10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the transition period from                  to

Commission File Number:

0-27554

Conmed Healthcare Management, Inc.

(Exact name of registrant as specified in its charter)

Delaware	42-1297992
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7250 Parkway Dr., Suite 400 Hanover, MD	21076
(Address of principal executive offices)	(Zip Code)

(410) 567-5520

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ¨	Accelerated filer ¨
Non-Accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

	Number of Shares Outstanding
Class	May 14, 2012
Common Stock, $0.0001 par value per share	13,909,315

CONMED HEALTHCARE MANAGEMENT, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

	Page
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets
March 31, 2012 and December 31, 2011	1
Consolidated Statements of Income
For the three months ended March 31, 2012 and 2011	2
Consolidated Statements of Cash Flows
For the three months ended March 31, 2012 and 2011	3
Consolidated Statements of Shareholders’ Equity
For the three months ended March 31, 2012	4
Notes to Consolidated Financial Statements	5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	18
ITEM 4. CONTROLS AND PROCEDURES	18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	20
ITEM 1A. RISK FACTORS	20
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	20
ITEM 4. MINE SAFETY DISCLOSURES	20
ITEM 5. OTHER INFORMATION	20
ITEM 6. EXHIBITS	20
SIGNATURES	21

i

PART 1. FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

CONMED HEALTHCARE MANAGEMENT, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2012 (unaudited)			December 31, 2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	16,873,376		$	16,445,938
Accounts receivable		3,996,265			3,069,622
Prepaid expenses		984,251			1,215,841
Taxes receivable		264,292			—
Deferred taxes		250,000			240,000
Total current assets		22,368,184			20,971,401
PROPERTY AND EQUIPMENT, NET		986,465			732,152
DEFERRED TAXES		1,021,000			1,085,000
OTHER ASSETS
Service contracts acquired, net		151,350			129,500
Non-compete agreements, net		166,001			106,222
Goodwill		6,349,705			6,263,705
Deposits		118,792			56,275
Total other assets		6,785,848			6,555,702
	$	31,161,497		$	29,344,255
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	2,878,649		$	1,291,951
Accrued expenses		5,043,330			4,628,827
Taxes payable		—			532,780
Deferred revenue		624,322			600,895
Notes payable		416,740			832,102
Total current liabilities		8,963,041			7,886,555
DERIVATIVE FINANCIAL INSTRUMENTS		130,590			2,162,536
SHAREHOLDERS’ EQUITY
Preferred stock, no par value; authorized 5,000,000 shares; zero shares issued and outstanding as of March 31, 2012 and December 31, 2011		—			—
Common stock, $0.0001 par value, authorized 40,000,000 shares; issued and outstanding 13,909,315 and 13,132,481 shares as of March 31, 2012 and December 31, 2011, respectively		1,391			1,313
Additional paid-in capital		40,248,714			37,609,607
Accumulated deficit		(18,182,239	)		(18,315,756	)
Total shareholders' equity		22,067,866			19,295,164
	$	31,161,497		$	29,344,255

See Notes to Unaudited Financial Statements

Page - 1 -

CONMED HEALTHCARE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months Ended March 31, 2012			For the Three Months Ended March 31, 2011
Service contract revenue	$	18,939,216		$	16,311,093
HEALTHCARE EXPENSES:
Salaries, wages and employee benefits		10,975,655			9,295,969
Medical expenses		3,934,623			3,419,644
Other operating expenses		851,112			606,931
Total healthcare expenses		15,761,390			13,322,544
Gross profit		3,177,826			2,988,549
Selling and administrative expenses		2,516,735			2,027,966
Depreciation and amortization		123,838			172,471
Total operating expenses		2,640,573			2,200,437
Operating income		537,253			788,112
OTHER INCOME (EXPENSE)
Interest income		24,505			28,530
Interest (expense)		(3,917	)		—
(Loss) on fair value of derivatives		(305,324	)		(129,744	)
Total other income (expense)		(284,736	)		(101,214	)
Income before income taxes		252,517			686,898
Income tax expense		119,000			293,000
Net income	$	133,517		$	393,898
EARNINGS PER COMMON SHARE
Basic	$	0.01		$	0.03
Diluted	$	0.01		$	0.03
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic		13,622,268			12,839,656
Diluted		14,219,865			14,347,571

See Notes to Unaudited Financial Statements

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CONMED HEALTHCARE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Three Months Ended March 31, 2012			For the Three Months Ended March 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	133,517		$	393,898
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		85,216			74,804
Amortization of service contracts and non-compete agreements		38,622			97,667
Amortization of long-term customer agreement		43,750			43,750
Restricted stock compensation		77,559			—
Stock-based compensation		140,812			104,829
Loss on fair value of derivatives		305,324			129,744
Gain on disposal of property		(24,042	)		—
Deferred income taxes		54,000			35,000
Changes in working capital components
(Increase) decrease in accounts receivable		(926,643	)		325,445
Decrease in prepaid expenses		231,590			240,353
(Increase) decrease in deposits		(62,517	)		25,201
Increase (decrease) in accounts payable		1,586,698			(343,340	)
Increase (decrease) in accrued expenses		414,503			(200,076	)
(Decrease) in income taxes payable/receivable		(797,072	)		(151,300	)
Increase in deferred revenue		23,427			70,753
Net cash provided by operating activities		1,324,744			846,728
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(315,487	)		(149,258	)
Business combination		(250,000	)		—
Net cash (used in) investing activities		(565,487	)		(149,258	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable		(415,362	)		—
Proceeds from exercise of warrants and stock options		83,543			16,667
Net cash provided by (used in) financing activities		(331,819	)		16,667
Net increase in cash and cash equivalents		427,438			714,137
CASH AND CASH EQUIVALENTS
Beginning		16,445,938			13,270,089
Ending	$	16,873,376		$	13,984,226
NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
Reclassification of warrants from derivative financial instruments to additional paid-in capital upon exercise, at fair value.	$	2,337,270		$	5,097
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest		3,917			—
Income taxes paid	$	862,073		$	409,300

See Notes to Unaudited Financial Statements

Page - 3 -

CONMED HEALTHCARE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

	Preferred Stock		Common Stock		Additional Paid- in Capital		Accumulated Deficit			Total
Balance at December 31, 2011	$	—	$	1,313	$	37,609,607	$	(18,315,756	)	$	19,295,164
Net Income		—		—		—		133,517			133,517
Restricted stock expense		—		—		77,559		—			77,559
Stock option expense		—		—		140,812		—			140,812
Exercise of warrants and stock options		—		78		2,420,736		—			2,420,814
Balance at March 31, 2012	$	—	$	1,391	$	40,248,714	$	(18,182,239	)	$	22,067,866

See Notes to Unaudited Financial Statements

Page - 4 -

CONMED HEALTHCARE MANAGEMENT, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.         Basis of Presentation

The accompanying unaudited consolidated financial statements of Conmed Healthcare Management, Inc. (together with its consolidated subsidiaries, “Conmed”, the “Company”, “we”, “us”, or “our”, unless otherwise specified or the context otherwise requires) contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, the financial information and disclosures normally included in the financial statements prepared annually in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. Readers of this report should, therefore, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 2, 2012.

In the opinion of management, all adjustments (consisting of normal and recurring adjustments) which are considered necessary to fairly present our financial position and our results of operations as of and for these periods have been made.

Our interim results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results of operations to be expected for a full year.

NOTE 2.         Equity Compensation

The Board of Directors has adopted, and our stockholders have approved, the 2007 Stock Option Plan, as amended (the “2007 Plan”). The 2007 Plan provides for the grant of up to 3,100,000 incentive stock options, nonqualified stock options and restricted stock units. The 2007 Plan is administered by the independent members of the Board of Directors, which has the authority and discretion to determine: the persons to whom the options will be granted; when the options will be granted; the number of shares subject to each option; the price at which the shares subject to each option may be purchased; and when each option will become exercisable. The options generally vest over three to four years and expire no later than ten years from the date of grant.

During the three months ended March 31, 2012 and 2011, we recorded stock-based compensation expense totaling $140,812 and $104,829, respectively. During the three months ended March 31, 2012 and 2011, we recorded restricted stock compensation expense totaling $77,559 and $0, respectively.

