55,784			81,787		55,217
Earnings per share:
Basic	$	0.03	$	(0.07	)	$	0.03	$	(0.07	)
Diluted	$	0.02		n/a		$	0.02		n/a

* No diluted per share data is presented for loss periods because to do so would be anti-dilutive.

XML

Per Share Data

6 Months Ended

Jun. 30, 2012

Per Share Data [Abstract]

PER SHARE DATA

NOTE 8 – PER SHARE DATA

For the periods presented, the following table sets forth the computation of basic and, where applicable,* diluted earnings per share attributable to common stockholders (dollars in thousands, except per share data):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Numerator:
Net income (loss) attributable to common stockholders	$	1,607	$	(3,970	)	$	1,687	$	(3,929	)
Add: Impact of assumed conversions Interest on convertible debts		231		—			223		—
Net income (loss) attributable to common stockholders after assumed conversions	$	1,838	$	(3,970	)	$	1,910	$	(3,929	)
Denominator:
Weighted average common shares – basic		59,252		55,784			59,252		55,217
Effect of dilutive securities:
Series C convertible preferred stock		3,300		—			3,300		—
Series D convertible preferred stock		5,182		—			6,551		—
Stock options		—		—			—		—
Warrants		—		—			—		—
Convertible debts		20,700		—			12,684		—
Weighted average common shares – diluted		88,434		55,784			81,787		55,217
Earnings per share:
Basic	$	0.03	$	(0.07	)	$	0.03	$	(0.07	)
Diluted	$	0.02		n/a		$	0.02		n/a

* No diluted per share data is presented for loss periods because to do so would be anti-dilutive.

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Equity Instruments

6 Months Ended

Jun. 30, 2012

Equity Instruments [Abstract]

EQUITY INSTRUMENTS

NOTE 6 – EQUITY INSTRUMENTS

Our Series C preferred stock is currently convertible into common stock at the rate of approximately 316.28 common shares for each share of Series C preferred, adjustable for any dilutive issuances of common occurring in the future. Series C preferred shares vote with the common stockholders on an as-converted basis. The shares are nonparticipating except that dividends, when declared by our Board of Directors on the common stock, must be paid on the Series C stock on an as-converted basis before any dividends are paid on our common stock. The Series C is also cumulative with respect to dividends on common stock and junior series of preferred stock. Other significant rights and preferences of the Series C preferred include:

• the right to vote as a separate class to appoint five directors of the Company, and

• liquidation preferences, whereby the Series C holders 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 value of the liquidation preference is $250 per share, or approximately $2.6 million at June 30, 2012).

We also have a class of convertible preferred stock, Series D, for which 7,000 shares are authorized and 250 shares were issued during the six months ended and outstanding as of June 30, 2012. The shares, which were granted in January 2012, do not vest until the tenth anniversary of the grant date. Such shares were issued in exchange for the cancelation of 120 previously granted warrants to purchase Series D shares. Once vested, a Series D preferred share will be convertible at any time into 100,000 shares of common stock, subject to adjustment in the event of any common stock dividend, split, combination thereof or other similar recapitalization, without additional consideration. Prior to vesting and thereafter, each Series D convertible preferred share is entitled to all voting, dividend, liquidation and other rights accorded a share of Series D convertible preferred stock. As to dividends, the Series D stock is noncumulative. If a dividend is declared on the common stock, each share of Series D stock is entitled to receive a dividend equal to 50% of the dividend declared for the common stock as if the Series D stock had been converted. Despite their nonvested status, voting rights of each share nevertheless consist of the right to cast the number of votes equal to those of 500,000 shares of common stock. Unless otherwise required by applicable law, holders of shares of Series D have the right to vote together with holders of common stock as a single class on all matters submitted to a vote of our stockholders. At June 30, 2012, approximately $3.6 million of compensation expense remained to be recognized over the next 9.5 years related to the Series D shares.

STOCK INCENTIVE COMPENSATION PLANS

WARRANTS:

To Purchase Common Stock

We periodically issue warrants to purchase shares of our common stock for the services of employees and non-employee directors.

Due to employee and director resignations, we derecognized net compensation costs of approximately $32,000 and $24,000, respectively, related to warrants to purchase common stock during the three and six months ended June 30, 2012. Total unrecognized compensation costs related to warrants as of June 30, 2012, was approximately $204,000 which is expected to be recognized over a weighted-average period of 37 months. The total fair value of warrants vested during the three and six months ended June 30, 2012, was $5,708.

