NOTE 5 CONTINGENCIES

Going concern uncertainty:

At June 30, 2013, we had a working capital deficiency of approximately $25.3 million and a stockholders’ equity deficiency of approximately $25.2 million resulting primarily from a history of operating losses and costs of capital. As of June 30, 2013, past due principal and interest totaled approximately $6.0 million, of which $4.7 million was owed to a related party who had not provided the Company with formal notice of default. As a result of these conditions, 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. Except for consideration in determining the valuation allowance for deferred tax assets from net operating loss carryforwards (Note 8), the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Additional Financing

Although our existing capital may not be sufficient to meet our cash needs, we expect to be able to sustain current operations over the near term with our new Senior Secured Revolving Credit Facility, existing customer contracts, the addition of new pharmacy management contracts that we are close to obtaining through our marketing efforts, the collection of receivables, and the extension of vendor payments. However, we will need additional financing in the future and we will continue to explore various alternative sources of financing. Nevertheless, there can be no assurance that we will be able to find such financing in amounts or on terms acceptable to us, if at all, or that we will be able to achieve or sustain profitable operations and positive operating cash flows in the near term. Our ability to achieve our business objectives and continue as a going concern for a reasonable period of time is dependent upon the success of our plans.

Concentration, major customer contract:

We currently provide behavioral health services on an at-risk basis to approximately 37,000 members of a health plan providing Medicare benefits. This contract accounted for 46.0%, or approximately $1.0 million, of our revenue for the six months ended June 30, 2013. This contract is for a three-year period effective January 1, 2012, and may be terminated by either party with 90 days written notice.

Legal matters:

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 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 but 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. The Company appealed the lower court’s decision and posted a collateralized appeal bond for approximately $1.3 million. On February 14, 2013, the 11^th Circuit Court of Appeals of the State of Florida reversed the lower court’s judgment in favor of Katzman and remanded the case for a new trial on both liability and damages. The appellate court also taxed appellate costs in favor of CompCare against Katzman in the amount of $76,554. The decision of the appellate court also reverses the lower court’s award of attorney’s fees previously awarded to Katzman against CompCare and the need for us to maintain an appeal bond for approximately $1.3 million.

(2)

On March 2, 2012, a former health plan client in Missouri instituted an arbitration proceeding against us relating to allegations that we breached our obligation to pay claims submitted to us for payment. The amount demanded is approximately $2 million. We have filed a counter claim for breach of contract and tortious interference in an amount between $500,000 and $1 million. The parties have now completed document production. We intend to vigorously defend against the claims asserted in the arbitration demand.

(3)

On February 7, 2011, a health care provider, Oceans Healthcare, LLC, filed suit in the 19^th Judicial District Court for the state of Louisiana claiming breach of contract in that we failed to pay claims submitted to us for payment. On January 14, 2013, the Court granted a motion to add six additional plaintiffs to the Oceans suit. The parties are demanding in excess of $2 million. The litigation is currently in the discovery stage. We intend to vigorously defend against the litigation.

(4)

On May 30, 2013, a former health plan client in Michigan instituted an arbitration proceeding against us relating to its allegations that we breached our obligation to pay claims submitted to us for payment. The amount demanded is in excess of $5 million. The parties are in the process of selecting an arbitrator to hear the dispute. We intend to vigorously defend against the claims asserted in the arbitration demand.

(5)

On August 10, 2012, we filed an arbitration demand against a former client in Puerto Rico. The Company believes that it is owed approximately $2.0 million. A hearing date is currently scheduled in October 2013.

Management believes that it has established a provision for legal expenses that it believes is adequate for the estimated probable minimum losses, including legal defense costs, to be incurred from these matters.