During the three months ended March 31, 2012, options were granted to purchase 60,500 shares of common stock at an average exercise price of $3.58 per share and an average grant date fair value of $2.17 per share. During the three months ended March 31, 2012, 50,000 restricted stock units (“RSU”) were granted at an average grant date fair value of $2.86 per share and upon vesting each RSU will be exchanged for a share of common stock. Additionally, during the three months ended March 31, 2012, options to purchase 8,204 shares of common stock were forfeited, options to purchase 1,088 shares of common stock were cancelled and options to purchase 27,553 shares of common stock were exercised at an average exercise price of $2.22 per share. As of March 31, 2012, 133,916 shares remain available for grant under the 2007 Plan.

As of March 31, 2012, stock-based compensation expense not yet recognized in income totaled $1,594,840, which is expected to be recognized over a weighted-average remaining period of 3.01 years.

NOTE 3.         Common Stock Warrants

Investor Warrants

In connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued to investors warrants to purchase an aggregate of 1,500,000 shares of common stock, exercisable at $0.30 per share and warrants to purchase an aggregate of 500,000 shares of common stock, exercisable at $2.50 per share. The warrants vested immediately and expired on March 13, 2012. All 1,027,333 of these warrants outstanding on January 1, 2012 were exercised prior to expiration. Of the 773,000 outstanding warrants exercisable at $0.30 per share, 747,070 were exercised on a net share basis and 25,930 were exercised for cash generating proceeds of $7,779 to the Company. Of the 254,333 outstanding warrants exercisable at $2.50 per share, 248,500 were exercised on a net share basis and 5,833 were exercised for cash generating proceeds of $14,583 to the Company.

Page - 5 -

Placement Agent Warrant

In connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued to Maxim Group LLC, our exclusive placement agent, a warrant to purchase 300,000 shares of common stock, exercisable at $2.75 per share. The warrant vested immediately and expired on January 26, 2012. All 15,750 of these warrants outstanding on January 1, 2012 were exercised on a net share basis prior to expiration.

Consultant Warrant @ $3.72 per share

In connection with a consulting agreement dated July 24, 2007, we issued to a consultant a warrant to purchase 20,000 shares of common stock at an exercise price of $3.72 per share expiring July 24, 2011. The warrant vested over one year and was contingent upon the continued service to the Company of the warrant holder. These warrants expired on July 24, 2011.

Consultant Warrants @ $1.85 per share

In connection with the purchase in 2008 of all of the assets of Emergency Medicine Documentation Consultants, P.C., a provider of medical services in northwest Oregon, we issued warrants to two consultants to purchase an aggregate of 80,000 shares of common stock at an exercise price of $1.85 per share. The warrants vested immediately and expire February 28, 2013.

Summary

The following table summarizes the warrant activity for the three months ended March 31, 2012:

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share		Placement Agent Warrant		Consultant Warrant @ $3.72 per share		Consultant Warrants @ $1.85 per share		Total
Exercise price	$	0.30	$	2.50	$	2.75	$	3.72	$	1.85	$	1.85
Warrants outstanding as of December 31, 2011		773,000		254,333		15,750		—		80,000		1,123,083
Warrants exercised		773,000		254,333		15,750		—		—		1,043,083
Warrants outstanding as of March 31, 2012		—		—		—		—		80,000		80,000

The following table summarizes the warrant activity for the three months ended March 31, 2011:

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share		Placement Agent Warrant		Consultant Warrant @ $3.72 per share		Consultant Warrants @ $1.85 per share		Total
Exercise price	$	0.30	$	2.50	$	2.75	$	3.72	$	1.85	$	1.46
Warrants outstanding as of December 31, 2010		813,000		496,667		300,000		20,000		80,000		1,709,667
Warrants exercised		—		6,667		27,500		—		—		34,167
Warrants outstanding as of March 31, 2011		813,000		490,000		272,500		20,000		80,000		1,675,500

Page - 6 -

NOTE 4.         Fair Value of Warrants

As a result of adopting derivative accounting for certain warrants which contain an exercise price adjustment feature effective January 1, 2009, 1,705,000 of our then issued and outstanding common stock purchase warrants previously treated as equity were no longer afforded equity treatment and as a result were recorded as a liability based on fair value estimates. During the years ended December 31, 2010 and 2009, warrants to purchase 90,000 and 814,570 shares of common stock, respectively, were amended to remove the provisions that resulted in the liability treatment and were treated as equity. During the year ended December 31 2011, 771,020 of our previously issued, amended and outstanding common stock purchase warrants were amended a second time in connection with the previously terminated merger agreement to have a cash settlement feature and, as a result, were no longer afforded equity treatment. This resulted in a reclassification from equity to liability of $2,513,391 in 2011 compared to a $282,670 reclassification of liability to equity in 2010 reflecting the first warrant amendment. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model and all changes in the fair value of these warrants are recognized in earnings until such time as the warrants are exercised, amended or expire.

Investor Warrants @ $0.30 per share

Black-Scholes assumptions	March 31, 2012		December 31, 2011
Expected life (years)		—		0.2
Expected volatility		—		84.15	%
Risk-free interest rate		—		0.1	%
Expected dividend yield		—		0.0	%

Investor Warrants @ $2.50 per share

Black-Scholes assumptions	March 31, 2012		December 31, 2011
Expected life (years)		—		0.2
Expected volatility		—		84.15	%
Risk-free interest rate		—		0.1	%
Expected dividend yield		—		0.0	%

Placement Warrant @ $2.75 per share

Black-Scholes assumptions	March 31, 2012		December 31, 2011
Expected life (years)		—		0.1
Expected volatility		—		26.83	%
Risk-free interest rate		—		0.1	%
Expected dividend yield		—		0.0	%

Consultant Warrants @ $1.85 per share

Black-Scholes assumptions	March 31, 2012			December 31, 2011
Expected life (years)		0.9			1.2
Expected volatility		49.08	%		58.65	%
Risk-free interest rate		0.1	%		0.1	%
Expected dividend yield		0.0	%		0.0	%

Page - 7 -

The following tables summarize the warrant activity subject to fair value accounting for the three months ended March 31, 2012:

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share		Placement Agent Warrants @ $2.75 per share		Consultant Warrants @ $1.85 per share		Total
Warrants outstanding subject to fair value accounting as of December 31, 2011		773,000		254,333		9,450		80,000		1,116,783
Warrants exercised		773,000		254,333		9,450		—		1,036,783
Warrants outstanding subject to fair value accounting as of March 31, 2012		—		—		—		80,000		80,000

	Investor Warrants @ $0.30 per share			Investor Warrants @ $2.50 per share			Placement Agent Warrants @ $2.75 per share			Consultant Warrants @ $1.85 per share		Total
Fair value of warrants outstanding as of December 31, 2011	$	1,924,826		$	144,090		$	947		$	92,673	$	2,162,536
Realized loss on warrants exercised or reclassified to equity treatment upon amendment		219,847			47,532			28			—		267,407
Unrealized loss on warrants		—			—			—			37,917		37,917
Fair value of exercised warrants transferred to equity		(2,144,673	)		(191,622	)		(975	)		—		(2,337,270	)
Fair value of warrants outstanding as of March 31, 2012	$	—		$	—		$	—		$	130,590	$	130,590

The following tables summarize the warrant activity subject to fair value accounting for the three months ended March 31, 2011:

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share		Total
Warrants outstanding subject to fair value accounting as of December 31, 2010		131,430		496,667		628,097
Warrants exercised		—		6,667		6,667
Warrants amended		—		—		—
Warrants outstanding subject to fair value accounting as of March 31, 2011		131,430		490,000		621,430

Page - 8 -

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share			Total
Fair value of warrants outstanding as of December 31, 2010	$	361,537	$	331,159		$	692,696
Realized loss on warrants exercised or reclassified to equity treatment upon amendment		—		651			651
Unrealized loss on warrants		28,886		100,207			129,093
Fair value of exercised warrants transferred to equity		—		(5,097	)		(5,097	)
Fair value of warrants outstanding as of March 31, 2011	$	390,423	$	426,920		$	817,343

As of March 31, 2012, we had outstanding warrants to purchase an aggregate of 80,000 shares of common stock, all of which were subject to derivative accounting for warrants, at an average exercise price of $1.85, and we have reserved shares of our common stock for issuance in connection with the potential exercise thereof.