A summary of our warrant activity for the three and six months ended June 30, 2012 and 2011 follows:

Warrants	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term
Outstanding at January 1, 2012		41,057,583		$	0.35		4.86 years
Granted		25,000		$	0.25
Forfeited or expired		(100,000	)	$	0.53
Outstanding at March 31, 2012		40,982,583		$	0.35		4.61 years
Forfeited or expired		(2,300,000	)	$	0.32
Outstanding at June 30, 2012		38,682,583		$	0.35		4.58 years
Exercisable at June 30, 2012*		37,615,583		$	0.33		4.62 years
Outstanding at January 1, 2011		27,209,750		$	0.38		4.25 years
Granted		1,291,500		$	0.89
Reclassified		500,000		$	0.55
Forfeited, expired, or cancelled		(650,000	)	$	0.51
Outstanding at March 31, 2011		28,351,250		$	0.40		4.05 years
Granted		433,000		$	0.25
Forfeited or expired		(1,000,000	)	$	1.00
Outstanding at June 30, 2011		27,784,250		$	0.37		3.77 years
Exercisable at June 30, 2011*		25,459,250		$	0.34		3.76 years

* No aggregate intrinsic value.

To Purchase Series D Convertible Preferred Stock

During the three months ended June 30, 2012, warrants to purchase up to 100 shares of our Series D convertible preferred stock expired. All such warrants have now expired unexercised.

OPTIONS:

From time-to-time, we grant stock options as compensation for services to our employees, non-employee directors and certain consultants (“grantees”) allowing grantees to purchase our common stock pursuant to stockholder-approved stock option plans. We currently have three active incentive qualified option plans, the 1995 Incentive Plan, the 2002 Incentive Plan and the 2009 Equity Compensation Plan (collectively, the “Plans”), that provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, restricted preferred stock, and common stock grants to grantees. Grants issued under the Plans may qualify as incentive stock options (“ISOs”) under Section 422A of the Internal Revenue Code of 1986, as amended. Options for ISOs may be granted for terms of up to ten years. The vesting of options issued under the 1995 and 2002 plans generally occurs after six months for one-half of the options and after 12 months for the remaining options. For the 2009 Equity Compensation Plan, the vesting period is determined by the Compensation and Stock Option Committee. The exercise price for ISOs must equal or exceed the fair market value of the underlying shares on the date of grant. The Plans also provide for the full vesting of all outstanding options under certain change of control events. The maximum number of common shares authorized for issuance under the Plans is 52,000,000. As of June 30, 2012, there were a total of 43,938,100 shares available for grant and 7,030,900 options outstanding, 6,413,000 of which were exercisable, under the Plans.

In addition, under our Non-employee Directors’ Stock Option Plan, we are authorized to issue non-qualified stock options to our non-employee directors for up to 1,000,000 common shares. Each non-qualified stock option is exercisable at a price equal to the average of the closing bid and asked prices of the common stock in the over-the-counter market for the most recent preceding day there was a sale of the stock prior to the grant date. Grants of options vest in accordance with vesting schedules established by our Board of Directors’ Compensation and Stock Option Committee. Upon joining our Board of Directors, directors receive an initial grant of 25,000 options. Annually, directors are granted 15,000 options on the date of our annual meeting. As of June 30, 2012, there were 796,668 shares available for option grants and 105,000 options outstanding under the non-qualified directors’ plan, 65,000 of which were exercisable.

As of June 30, 2012, we also had 1,500,000 options outstanding and exercisable. These options were issued outside the option plans described above.

A summary of our option activity for the three and six months ended June 30, 2012 and 2011 follows:

Options	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term
Outstanding at January 1, 2012		8,795,400		$	0.33		7.74 years
Forfeited or expired		(40,000	)	$	0.38
Outstanding at March 31, 2012		8,755,400		$	0.33		7.49 years
Forfeited or expired		(119,500	)	$	0.35
Outstanding at June 30, 2012		8,635,900		$	0.33		7.24 years
Exercisable at June 30, 2012*		7,978,000		$	0.33		7.15 years
Outstanding at January 1, 2011		2,611,100		$	0.50		8.09 years
Granted		25,000		$	0.23		9.82 years
Forfeited or expired		(464,750	)	$	0.30
Outstanding at March 31, 2011		2,171,350		$	0.54		7.77 years
Forfeited or expired		(116,500	)	$	0.38
Outstanding at June 30, 2011		2,054,850		$	0.55		7.47 years
Exercisable at June 30, 2011*		1,125,650		$	0.68		6.70 years

* No aggregate intrinsic value.

