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| CADV.OB > SEC Filings for CADV.OB > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
Executive Overview
The Company and its direct and indirect subsidiaries, CAHS and CHCM, are in the business of providing management and consulting services designed to enable integrated health care delivery systems and other care management organizations to reduce the costs, while improving the quality, of medical services provided to their subscribers. The management and consulting services include care management program enhancement services, executive and clinical management services, and training programs. The Company's management and consulting services have been and continue to be provided to integrated health care delivery systems and other care management organizations. The Company operates in one business segment.
The Company focuses on offering its healthcare consulting, data warehousing and analytic services. As part of this effort, the Company has developed RPNavigator, a proprietary tool to help managed care plans and employers better understand and forecast resource consumption, risk, and costs associated with their respective populations. In providing its consulting services, the Company licenses RPNavigator to its customers. The Company recognizes revenue as services are performed or ratably under contract terms. For a further discussion of considerations relating to this business, see "Liquidity, Financial Condition and Capital Resources - General Overview".
Management believes it must continue to refine its current service lines in order to continue to add value to existing and potential customers. In addition, the Company intends to broaden the services offered with unique and complementary cost-containment strategies. Management intends to evaluate each service in light of anticipated changes in the health care industry, the cost to enter each such service line as well as the availability and timeliness of competent resources. To further expand its line of services, the Company contemplates pursuing alternatives to its internal product and service development efforts by entering into strategic alliances and joint ventures as well as through acquisitions.
Critical Accounting Policies
The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions about future events and their effects cannot be determined with certainty. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, our management is periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time. Actual results may differ from these estimates under different assumptions or conditions.
Certain accounting policies have a significant impact on amounts reported in financial statements. A summary of those significant accounting policies can be found in Note B to the Company's financial statements
A critical accounting policy is one that is both important to the portrayal of the Company's financial condition or results of operations and requires significant judgment or a complex estimation process. The Company believes the following fit that definition:
Revenue recognition
With respect to RPNavigator license fees, most of the Company's customers licensing RPNavigator are required, as part of their agreements with the Company, to receive consulting services from the Company. All contracts provide for licensing of RPNavigator and consulting services at a fixed monthly fee, a per member per month fee, or a combination of both. The Company earns the revenue from licensing and consulting services on a monthly basis and recognizes revenue from both services on a monthly basis at either a fixed monthly fee, a per member per month fee or a combination of both. Additionally, the Company provides separate consulting services on a fee for service basis. Revenue for these consulting services is recognized as the services are provided.
Accounting for stock-based compensation
The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standard No. 123R, "Share Based Payment" (FAS123R), which requires that all share-based payments, including grants of stock options, be recognized in the statement of operations as compensation expense, based on their fair values at the date of grant. Under the provisions of FAS 123R, the estimated fair value of options granted under the Company's Employee Stock Option Plan and Director Stock Option Plan are recognized as compensation expense over the service period which is generally the same as the option-vesting period.
For the purposes of determining estimated fair value under FAS 123R, the Company has computed the fair values of all share-based compensation using the Black-Scholes option pricing model. This model requires the Company to make certain estimates and assumptions. The Company calculated expected volatility based on the Company's historical stock volatility. The computation of expected life is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Under FAS 123R, forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which the actual forfeitures differ, or are expected to differ, from the previous estimate.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, "Fair Value Measurements," to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The provisions under SFAS No. 157 were effective for the Company beginning January 1, 2008. In February 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157," which defers the effective date of SFAS No. 157 for all nonrecurring fair-value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008. The adoption of these pronouncements did not have a material impact on our financial position and results of operations.
In October of 2008, the Financial Accounting Standards Board issued Staff Position No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active," which clarifies the application of FASB Statement No. 157 in a market that is not active. This FSP is effective for fiscal years beginning after October 10, 2008. The adoption of this pronouncement will not have a material impact on our financial position and results of operations.
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" including an amendment of SFAS No. 115. SFAS No. 159 provides companies with an option to report selected financial liabilities at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The provisions under SFAS No. 159 were effective for the Company beginning January 1, 2008. The adoption of this pronouncement did not have a material impact on our financial position and results of operations.
In April 2008, the Financial Accounting Standards Board issued Staff Position No. 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP No. 142-3"). FSP No. 142-3 amends the factors to be considered when developing renewal or extension assumptions that are used to estimate an intangible asset's useful life under SFAS No. 142, "Goodwill and Other Intangible Assets." FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of this pronouncement will not have a material impact on our financial position and results of operations.
In May 2008, the Financial Accounting Standards Board issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 became effective in September 2008 following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The adoption of this pronouncement did not have a material impact on our financial position and results of operations.
Results of Operations-Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The following discussion compares the Company's results of operations for the year ended December 31, 2008, with those for the year ended December 31, 2007. The Company's consolidated financial statements and notes thereto included elsewhere in this report contain detailed information that should be reviewed in conjunction with the following discussion.
Total revenues for the years ended December 31, 2008 and 2007 were approximately $3,824,000 and $4,363,000, respectively. The decrease in revenues of approximately $539,000 was primarily attributable to decreased revenue of approximately $790,000, largely due to decreased membership of one customer, offset by increased revenue of approximately $74,000 in current customer business due to increased services primarily with one customer and approximately $177,000 in new business including two new customers and a one-time consulting engagement.