NOTE 5.         Fair Value Measurements

The Company is required to disclose the fair value measurements required by the fair value measurement guidance. The derivative financial instruments recorded at fair value in the balance sheets as of March 31, 2012 and December 31, 2011 are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

· Level 1 – Quoted prices in active markets for identical assets or liabilities.

· Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables summarize the financial liabilities measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

	As of March 31, 2012
	Total		Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)
Derivative financial instruments	$	130,590	$	—	$	—	$	130,590

	As of December 31, 2011
	Total		Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)
Derivative financial instruments	$	2,162,536	$	—	$	—	$	2,162,536

Page - 9 -

Equity-linked financial instruments consist of stock warrants issued by the Company that contain an exercise price adjustment feature or a cash settlement feature. In accordance with derivative accounting for warrants, we calculated the fair value of warrants using the Black-Scholes option pricing model and the assumptions used are described in Note 4, “Fair Value of Warrants”. Any gains and losses related to the change in fair value of the financial instruments are included in other income (expense) on the Statements of Income.

During the three months ended March 31, 2012, certain warrants were exercised and, as a result, the fair value of $2,337,270 was transferred from a liability and into equity and we recognized a $267,407 realized loss related to the exercise of these warrants. We also recognized a $37,917 unrealized loss related to the change in fair value of the warrants outstanding at March 31, 2012.

During the three months ended March 31, 2011, certain warrants were exercised and, as a result, the fair value of $5,097 was transferred from a liability and into equity and we recognized a $651 realized loss related to the exercise of these warrants. We also recognized a $129,093 unrealized loss related to the change in fair value of the warrants outstanding at March 31, 2011.

The following table reflects the activity for liabilities measured at fair value using Level 3 inputs for the three months ended March 31:

	2012			2011
Fair value of warrants outstanding as of January 1	$	2,162,536		$	692,696
Fair value of exercised warrants transferred to equity		(2,337,270	)		(5,097	)
Realized loss on warrants exercised or reclassified to equity treatment upon amendment		267,407			651
Unrealized loss on warrants		37,917			129,093
Fair value of warrants outstanding as of March 31	$	130,590		$	817,343

Financial instruments include cash and cash equivalents (level 1), accounts receivable (level 2), accounts payable (level 2), accrued expenses (level 2), deferred revenue (level 2), and derivative financial instruments (level 3). The fair value of current assets and current liabilities is estimated to approximate carrying value due to the short-term nature of these instruments. The fair value of derivative financial instruments is estimated using the Black-Scholes option pricing model.

Page - 10 -

NOTE 6.         Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per-share:

	For the Three Months Ended
	March 31, 2012		March 31, 2011
Numerator for basic and diluted earnings per share:
Net income	$	133,517	$	393,898
Denominator:
Weighted-average basic shares outstanding		13,622,268		12,839,656
Assumed conversion of dilutive securities
Stock options		563,247		580,666
Restricted stock		314		—
Warrants		34,036		927,249
Potentially dilutive common shares		597,597		1,507,915
Denominator for diluted earnings per share – Adjusted weighted average shares		14,219,865		14,347,571
Earnings (loss) per common share:
Basic	$	0.01	$	0.03
Diluted	$	0.01	$	0.03

Common stock warrants and options outstanding totaling 1,094,416 and 782,958 shares, respectively, are not included in diluted earnings per common share for the three months ended March 31, 2012 and 2011, respectively, as they would have an antidilutive effect on earnings per common share.

NOTE 7.         Professional Liability Litigation

From time to time, the Company is party to legal proceedings in the ordinary course of business, including claims of professional negligence based on services performed by our employees and independent medical providers, including physicians, physician assistants, nurse practitioners and nurses providing treatments at the various facilities.

The Company evaluates each medical malpractice claim or similar contingent liability to determine the likelihood and amount of estimated claims as follows:

· In the event the Company determines it is probable that the Company will incur a loss arising from the claim and the amount can be reasonably estimated, a liability is established to satisfy the claim including an estimate of related legal fees. A receivable is then established to recognize the anticipated insurance recoveries at the same time that it recognized the liability, measured on the same basis as the liability, subject to the need for a valuation allowance for uncollectible accounts.

· In the event the Company determines it is not probable that the Company will incur a loss arising from the claim or the amount cannot be reasonably estimated, no liability is established to satisfy the claim and legal fees related to the claim are expensed as incurred.

These accruals are adjusted periodically as assessments change or additional information becomes available.

The amounts accrued for contingencies deemed probable are included in accrued expenses and total $186,000 and $0 as of March 31, 2012 and December 31, 2011, respectively. The amounts recorded for insurance recoveries are included in accounts receivable and total $136,000 and $0 as of March 31, 2012 and December 31, 2011, respectively.

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NOTE 8.         Income Tax Matters

Our effective tax rate was 47.2% and 42.7% during the three months ended March 31, 2012 and 2011, respectively, which differs from the expected tax rate of 40.0%, primarily due to permanent differences related to stock-based compensation and derivatives related to warrants. The change in our effective tax rate from prior periods is primarily due to higher permanent differences related to stock-based compensation and derivatives related to warrants. We recorded income tax expense of $119,000 and $293,000 for the three months ended March 31, 2012 and 2011, respectively.

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

Information included in this section and elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements regarding the business, operations and financial condition of Conmed Healthcare Management, Inc. (together with its consolidated subsidiaries, the “Company”, “we”, “us”, or “our” unless otherwise specified or the context otherwise requires) within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from our future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, and other statements that are not historical facts, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “plan,” “potential” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. We caution you not to place undue reliance on these forward-looking statements. Such forward-looking statements relate only to events as of the date on which the statements are made. These forward-looking statements involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond the Company’s control) including, without limitation, the Company’s ability to increase revenue and to continue to obtain new contracts;contract renewals and extensions; the incurrence of start-up costs associated with new contracts; inflation exceeding the Company’s projection of the inflation rate of cost of services under multi-year contracts; the ability to obtain bonds; decreases in occupancy levels or disturbances at detention centers; malpractice litigation; the ability to utilize third party administrators for out -of- facility care; compliance with laws and government regulations, including those relating to healthcare; investigation and auditing of our contracts by government agencies; competition; termination of contracts due to lack of government appropriations; material adverse changes in economic and industry conditions in the healthcare market; negative publicity regarding the provision of correctional healthcare services; dependence on key personnel and the ability to hire skilled personnel; influences of certain stockholders; increases in healthcare costs; insurance; completion and integration of future acquisitions; public company obligations; limited liability of directors and officers; the Company’s ability to meet the NYSE Amex continued listing standards; and stock price volatility. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future changes make it clear that any projected results or events expressed or implied therein will not be realized. You are advised, however, to consult any further disclosures we make in future public statements and press releases. More detailed information about us and the risk factors that may affect the realization of forward-looking statements is set forth in our filings with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 2, 2012. Investors and security holders are urged to read this document free of charge on the SEC’s web site at www.sec.gov.

General

We provide healthcare services to county and municipal detention centers across the United States. As a result of the Supreme Court decision in Estelle v. Gamble (1976), all individuals held against their will are required to be provided with community standard healthcare. Under this requirement, correctional institutions are required to provide healthcare services for their inmates. We are a specialist in the provision of these services, having provided correctional healthcare services since 1984. We began providing correctional healthcare services in the State of Maryland, and currently serve county and municipal correctional facilities in forty-five counties in ten states: Arizona, Kansas, Kentucky, Maryland, New Jersey, Oregon, Tennessee, Texas, Virginia and Washington. Our services have expanded to include mental health, pharmacy and out-of-facility healthcare services.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and related medical expense accruals, amortization and potential impairment of intangible assets and goodwill and stock-based compensation expense. As these are condensed consolidated financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 2, 2012. There have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2011.