Total recognized compensation costs during the three and six months ended June 30, 2012 were approximately $73,000 and $168,000, respectively. As of June 30, 2012, there was approximately $112,000 of unrecognized compensation cost related to options expected to be recognized over a weighted-average period of 13 months. We might have recognized approximately $15,000 and $34,000 of tax benefits attributable to stock-based compensation expense recorded during the three and six ended June 30, 2012. However, this potential benefit was fully offset by our valuation allowance due to the aforementioned significant uncertainty of future realization. The total fair value of options vested during the three and six months ended June 30, 2012, was $11,148.

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Income Taxes

6 Months Ended

Jun. 30, 2012

Income Taxes [Abstract]

INCOME TAXES

NOTE 7 – INCOME TAXES

We are subject to the income tax jurisdictions of the U.S., Puerto Rico, as well as multiple state tax jurisdictions. Our provisions for income taxes for the three and six months ended June 30, 2012 and 2011, represented solely certain state income tax expenses. The effective income tax rates for the three and six months ended June 30, 2012 were 0.1% and 0.3%, respectively. Our income before income taxes for the three and six months ended June 30, 2012, was attributable to the net profit of a subsidiary in Puerto Rico, which is currently not subject to the U.S. federal tax jurisdiction. For the three months ended June 30, 2012, our subsidiary in Puerto Rico utilized approximately $1.0 million of deferred tax assets from net operating loss carryforwards. At June 30, 2012, we have federal net operating loss carryforwards of approximately $38.4 million, the deductibility of $29.3 million of which is presently limited to approximately $361,000 annually under Section 382 of the Internal Revenue Code due to recent changes in control of the Company.

Management has evaluated our tax positions taken or to be taken on income tax returns that remain subject to examination (i.e., tax years 2008 and thereafter federally, earlier for certain other jurisdictions), and has concluded that there are no uncertain tax positions, as defined in generally accepted accounting principles, that require recognition or disclosure in the consolidated financial statements.

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Subsequent Events

6 Months Ended

Jun. 30, 2012

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 9 – SUBSEQUENT EVENTS

Other than the changes in our outstanding debt instruments described in Notes 2 and 3, no events were identified that in our opinion require accounting recognition or disclosure in these financial statements.

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Long Term Debt (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2012
Debt Instrument (Textual) [Abstract]
Notes renewal percentage	98.00%
Senior Promissory Notes [Member]
Debt Instrument (Textual) [Abstract]
Amount outstanding	1.8
Maturity date	Apr. 15, 2012
Notes modified	1.7
Revised maturity date	Apr. 15, 2013
Interest rate	14.00%
Interest effective date	Apr. 15, 2012

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Equity Instruments (Details 1) (Stock Options [Member], USD $)	3 Months Ended				6 Months Ended		12 Months Ended
	Jun. 30, 2012	Mar. 31, 2012	Jun. 30, 2011	Mar. 31, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	Dec. 31, 2010
Stock Options [Member]
Schedule of Option activity
Share-based compensation arrangement by share-based payment award, options, outstanding, beginning balance	8,755,400	8,795,400	2,171,350	2,611,100	8,795,400	2,611,100	2,611,100
Share-based compensation arrangement by share-based payment award, options, outstanding, weighted average exercise price, beginning balance	$ 0.33	$ 0.33	$ 0.54	$ 0.50	$ 0.33	$ 0.50	$ 0.50
Weighted-average remaining contractual term outstanding beginning balance	7 years 2 months 27 days	7 years 5 months 27 days	7 years 5 months 19 days	7 years 9 months 7 days			7 years 8 months 27 days	8 years 1 month 2 days
Shares forfeited or expired		(40,000)		(464,750)	(119,500)	(116,500)
Weighted-average exercise price forfeited		$ 0.38		$ 0.30	$ 0.35	$ 0.38
Share-based compensation arrangement by share-based payment award, options, outstanding, ending balance	8,635,900	8,755,400	2,054,850	2,171,350	8,635,900	2,054,850	8,795,400	2,611,100
Share-based compensation arrangement by share-based payment award, options, outstanding, weighted average exercise price, ending balance	$ 0.33	$ 0.33	$ 0.55	$ 0.54	$ 0.33	$ 0.55	$ 0.33	$ 0.50
Weighted-average remaining contractual term outstanding ending balance	7 years 2 months 27 days	7 years 5 months 27 days	7 years 5 months 19 days	7 years 9 months 7 days			7 years 8 months 27 days	8 years 1 month 2 days
Shares exercisable ending balance	7,978,000		1,125,650		7,978,000	1,125,650
Weighted-average exercise price exercisable ending	$ 0.33		$ 0.68		$ 0.33	$ 0.68
Weighted average remaining contractual term exercisable ending					7 years 1 month 24 days	6 years 8 months 12 days
Shares granted				25,000
Weighted-average exercise price granted				$ 0.23
Sharebased compensation arrangement by sharebased payment award options granted weighted average remaining contractual term				9 years 9 months 26 days