Cost of services:
Cost of services for the years ended December 31, 2008 and 2007 were approximately $1,546,000 and $1,687,000, respectively. The decrease in the cost of services of approximately $141,000 was primarily due to decreases in personnel costs of approximately $137,000 relating to terminated employees, decreases in travel costs of approximately $6,000, offset by increases in professional costs of approximately $2,000. The Company's direct costs are mostly fixed with the exception of its costs associated with licensing fees. Any variation in direct costs is largely due to a change in licensing fees related to a change in license fee revenue. Other direct costs, such as personnel costs, may increase only if a large volume of increased business occurs where additional staffing would be required.
Operating Cost and Expenses
Selling, general and administrative:
Selling, general and administrative costs for the years ended December 31, 2008 and 2007 were $3,014,000 and $2,709,000, respectively. The increase in selling, general and administrative costs of approximately $305,000 is largely due to increases in personnel costs of approximately $192,000, largely related to salary increases, increases in professional costs of approximately $194,000 largely relating to legal and consulting fees due to the trial of Alan Fontes vs. CareAdvantage, Inc. that commenced during 2008 and increases of approximately $5,000 in information and communication costs, offset by decreases in facility costs of approximately $27,000, decreased travel costs of approximately $5,000 and decreases in other general and administrative costs of approximately $54,000.
Depreciation and amortization for the year ended December 31, 2008 aggregated $70,000 compared to $67,000 for the year ended December 31, 2007. The slight increase in depreciation and amortization costs of approximately $3,000 is largely due to capital purchases.
Interest expense:
Interest expense for the years ended December 31, 2008 and 2007 was $23,000 and $18,000, respectively. The increase in interest expense of approximately $5,000 is largely due to interest on equipment capital leases.
Net loss:
The Company had a net loss of $832,000 for the year ended December 31, 2008, compared to a net loss of $83,000 for the year ended December 31, 2007. This increase in net loss reflects new business not being realized and an increase in professional costs of approximately $194,000 largely related to the trial of Alan Fontes vs. CareAdvantage, Inc. and increased personnel costs due to salary increases relating to market adjustments. The Company's net loss for the twelve month period ended December 31, 2007 includes a gain on sale of fixed assets of approximately $38,000.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital reserves.
Liquidity, Financial Condition and Capital Resources
General Overview:
At December 31, 2008, the Company had cash and cash equivalents of $88,000 and negative working capital of approximately $240,000. At December 31, 2007, the Company's cash balance was $508,000 and working capital was approximately $558,000.
Despite the history of losses the Company has incurred, the Company believes that its business has the potential to become profitable for the Company. The Company recently entered into a Service and License Agreement with a new state -organization customer that offers a potential opportunity to provide services to various other new customers including states and state organizations. Management believes that these opportunities enhance business prospects and may lead to a more significant market penetration and improved revenues and profitability for the Company.
If the Company is unable to develop its business as planned, it may be required to seek additional capital financing. If the Company is not successful in obtaining additional capital, it may need to either restructure its business, sell its assets, or cease operations entirely. In each case, the Company may be required to file for bankruptcy protection. The Company is cautiously optimistic, however, about opportunities in its business and currently plans to pursue those opportunities.
Financial Condition:
Net cash (used in)/provided by operating activities amounted to approximately ($354,000) and $136,000 for the years ended December 31, 2008 and 2007, respectively. This increase in cash used by operating activities is largely due to changes in operating assets and liabilities relating primarily to accounts payable and non-cash charges, offset by Company's loss of approximately $832,000 in 2008.
Net cash (used in)/provided by investing activities amounted to approximately ($4,000) and $21,000 for the years ended December 31, 2008 and 2007, respectively. This decrease in cash provided is largely due a gain on sale of assets of approximately $38,000 in 2007. Capital purchases of approximately $4,000 and $17,000 were made in 2008 and 2007, respectively.
Net cash used in financing activities amounted to approximately $62,000 and $20,000 for the years ended December 31, 2008 and 2007, respectively. This increase in cash used is largely due to payments on capital leases for equipment, offset by $25,000 in proceeds from exercise of common stock options in 2007. There were no options exercised in 2008.
The Company generates most of its revenue from the licensing of RPNavigator and providing consulting services in connection with that licensing. Management believes that its cash on hand at December 31, 2008 and cash flow from operations based on a forecast prepared by management, which takes into account executed contracts, and cost reductions planned and effectuated as of December 31, 2008, should enable the Company to meet its obligations as they become due during the next 12 months. Such forecast includes contracts with new customers as well as expanding business with current customers that are expected to start in the next three to six months. However, there can be no assurances that management's plans, including projected revenue, will be attained. If the Company is unsuccessful in increasing its business, obtaining additional financing, or curtailing operational costs to the point that net revenues are sufficient to offset expenses, the Company will continue to operate at a loss and will be required to wind up its operations, sell its assets, restructure the business, or liquidate, as a result of which there is substantial doubt about its ability to continue as a going concern. No adjustments have been made to the accompanying financial statements with respect to such uncertainty. Notwithstanding the foregoing, the Company is cautiously optimistic about opportunities in its business and currently plans to pursue those opportunities. The Company has a history of losses and for the 12 months ended December 31, 2008, it had a net loss of $832,000. Additionally, at December 31, 2008, the Company has an accumulated deficit of $24,370,000, stockholders deficit of $379,000 and cash and cash equivalents of $88,000.
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