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Results of Operations

Three Months Ended March 31, 2012 compared to Three Months Ended March 31, 2011

The following discussion of financial results is derived from unaudited financial statements for the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31, 2012						Three Months Ended March 31, 2011
	Amount			% of Revenue			Amount			% of Revenue
Service contract revenue	$	18,939,216			100.0	%	$	16,311,093			100.0	%
HEALTHCARE EXPENSES:
Salaries, wages and employee benefits		10,975,655			58.0	%		9,295,969			57.0	%
Medical expenses		3,934,623			20.8	%		3,419,644			21.0	%
Other operating expenses		851,112			4.5	%		606,931			3.7	%
Total healthcare expenses		15,761,390			83.2	%		13,322,544			81.7	%
Gross profit		3,177,826			16.8	%		2,988,549			18.3	%
OPERATING EXPENSES:
Selling and administrative expenses		2,516,735			13.3	%		2,027,966			12.4	%
Depreciation and amortization		123,838			0.7	%		172,471			1.1	%
Total operating expenses		2,640,573			13.9	%		2,200,437			13.5	%
Operating income		537,253			2.8	%		788,112			4.8	%
OTHER INCOME (EXPENSE)
Interest income		24,505			0.1	%		28,530			0.2	%
Interest (expense)		(3,917	)		(0.0	)%		—			0.0	%
(Loss) on fair value of derivatives		(305,324	)		(1.6	)%		(129,744	)		(0.8	)%
Total other income (expense)		(284,736	)		(1.5	)%		(101,214	)		(0.6	)%
Income before income taxes		252,517			1.3	%		686,898			4.2	%
Income tax expense		119,000			0.6	%		293,000			1.8	%
Net income	$	133,517			0.7	%	$	393,898			2.4	%

Summary

Net revenue from medical services provided primarily to correctional institutions for the three months ended March 31, 2012 and 2011, was $18,939,216 and $16,311,093, respectively, which represents an increase of $2,628,123 or 16.1%. Net income was $133,517, or 0.7% of revenue, compared to net income of $393,898, or 2.4% of revenue, for the three months ended March 31, 2012 and 2011, respectively, which represented a decrease in net income of $260,381.

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Revenue

The addition of service contracts signed with new jurisdictions since January 1, 2011 accounted for $2,471,426 or 94.0% of the increase in revenue for the three months ended March 31, 2012 compared to the same period for the prior year. These jurisdictions are as follows: Alexandria, VA; Galveston County, TX; Gray County, TX; Haywood County, TN; Ocean County, NJ; Oldham County, TX; Newport News, VA; Randall County, TX; and Worcester County, MD. Revenue improvement totaling $90,946, or 3.3% of the increase over the prior year period, resulted primarily from expansion of the services provided under a number of our existing contracts in which we were providing services prior to January 1, 2011. Price increases related to existing service requirements totaled $270,706, or 10.3% of the revenue increase over the prior year period. Also, partially offsetting the revenue increases above were decreases in other volume related activities totaling $204,955 primarily associated with a decrease in stop/loss reimbursements due to lower out-of-facility medical expenditures in excess of stop/loss limits which are billed back to clients and business decisions to exit specific less profitable markets, both of which were partially offset by an increase in revenue associated with higher inmate populations at certain facilities.

Healthcare Expenses

Salaries and employee benefits

Salaries and employee benefits for healthcare employees were $10,975,655, or 58.0% of revenue, for the three months ended March 31, 2012, compared to $9,295,969, or 57.0% of revenue, for the three months ended March 31, 2011, an increase of $1,679,686, or 18.1%. The increase in spending as a percent of revenue is primarily due to having 91 days in the three months ended March 31, 2012 resulting in one day of additional wages being paid compared to 90 days in the three months ended March 31, 2011. Approximately 86.4% of the increase is related to new healthcare employees required to support the staffing requirements for our new medical service contracts as detailed above. Additional services related to previously existing medical service contracts, as well as cost-of-living and wage and benefit adjustments for existing employees accounted for the remainder of the increase.

Medical expenses

Medical expenses for the three months ended March 31, 2012 and 2011 were $3,934,623, or 20.8% of revenue, and $3,419,644, or 21.0% of revenue, respectively, which represented an increase of $514,979, or 15.1%. The increase in spending for medical expenses in absolute dollars primarily reflects increases related to medical services for new contracts both in- and out-of-facility as well as pharmacy services which were partially offset by decreases in out-of-facility expenditures at certain existing facilities. The decrease in medical expenses as a percentage of revenue results, in part, from a decrease in out-of-facility expense at certain facilities which was partially offset by increases in pharmacy expenses at existing facilities. The increase in spending resulting from new service contracts was partially offset by a 0.6% decrease in medical expenses at existing sites. This decrease is primarily the result of a 26.7% decrease in out-of-facility expenses and a 5.0% decrease of in-facility expenses, which were partially offset by a 30.2% increase in pharmacy expenses.

Other operating expenses

Other operating expenses were $851,112, or 4.5% of revenue, for the three months ended March 31, 2012, compared to $606,931, or 3.7% of revenue, for the three months ended March 31, 2011. The increase of $244,181 in spending is primarily related to a $136,898 increase in legal fees, a $63,376 increase in travel expenses and a $26,103 increase in information systems expenses partially offset by a $19,768 reduction in professional liability insurance and an $11,182 reduction in education expenses.

Gross Profit

Gross profit increased to $3,177,826 for the three months ended March 31, 2012 compared to $2,988,549 for the three months ended March 31, 2011, reflecting the higher volume. However, gross margin as a percentage of revenue declined to 16.8% for the three months ended March 31, 2012 from 18.3% for the three months ended March 31, 2011 due to lower initial margins associated with the new contract wins. Gross profit for the three months ended March 31, 2012 at existing contracts in which we were providing services prior to January 1, 2011 was 17.1%. Gross profit for the three months ended March 31, 2012 for new contracts added since January 1, 2011 was 14.6%.

Operating Expenses

Selling and administrative expenses

Selling and administrative expenses for the three months ended March 31, 2012 and 2011 were $2,516,735, or 13.3% of revenue, and $2,027,966, or 12.4% of revenue, respectively. The increased expenditure of $488,770 primarily reflects an increased investment in additional management and administrative personnel required to support new contracts and services added since January 1, 2011 coupled with a $116,009 increase in board expenses, which was primarily attributed to restricted stock compensation, and a $41,478 increase in business taxes which were partially offset by a $32,602 reduction in consulting, a $19,720 decrease in accounting fees, and a $13,652 reduction in travel expenses. Stock-based compensation for the three months ended March 31, 2012 and 2011 was $140,812 and $104,829, respectively. Restricted stock compensation for the three months ended March 31, 2012 and 2011 was $77,559 and $0, respectively.

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Depreciation and amortization

Depreciation and amortization primarily reflects the amortization of intangible assets related to the acquisition of Conmed, Inc. in January 2007 and the acquisition of Correctional Mental Health Services, LLC (“CMHS”) in November 2008. Amortization of service contracts acquired was $18,400, or 0.1% of revenue, for the three months ended March 31, 2012, compared to $61,000, or 0.4% of revenue, for the three months ended March 31, 2011. The decrease primarily reflects a decrease in amortization expense as certain individual service contracts acquired have become fully amortized. Amortization of non-compete agreements was $20,222, or 0.1% of revenue, for the three months ended March 31, 2012, compared to $36,667, or 0.2% of revenue, for the three months ended March 31, 2011. Depreciation expense increased to $85,216 for the three months ended March 31, 2012 compared to $74,804 for the prior year period due primarily to capital expenditures associated with purchases of vehicles, software and medical equipment which was partially offset by lower computer depreciation as certain assets have become fully depreciated.

Interest income

Interest income was $24,505 for the three months ended March 31, 2012 compared to $28,530 for the same period in 2011. Reduced short-term interest rates partially offset by higher average cash balances during the three months ended March 31, 2012 account for the decreased interest income compared to the same period in 2011.