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Consolidated Statements of Operations (Parenthetical) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Consolidated Statements of Operations [Abstract]
Amortization of debt discount	$ 75	$ 221	$ 270	$ 410
Interest expense, related parties	$ 159	$ 126	$ 319	$ 244

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Long Term Debt

6 Months Ended

Jun. 30, 2012

Long-Term Debt [Abstract]

LONG-TERM DEBT

NOTE 3 – LONG-TERM DEBT

Our senior promissory notes payable to unrelated parties in the total amount of approximately $1.8 million matured on April 15, 2012, but were not repaid. However, during June, July, and August of 2012, we reached agreement with holders of approximately $1.7 million of the notes, or approximately 98%, to renew the notes for an additional year. The notes will mature April 15, 2013 and bear interest at 14% effective from April 15, 2012. Although we expect to negotiate the same note modifications with the remaining senior note holders in the near future, we cannot provide any assurance of the ultimate success of these negotiations.

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Equity Instruments (Details Textual) (USD $)	3 Months Ended	6 Months Ended				3 Months Ended	6 Months Ended					6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012 Warrants	Jun. 30, 2012 Common Stock [Member]	Jun. 30, 2012 Stock Option [Member]	Jun. 30, 2012 Series C Convertible Preferred Stock [Member]	Jun. 30, 2012 Warrant [Member]	Jun. 30, 2012 Warrant [Member]	Jun. 30, 2012 Series D Convertible Preferred Stock [Member]	Jan. 04, 2012 Series D Convertible Preferred Stock [Member]	Jun. 30, 2012 Stock Incentive Compensation Plans [Member]	Jun. 30, 2012 Stock Incentive Compensation Plans [Member] Maximum [Member]	Jun. 30, 2012 Non Qualified Directors Plan [Member]	Jun. 30, 2012 Non Qualified Directors Plan [Member] Initial [Member]
Equity Instruments [Line Items]
Conversion rate of preferred stock into common stock			316.28
Convertible preferred stock, shares issued upon conversion								100,000
Number of common stock each holder owns								500,000
Common stock, shares authorized											5,200,000
Options available for grant										43,938,100		796,668
Share-based compensation arrangement by share-based payment award, options, outstanding, ending balance										7,030,900		105,000
Options exercisable										6,413,000		65,000
Non qualified stock options to our non employee directors												1,000,000
Initial options granted													25,000
Options granted annually												15,000
Liquidation preference per share value					$ 250
Liquidation preference value					$ 2,600,000
Series D convertible preferred stock, vested shares								7,000
Preferred stock, shares issued									250
Preferred stock ,vesting period								10 years
Number of warrants cancelled in exchange of share issue		120
Compensation Costs, Unrecognized				112,000		204,000	204,000	3,600,000
Compensation Costs ,Expected Weighted-Average period				13 months			37 months	9 years 6 months
Options vested fair value gross	11,148	11,148				5,708	5,708
Warrants to purchase								100
Equity instrument (Textual) [Abstract]
Compensation Costs Related to Warrants, Derecognized	32,000	24,000
Compensation costs recognized	73,000	168,000
Compensation Costs, Unrecognized				112,000		204,000	204,000	3,600,000
Compensation Costs ,Expected Weighted-Average period				13 months			37 months	9 years 6 months
Dividend Issued Treated as Conversion Percent	50.00%	50.00%
Options Outstanding and Exercisable	1,500,000	1,500,000
Tax benefits attributable to stock based compensation expense recognized	$ 15,000	$ 34,000

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Notes Payable (Details) (USD $)	6 Months Ended		6 Months Ended
	Jun. 30, 2012 Zero Coupon Promissory Note [Member]	Aug. 31, 2012 Zero Coupon Promissory Note [Member]	Jun. 30, 2012 14% Promissory Note [Member]	Oct. 31, 2012 14% Promissory Note [Member]	Jul. 31, 2012 14% Promissory Note [Member]	Jun. 30, 2012 24% Convertible Promissory Note [Member]	Jun. 04, 2011 24% Convertible Promissory Note [Member]
Notes Payable (Textual) [Abstract]
Amount of promissory notes renewed	$ 230,000		$ 100,000
Interest rate	0.00%		14.00%			24.00%
Maturity date	May-2012		Apr-2012
Extended maturity date					Jul. 31, 2012
Renewed maturity date		Aug. 31, 2012		Oct. 31, 2012
Convertible promissory note						2,000,000
Convertible promissory note term							Jun. 04, 2011
Interest due but not paid						$ 1,000,000
Renewal interest rate						24.00%