(Loss) on fair value of derivatives

During the three months ended March 31, 2012 and 2011, we recognized a realized loss of $267,407 and $651, respectively, related to warrants subject to derivative accounting treatment that were exercised and transferred to equity treatment. The realized loss is the difference between the fair value at the date of exercise and the fair value at the beginning of each year. In addition, during the three months ended March 31, 2012 and 2011, we recorded an unrealized loss of $37,917 and $129,093, respectively. The unrealized loss is the difference between the fair value of warrants remaining at the end of each period and the fair value of those same warrants at the beginning of the each year. The decrease of $91,176 was primarily the result of the decreased number of warrants subject to the derivative accounting treatment due to the exercise of all but 80,000 of the outstanding warrants partially offset by the increase in our stock price of $0.64 during the three months ended March 31, 2012, compared to a $0.22 stock price increase during the three months ended March 31, 2011.

During the three months ended March 31, 2012, 31,763 warrants subject to derivative accounting treatment were exercised generating $22,362 of cash receipts and warrants subject to derivative accounting treatment totaling 1,005,020 shares of common stock were exercised by cashless exercise resulting in the issue of 717,297 shares of common stock. As a result, a total of 749,060 shares of common stock were issued related to the exercise of warrants subject to derivative accounting treatment. The fair value of the exercised warrants transferred to equity was $2,337,270 which was estimated using the Black-Scholes option pricing model on each exercise date. As of March 31, 2012, we had outstanding warrants to purchase an aggregate of 80,000 shares of common stock that remain subject to derivative accounting. During the three months ended March 31, 2011, 6,667 warrants were exercised generating $16,667 of cash receipts.

The following table summarizes the change in fair value for the three months ended March 31:

	2012			2011
Fair value of warrants outstanding as of January 1	$	2,162,536		$	692,696
Fair value of exercised warrants transferred to equity		(2,337,270	)		(5,097	)
Realized loss on warrants exercised or reclassified to equity treatment upon amendment		267,407			651
Unrealized loss on warrants		37,917			129,093
Fair value of warrants outstanding as of March 31	$	130,590		$	817,343

See Note 4, “Fair Value of Warrants”, for additional information on the warrant activity subject to fair value accounting for the three months ended March 31, 2012.

Income tax expense

Our effective tax rate was 47.2% and 42.7% during the three months ended March 31, 2012 and 2011, respectively, which differs from the expected tax rate of 40.0%, primarily due to permanent differences related to stock-based compensation and derivatives related to warrants. The change in our effective tax rate from prior periods is primarily due to higher permanent differences related to stock-based compensation and derivatives related to warrants. We recorded income tax expense of $119,000 and $293,000 for the three months ended March 31, 2012 and 2011, respectively.

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Liquidity and Capital Resources

Financing is generally provided by funds generated from our operating activities.

Cash Flow for the three months ended March 31, 2012 compared to the three months ended March 31, 2011

Cash as of March 31, 2012 and March 31, 2011 was $16,873,376 and $13,984,226, respectively. We believe that our existing cash balances and anticipated cash flows from future operations will be sufficient to meet our normal operating requirements and liquidity needs for at least the next twelve months.

Cash Flows from Operating Activities

Cash flow from operations for the three months ended March 31, 2012 totaled $1,324,744, reflecting a net income of $133,517 plus $721,241 in adjustments for non-cash expenses such as amortization of intangible assets of $38,622, amortization of long-term customer agreement of $43,750, stock-based compensation of $140,812, restricted stock compensation of $77,559, change in fair value of warrants of $305,324, depreciation of $85,216, gain on the disposal of property of $24,042 and deferred income taxes of $54,000. Changes in working capital components provided $469,986, reflective of a decrease in prepaid expenses of $231,590 and increases in accrued expenses of $414,503, accounts payable of $1,586,698 and deferred revenue of $23,427, partially offset by an increase in accounts receivable of $926,643 and decreases in deposits of $62,517 and income taxes payable of $797,072. The increase in accounts payable was primarily due to the timing of vendor payments in relation to quarter end. The increase in accrued expenses resulted primarily from increases in accrued medical expenses, accrued malpractice litigation expenses and accruals for employee benefits which was partially offset by a decrease in accrued wages covering seven fewer days as compared to the accrual at December 31, 2011. The decrease in income taxes payable/receivable resulted primarily from the payment of scheduled estimated taxes partially offset by accruals of estimated taxes payable. The increase in accounts receivable resulted primarily from slower collection of receivables on certain existing medical service contracts resulting in an average 19.0 days sales outstanding as of March 31, 2012 as well as increased insurance carrier receivables related to malpractice litigation and was partially offset by decreased receivables for stop/loss reimbursements due to out-of-facility medical expenditures in excess of stop/loss limits. The decrease in prepaid expenses resulted primarily from a reduction in prepaid professional liability insurance. We prepaid our annual professional liability insurance policy premium in October 2011 and we expense the prepaid amounts ratably during the annual policy period of October through September. The increase in deposits resulted primarily from a bid deposit required for a request for proposal which will be refunded upon award of the contract. Deferred revenue reflects increased deferred expenses for out-of-facility patient care offset by lower prepayments for services to be performed in after March 31, 2012.

Cash flow from operations for the three months ended March 31, 2011 totaled $846,728, reflecting net income of $393,898 plus $485,794 in adjustments for non-cash expenses such as amortization of intangible assets of $97,667, amortization of long-term customer agreement of $43,750, stock-based compensation of $104,829, change in fair value of warrants of $129,744, depreciation of $74,804 and deferred income taxes of $35,000. Changes in working capital components used $32,964, reflecting a decrease in accounts payable of $343,340, accrued expenses of $200,076 and income taxes payable of $151,300 partially offset by a decrease in accounts receivable of $325,445, prepaid expenses of $240,353 and deposits of $25,201 in addition to an increase in deferred revenue of $70,753. The decrease in accounts payable was primarily due to the timing of vendor payments in relation to quarter end. The decrease in accrued expenses resulted primarily from a decrease in accrued wages covering eight fewer days as compared to the accrual at December 31, 2010 which was partially offset by increases in accrued medical expenses and accruals for employee benefits. The decrease in income taxes payable resulted primarily from the payment of scheduled estimated taxes partially offset by accruals of estimated taxes payable. The decrease in accounts receivable resulted primarily from faster collection of receivables on new medical service contracts added in 2010 which was partially offset by increased receivables for stop/loss reimbursements due to out-of-facility medical expenditures in excess of stop/loss limits related to new service contracts. The decrease in prepaid expenses resulted primarily from a reduction in prepaid professional liability insurance. We prepaid our annual professional liability insurance policy premium in October 2010 and we expense the prepaid amounts ratably during the annual policy period of October through September. The decrease in deposits resulted primarily from the return of a bid deposit required for a request for proposal. Deferred revenue increased primarily as a result of an increase in advance customer payments received prior to quarter end.

Cash Flows from Investing Activities

Cash flow from investing activities for the three months ended March 31, 2012 used $565,487. Purchases of property and equipment used $315,487 primarily for purchases of vehicles, computers, software and medical equipment. The purchase of the assets of a small correctional healthcare company used $250,000.

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Cash flow used in investing activities for the three months ended March 31, 2011 used $149,258 for purchases of property and equipment primarily for purchases of vehicles, computers and medical equipment.

Cash Flows from Financing Activities

Cash flow from financing activities for the three months ended March 31, 2012 used $331,819. Proceeds from the exercise of stock options and warrants provided $83,543 and the financing of certain business insurance policies required payments of $415,362.

Cash flow from financing activities for the three months ended March 31, 2011 generated cash of $16,667 related to the proceeds from the exercise of warrants.

Loans

As of March 31, 2012, we had $416,740 outstanding on a short-term note payable pertaining to the financing of certain business insurance policies due in installments over the next three months.

Off Balance Sheet Arrangements

We are required to provide performance and payment guarantee bonds to county governments under certain contracts. As of March 31, 2012, we have seven performance bonds totaling $6,445,307 and three payment bonds for $3,958,020, totaling $10,403,327. The surety issuing the bonds has recourse against our assets in the event the surety is required to honor the bonds.

Contractual Obligations

The following table presents our expected cash requirements for contractual obligations outstanding as of March 31, 2012:

	Total		Current		2 – 3 Years		4 – 5 Years		Thereafter
Notes payable	$	419,280	$	419,280	$	—	$	—	$	—
Equipment leases		227,854		65,665		116,451		45,738		—
Automobile leases		145,094		62,422		82,672		—		—
Office Space leased		392,760		225,810		166,950		—		—
Total Contractual Cash Obligations	$	1,184,988	$	773,177	$	366,073	$	45,738	$	—

Effects of Inflation

We do not believe that inflation and changing prices over the past three years have had a significant impact on our revenue or results of operations.

Potential Future Service Contract Revenue

As of March 31, 2012, we have entered into 69 agreements with county and municipal governments to provide medical and healthcare services primarily to county and municipal correctional facilities. Most of these contracts are for multiple years and include option renewal periods which are, in all cases, at the option of the county or municipality. The original terms of the contracts are from one to ten years. These medical and mental healthcare service contracts have potential future service contract revenue of $215 million as of March 31, 2012, with a weighted-average term of 4.2 years including option renewal periods, of which approximately $70 million relates to the initial contract period and approximately $145 million relates to the option renewal periods.

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information in this Item is not required to be provided by Smaller Reporting Companies pursuant to Regulation S-K.

ITEM 4.         CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

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Changes in Internal Control over Financial Reporting. During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

There are no material changes in the legal proceedings pending against us.

ITEM 1A.       RISK FACTORS

The information in this Item is not required to be provided by Smaller Reporting Companies.

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

None

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.          MINE SAFETY DISCLOSURES

No disclosure required pursuant to this Item.

ITEM 5.          OTHER INFORMATION

None

ITEM 6.          EXHIBITS

31.1	Section 302 Certification of Principal Executive Officer
31.2	Section 302 Certification of Principal Financial Officer
32.1	Section 906 Certification of Principal Executive Officer
32.2	Section 906 Certification of Principal Financial Officer
101	Financial Statements from the quarterly report on Form 10-Q of the Company for the quarter ended March 31, 2012, filed on May 10, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Shareholders’ Equity and (v) the Notes to Consolidated Financial Statements tagged as blocks of text. (†)

(†) Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability of that Section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act, except as shall be expressly set forth by specific reference in such filing or document.

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SIGNATURES

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

	Conmed Healthcare Management, Inc.
May 14, 2012
	By	/s/ Richard W. Turner
	Richard W. Turner, Ph.D.
	Chairman and Chief Executive Officer
	(principal executive officer)
May 14, 2012
	By	/s/ Thomas W. Fry
	Thomas W. Fry
	Chief Financial Officer and Secretary
	(principal financial officer and principal accounting officer)

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Richard W. Turner, Ph.D. certify that:

1)     I have reviewed this Quarterly Report on Form 10-Q of Conmed Healthcare Management, Inc.;

2)     Based on my knowledge, this 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 report;

3)     Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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.

May 14, 2012

By	/s/ Richard W. Turner
Richard W. Turner, Ph.D.
Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Thomas W. Fry, certify that:

1)     I have reviewed this Quarterly Report on Form 10-Q of Conmed Healthcare Management, Inc.;

2)     Based on my knowledge, this 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 report;

3)     Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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.

May 14, 2012

By	/s/ Thomas W. Fry
Thomas W. Fry
Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION 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 Conmed Healthcare Management, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard W. Turner, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

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

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

May 14, 2012

By	/s/ Richard W. Turner
Richard W. Turner, Ph.D.
Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to and will be retained by Conmed Healthcare Management, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION 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 Conmed Healthcare Management, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas W. Fry, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

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

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

May 14, 2012

By	/s/ Thomas W. Fry
Thomas W. Fry
Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to and will be retained by Conmed Healthcare Management, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request.

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Common Stock Warrants

3 Months Ended

Mar. 31, 2012

Common Stock Warrants

NOTE 3.         Common Stock Warrants

Investor Warrants

In connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued to investors warrants to purchase an aggregate of 1,500,000 shares of common stock, exercisable at $0.30 per share and warrants to purchase an aggregate of 500,000 shares of common stock, exercisable at $2.50 per share. The warrants vested immediately and expired on March 13, 2012. All 1,027,333 of these warrants outstanding on January 1, 2012 were exercised prior to expiration. Of the 773,000 outstanding warrants exercisable at $0.30 per share, 747,070 were exercised on a net share basis and 25,930 were exercised for cash generating proceeds of $7,779 to the Company. Of the 254,333 outstanding warrants exercisable at $2.50 per share, 248,500 were exercised on a net share basis and 5,833 were exercised for cash generating proceeds of $14,583 to the Company.

Placement Agent Warrant

In connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued to Maxim Group LLC, our exclusive placement agent, a warrant to purchase 300,000 shares of common stock, exercisable at $2.75 per share. The warrant vested immediately and expired on January 26, 2012. All 15,750 of these warrants outstanding on January 1, 2012 were exercised on a net share basis prior to expiration.

Consultant Warrant @ $3.72 per share

In connection with a consulting agreement dated July 24, 2007, we issued to a consultant a warrant to purchase 20,000 shares of common stock at an exercise price of $3.72 per share expiring July 24, 2011. The warrant vested over one year and was contingent upon the continued service to the Company of the warrant holder. These warrants expired on July 24, 2011.

Consultant Warrants @ $1.85 per share

In connection with the purchase in 2008 of all of the assets of Emergency Medicine Documentation Consultants, P.C., a provider of medical services in northwest Oregon, we issued warrants to two consultants to purchase an aggregate of 80,000 shares of common stock at an exercise price of $1.85 per share. The warrants vested immediately and expire February 28, 2013.

Summary

The following table summarizes the warrant activity for the three months ended March 31, 2012:

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share		Placement Agent Warrant		Consultant Warrant @ $3.72 per share		Consultant Warrants @ $1.85 per share		Total
Exercise price	$	0.30	$	2.50	$	2.75	$	3.72	$	1.85	$	1.85
Warrants outstanding as of December 31, 2011		773,000		254,333		15,750		—		80,000		1,123,083
Warrants exercised		773,000		254,333		15,750		—		—		1,043,083
Warrants outstanding as of March 31, 2012		—		—		—		—		80,000		80,000

The following table summarizes the warrant activity for the three months ended March 31, 2011:

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share		Placement Agent Warrant		Consultant Warrant @ $3.72 per share		Consultant Warrants @ $1.85 per share		Total
Exercise price	$	0.30	$	2.50	$	2.75	$	3.72	$	1.85	$	1.46
Warrants outstanding as of December 31, 2010		813,000		496,667		300,000		20,000		80,000		1,709,667
Warrants exercised		—		6,667		27,500		—		—		34,167
Warrants outstanding as of March 31, 2011		813,000		490,000		272,500		20,000		80,000		1,675,500

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Equity Compensation

3 Months Ended

Mar. 31, 2012

Equity Compensation

NOTE 2.         Equity Compensation

The Board of Directors has adopted, and our stockholders have approved, the 2007 Stock Option Plan, as amended (the “2007 Plan”). The 2007 Plan provides for the grant of up to 3,100,000 incentive stock options, nonqualified stock options and restricted stock units. The 2007 Plan is administered by the independent members of the Board of Directors, which has the authority and discretion to determine: the persons to whom the options will be granted; when the options will be granted; the number of shares subject to each option; the price at which the shares subject to each option may be purchased; and when each option will become exercisable. The options generally vest over three to four years and expire no later than ten years from the date of grant.

During the three months ended March 31, 2012 and 2011, we recorded stock-based compensation expense totaling $140,812 and $104,829, respectively. During the three months ended March 31, 2012 and 2011, we recorded restricted stock compensation expense totaling $77,559 and $0, respectively.

During the three months ended March 31, 2012, options were granted to purchase 60,500 shares of common stock at an average exercise price of $3.58 per share and an average grant date fair value of $2.17 per share. During the three months ended March 31, 2012, 50,000 restricted stock units (“RSU”) were granted at an average grant date fair value of $2.86 per share and upon vesting each RSU will be exchanged for a share of common stock. Additionally, during the three months ended March 31, 2012, options to purchase 8,204 shares of common stock were forfeited, options to purchase 1,088 shares of common stock were cancelled and options to purchase 27,553 shares of common stock were exercised at an average exercise price of $2.22 per share. As of March 31, 2012, 133,916 shares remain available for grant under the 2007 Plan.

As of March 31, 2012, stock-based compensation expense not yet recognized in income totaled $1,594,840, which is expected to be recognized over a weighted-average remaining period of 3.01 years.

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CONSOLIDATED BALANCE SHEETS (USD $)	Mar. 31, 2012	Dec. 31, 2011
CURRENT ASSETS
Cash and cash equivalents	$ 16,873,376	$ 16,445,938
Accounts receivable	3,996,265	3,069,622
Prepaid expenses	984,251	1,215,841
Taxes receivable	264,292
Deferred taxes	250,000	240,000
Total current assets	22,368,184	20,971,401
PROPERTY AND EQUIPMENT, NET	986,465	732,152
DEFERRED TAXES	1,021,000	1,085,000
OTHER ASSETS
Service contracts acquired, net	151,350	129,500
Non-compete agreements, net	166,001	106,222
Goodwill	6,349,705	6,263,705
Deposits	118,792	56,275
Total other assets	6,785,848	6,555,702
Assets, Total	31,161,497	29,344,255
CURRENT LIABILITIES
Accounts payable	2,878,649	1,291,951
Accrued expenses	5,043,330	4,628,827
Taxes payable		532,780
Deferred revenue	624,322	600,895
Notes payable	416,740	832,102
Total current liabilities	8,963,041	7,886,555
DERIVATIVE FINANCIAL INSTRUMENTS	130,590	2,162,536
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized 5,000,000 shares; zero shares issued and outstanding as of March 31, 2012 and December 31, 2011
Common stock, $0.0001 par value, authorized 40,000,000 shares; issued and outstanding 13,909,315 and 13,132,481 shares as of March 31, 2012 and December 31, 2011, respectively	1,391	1,313
Additional paid-in capital	40,248,714	37,609,607
Accumulated deficit	(18,182,239)	(18,315,756)
Total shareholders' equity	22,067,866	19,295,164
Liabilities and Equity, Total	$ 31,161,497	$ 29,344,255

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)	Total	Restricted Stock	Stock Options	Common Stock	Additional Paid- in Capital	Additional Paid- in Capital Restricted Stock	Additional Paid- in Capital Stock Options	Accumulated Deficit
Beginning Balance at Dec. 31, 2011	$ 19,295,164			$ 1,313	$ 37,609,607			$ (18,315,756)
Net income	133,517							133,517
Stock expense		77,559	140,812			77,559	140,812
Exercise of warrants and stock options	2,420,814			78	2,420,736
Ending Balance at Mar. 31, 2012	$ 22,067,866			$ 1,391	$ 40,248,714			$ (18,182,239)

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Basis of Presentation

3 Months Ended

Mar. 31, 2012

Basis of Presentation

NOTE 1.         Basis of Presentation

The accompanying unaudited consolidated financial statements of Conmed Healthcare Management, Inc. (together with its consolidated subsidiaries, “Conmed”, the “Company”, “we”, “us”, or “our”, unless otherwise specified or the context otherwise requires) contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, the financial information and disclosures normally included in the financial statements prepared annually in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. Readers of this report should, therefore, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 2, 2012.

In the opinion of management, all adjustments (consisting of normal and recurring adjustments) which are considered necessary to fairly present our financial position and our results of operations as of and for these periods have been made.

Our interim results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results of operations to be expected for a full year.

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Preferred stock, no par value
Preferred stock, authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, authorized	40,000,000	40,000,000
Common stock, issued	13,909,315	13,132,481
Common stock, outstanding	13,909,315	13,132,481

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 14, 2012
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Trading Symbol	CONM
Entity Registrant Name	CONMED HEALTHCARE MANAGEMENT, INC.
Entity Central Index Key	0000943324
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		13,909,315

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CONSOLIDATED STATEMENTS OF INCOME (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Service contract revenue	$ 18,939,216	$ 16,311,093
HEALTHCARE EXPENSES:
Salaries, wages and employee benefits	10,975,655	9,295,969
Medical expenses	3,934,623	3,419,644
Other operating expenses	851,112	606,931
Total healthcare expenses	15,761,390	13,322,544
Gross profit	3,177,826	2,988,549
Selling and administrative expenses	2,516,735	2,027,966
Depreciation and amortization	123,838	172,471
Total operating expenses	2,640,573	2,200,437
Operating income	537,253	788,112
OTHER INCOME (EXPENSE)
Interest income	24,505	28,530
Interest (expense)	(3,917)
(Loss) on fair value of derivatives	(305,324)	(129,744)
Total other income (expense)	(284,736)	(101,214)
Income before income taxes	252,517	686,898
Income tax expense	119,000	293,000
Net income	$ 133,517	$ 393,898
EARNINGS PER COMMON SHARE
Basic	$ 0.01	$ 0.03
Diluted	$ 0.01	$ 0.03
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic	13,622,268	12,839,656
Diluted	14,219,865	14,347,571

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Earnings Per Share

3 Months Ended

Mar. 31, 2012

Earnings Per Share

NOTE 6.         Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per-share:

	For the Three Months Ended
	March 31, 2012		March 31, 2011
Numerator for basic and diluted earnings per share:
Net income	$	133,517	$	393,898
Denominator:
Weighted-average basic shares outstanding		13,622,268		12,839,656
Assumed conversion of dilutive securities
Stock options		563,247		580,666
Restricted stock		314		—
Warrants		34,036		927,249
Potentially dilutive common shares		597,597		1,507,915
Denominator for diluted earnings per share – Adjusted weighted average shares		14,219,865		14,347,571
Earnings (loss) per common share:
Basic	$	0.01	$	0.03
Diluted	$	0.01	$	0.03

Common stock warrants and options outstanding totaling 1,094,416 and 782,958 shares, respectively, are not included in diluted earnings per common share for the three months ended March 31, 2012 and 2011, respectively, as they would have an antidilutive effect on earnings per common share.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements

NOTE 5.         Fair Value Measurements

The Company is required to disclose the fair value measurements required by the fair value measurement guidance. The derivative financial instruments recorded at fair value in the balance sheets as of March 31, 2012 and December 31, 2011 are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

· Level 1 – Quoted prices in active markets for identical assets or liabilities.

· Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables summarize the financial liabilities measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

	As of March 31, 2012
	Total		Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)
Derivative financial instruments	$	130,590	$	—	$	—	$	130,590

	As of December 31, 2011
	Total		Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)	Significant unobservable inputs (Level 3)
Derivative financial instruments	$	2,162,536	$	—	$	—	$	2,162,536

Equity-linked financial instruments consist of stock warrants issued by the Company that contain an exercise price adjustment feature or a cash settlement feature. In accordance with derivative accounting for warrants, we calculated the fair value of warrants using the Black-Scholes option pricing model and the assumptions used are described in Note 4, “Fair Value of Warrants”. Any gains and losses related to the change in fair value of the financial instruments are included in other income (expense) on the Statements of Income.

During the three months ended March 31, 2012, certain warrants were exercised and, as a result, the fair value of $2,337,270 was transferred from a liability and into equity and we recognized a $267,407 realized loss related to the exercise of these warrants. We also recognizeda $37,917 unrealized loss related to the change in fair value of the warrants outstanding at March 31, 2012.

During the three months ended March 31, 2011, certain warrants were exercised and, as a result, the fair value of $5,097 was transferred from a liability and into equity and we recognized a $651 realized loss related to the exercise of these warrants. We also recognizeda $129,093 unrealized loss related to the change in fair value of the warrants outstanding at March 31, 2011.

The following table reflects the activity for liabilities measured at fair value using Level 3 inputs for the three months ended March 31:

	2012			2011
Fair value of warrants outstanding as of January 1	$	2,162,536		$	692,696
Fair value of exercised warrants transferred to equity		(2,337,270	)		(5,097	)
Realized loss on warrants exercised or reclassified to equity treatment upon amendment		267,407			651
Unrealized loss on warrants		37,917			129,093
Fair value of warrants outstanding as of March 31	$	130,590		$	817,343

Financial instruments include cash and cash equivalents (level 1), accounts receivable (level 2), accounts payable (level 2), accrued expenses (level 2), deferred revenue (level 2), and derivative financial instruments (level 3). The fair value of current assets and current liabilities is estimated to approximate carrying value due to the short-term nature of these instruments. The fair value of derivative financial instruments is estimated using the Black-Scholes option pricing model.

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Professional Liability Litigation

3 Months Ended

Mar. 31, 2012

Professional Liability Litigation

NOTE 7.         Professional Liability Litigation

From time to time, the Company is party to legal proceedings in the ordinary course of business, including claims of professional negligence based on services performed by our employees and independent medical providers, including physicians, physician assistants, nurse practitioners and nurses providing treatments at the various facilities.

The Company evaluates each medical malpractice claim or similar contingent liability to determine the likelihood and amount of estimated claims as follows:

· In the event the Company determines it is probable that the Company will incur a loss arising from the claim and the amount can be reasonably estimated, a liability is established to satisfy the claim including an estimate of related legal fees. A receivable is then established to recognize the anticipated insurance recoveries at the same time that it recognized the liability, measured on the same basis as the liability, subject to the need for a valuation allowance for uncollectible accounts.

· In the event the Company determines it is not probable that the Company will incur a loss arising from the claim or the amount cannot be reasonably estimated, no liability is established to satisfy the claim and legal fees related to the claim are expensed as incurred.

These accruals are adjusted periodically as assessments change or additional information becomes available.

The amounts accrued for contingencies deemed probable are included in accrued expenses and total $186,000 and $0 as of March 31, 2012 and December 31, 2011, respectively. The amounts recorded for insurance recoveries are included in accounts receivable and total $136,000 and $0 as of March 31, 2012 and December 31, 2011, respectively.

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Income Tax Matters

3 Months Ended

Mar. 31, 2012

Income Tax Matters

NOTE 8.         Income Tax Matters

Our effective tax rate was 47.2% and 42.7% during the three months ended March 31, 2012 and 2011, respectively, which differs from the expected tax rate of 40.0%, primarily due to permanent differences related to stock-based compensation and derivatives related to warrants. The change in our effective tax rate from prior periods is primarily due to higher permanent differences related to stock-based compensation and derivatives related to warrants. We recorded income tax expense of $119,000 and $293,000 for the three months ended March 31, 2012 and 2011, respectively.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 133,517	$ 393,898
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	85,216	74,804
Amortization of service contracts and non-compete agreements	38,622	97,667
Amortization of long-term customer agreement	43,750	43,750
Restricted stock compensation	77,559
Stock-based compensation	140,812	104,829
Loss on fair value of derivatives	305,324	129,744
Gain on disposal of property	(24,042)
Deferred income taxes	54,000	35,000
Changes in working capital components
(Increase) decrease in accounts receivable	(926,643)	325,445
Decrease in prepaid expenses	231,590	240,353
(Increase) decrease in deposits	(62,517)	25,201
Increase (decrease) in accounts payable	1,586,698	(343,340)
Increase (decrease) in accrued expenses	414,503	(200,076)
(Decrease) in income taxes payable/receivable	(797,072)	(151,300)
Increase in deferred revenue	23,427	70,753
Net cash provided by operating activities	1,324,744	846,728
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(315,487)	(149,258)
Business combination	(250,000)
Net cash (used in) investing activities	(565,487)	(149,258)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable	(415,362)
Proceeds from exercise of warrants and stock options	83,543	16,667
Net cash provided by (used in) financing activities	(331,819)	16,667
Net increase in cash and cash equivalents	427,438	714,137
CASH AND CASH EQUIVALENTS
Beginning	16,445,938	13,270,089
Ending	16,873,376	13,984,226
NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
Reclassification of warrants from derivative financial instruments to additional paid-in capital upon exercise, at fair value.	2,337,270	5,097
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest	3,917
Income taxes paid	$ 862,073	$ 409,300

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Fair Value of Warrants

3 Months Ended

Mar. 31, 2012

Fair Value of Warrants

NOTE 4.         Fair Value of Warrants

As a result of adopting derivative accounting for certain warrants which contain an exercise price adjustment feature effective January 1, 2009, 1,705,000 of our then issued and outstanding common stock purchase warrants previously treated as equity were no longer afforded equity treatment and as a result were recorded as a liability based on fair value estimates. During the years ended December 31, 2010 and 2009, warrants to purchase 90,000 and 814,570 shares of common stock, respectively, were amended to remove the provisions that resulted in the liability treatment and were treated as equity. During the year ended December 31 2011, 771,020 of our previously issued, amended and outstanding common stock purchase warrants were amended a second time in connection with the previously terminated merger agreement to have a cash settlement feature and, as a result, were no longer afforded equity treatment. This resulted in a reclassification from equity to liability of $2,513,391 in 2011 compared to a $282,670 reclassification of liability to equity in 2010 reflecting the first warrant amendment. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model and all changes in the fair value of these warrants are recognized in earnings until such time as the warrants are exercised, amended or expire.

Investor Warrants @ $0.30 per share

Black-Scholes assumptions	March 31, 2012		December 31, 2011
Expected life (years)		—		0.2
Expected volatility		—		84.15	%
Risk-free interest rate		—		0.1	%
Expected dividend yield		—		0.0	%

Investor Warrants @ $2.50 per share

Black-Scholes assumptions	March 31, 2012		December 31, 2011
Expected life (years)		—		0.2
Expected volatility		—		84.15	%
Risk-free interest rate		—		0.1	%
Expected dividend yield		—		0.0	%

Placement Warrant @ $2.75 per share

Black-Scholes assumptions	March 31, 2012		December 31, 2011
Expected life (years)		—		0.1
Expected volatility		—		26.83	%
Risk-free interest rate		—		0.1	%
Expected dividend yield		—		0.0	%

Consultant Warrants @ $1.85 per share

Black-Scholes assumptions	March 31, 2012			December 31, 2011
Expected life (years)		0.9			1.2
Expected volatility		49.08	%		58.65	%
Risk-free interest rate		0.1	%		0.1	%
Expected dividend yield		0.0	%		0.0	%

The following tables summarize the warrant activity subject to fair value accounting for the three months ended March 31, 2012:

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share		Placement Agent Warrants @ $2.75 per share		Consultant Warrants @ $1.85 per share		Total
Warrants outstanding subject to fair value accounting as of December 31, 2011		773,000		254,333		9,450		80,000		1,116,783
Warrants exercised		773,000		254,333		9,450		—		1,036,783
Warrants outstanding subject to fair value accounting as of March 31, 2012		—		—		—		80,000		80,000

	Investor Warrants @ $0.30 per share			Investor Warrants @ $2.50 per share			Placement Agent Warrants @ $2.75 per share			Consultant Warrants @ $1.85 per share		Total
Fair value of warrants outstanding as of December 31, 2011	$	1,924,826		$	144,090		$	947		$	92,673	$	2,162,536
Realized loss on warrants exercised or reclassified to equity treatment upon amendment		219,847			47,532			28			—		267,407
Unrealized loss on warrants		—			—			—			37,917		37,917
Fair value of exercised warrants transferred to equity		(2,144,673	)		(191,622	)		(975	)		—		(2,337,270	)
Fair value of warrants outstanding as of March 31, 2012	$	—		$	—		$	—		$	130,590	$	130,590

The following tables summarize the warrant activity subject to fair value accounting for the three months ended March 31, 2011:

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share		Total
Warrants outstanding subject to fair value accounting as of December 31, 2010		131,430		496,667		628,097
Warrants exercised		—		6,667		6,667
Warrants amended		—		—		—
Warrants outstanding subject to fair value accounting as of March 31, 2011		131,430		490,000		621,430

	Investor Warrants @ $0.30 per share		Investor Warrants @ $2.50 per share			Total
Fair value of warrants outstanding as of December 31, 2010	$	361,537	$	331,159		$	692,696
Realized loss on warrants exercised or reclassified to equity treatment upon amendment		—		651			651
Unrealized loss on warrants		28,886		100,207			129,093
Fair value of exercised warrants transferred to equity		—		(5,097	)		(5,097	)
Fair value of warrants outstanding as of March 31, 2011	$	390,423	$	426,920		$	817,343

As of March 31, 2012, we had outstanding warrants to purchase an aggregate of 80,000 shares of common stock, all of which were subject toderivative accounting for warrants, at an average exercise price of $1.85, and we have reserved shares of our common stock for issuance in connection with the potential exercise thereof.