COMMENT 1:

We note that your revenue and accounts receivable are recorded net of a contractual allowance.  Please expand your disclosures to include the following:

 

·

For each period presented, quantify and disclose the amount of changes in estimates of prior period contractual adjustments that you recorded during the current period. For example for 2006,  this amount would represent the amount of the difference between estimates of contractual adjustments for services provided in 2005 and the amount of the new estimate or settlement amount that was recorded during 2006.

 

·	Quantify and disclose the reasonably possible effects that a change in estimate of unsettled amount from 3rd party payers as of the latest balance sheet date could have on your financial position and operations.

 

·

Disclose in a comparative tabular format, the payor mix concentrations and related aging of accounts receivable.  The aging schedule may be based on management's own reporting criteria (i.e, unbilled, less than 30 days, 30 to 60 days etc.) or some other reasonable presentation.  At a minimum, the disclosure should indicate the past due amounts and a breakdown by payor classification (i.e., Medicare, Medicaid, Managed care and other, and Self- pay).  We would expect Self-pay to be separately classified from any other grouping.  If your billing system does not have the capacity to provide an aging schedule of your receivables, disclose that fact and clarify how this affects your ability to estimate your allowance for bad debts.

 

·

If you have amounts that are pending approval from third party payers (i.e. Medicaid Pending), please disclose the balances of such amounts, where they have been classified in your aging buckets, and what payor classification they have been grouped with.  If amounts are classified outside of self'-pay, tell us why this classification is appropriate, and disclose the historical percentage of amounts that get reclassified into self pay.

 

RESPONSE:

In response to the Staff’s comments above, the Company will do the following and/or has the following clarifications:

 

·	In response to your fist question, we would propose that we amend the MD&A section of the filing to disclose the following in the description of Critical Accounting Policies:

 

“While we use all available information in the estimation of our net revenues, including our contractual status and historical collection experience with payors, by their nature, adjustments to previously recorded estimated net revenue amounts arise from time-to-time, and are recorded as an adjustment to current period net revenue when such amounts are both probable and estimable.  In almost all cases, such adjustments are not made until the time of final settlement because, until that point, we usually do not have sufficient information that would indicate that an adjustment is warranted.  We continually refine our estimated discounts and contractual allowances on a prospective basis to take new information and/or new payment experiences into consideration in order to make our prospective estimated net revenue as accurate as possible.  As a result, current period adjustments to prior period revenue estimates are not material to the Company’s results of operations or our financial condition in any period presented.”

 

·

It is not our policy to retrospectively change our estimates of prior period net revenue in future periods until we receive final payment because, until that point, we do not have sufficient information that would indicate that an adjustment is warranted.  However, we emphasize that we use all available information in developing our prospective estimates and refine this information frequently.  Therefore, as we discussed in our response above, these amounts are not material to our financial statements.  In fact, our net total estimate change amount arising from 2006 collections of 2005 recorded revenue represented less than 1% of the net revenue recorded in FY 2006 and less than 3% of the net revenue recorded in FY 2005.  We believe the proposed wording changes in the response above address this concern.

 

·

We will amend our filing to disclose our accounts receivable aging table as of the balance sheet date for receivables <30 days old, 31-60 days old, 61-90 days old, 91-120 days old, and> 120 days old.  We will also include a qualitative statement at the end of such aging table that states that accounts receivable from “self-pay” clients were not material in any period presented.  As background, please note that as of December 31, 2006 and December 31, 2005, accounts receivable from “self-pay” clients represented approximately 0.2% and 1.2% of the total accounts receivable, respectively.

 

·

Our systems are unable to make a distinction between accounts receivable which have been approved and are unpaid and accounts receivable that have not yet been approved.  Thus, from our perspective, all of our accounts receivable are pending approval until we actually receive payment.  As noted above, approximately 1% of our accounts receivable are from “self-pay” accounts and approximately 99% of our revenue and accounts receivable are from third party payors or client relationships .  Our billing system classifies each account receivable according to the Medicare, insurance or other information we have at the time the original invoice is processed.  The only time adjustments are made to this are in the case of errors (which are seldom) where we find that a patient’s insurance is no longer in force or a patient is not Medicare eligible for some reason.  We do not have any way to discern what percentage of accounts receivable get reclassified into “self-pay” from a third party payor, but we believe this is an immaterial amount.

 

 

 

 

 

 

 

COMMENT 2:

It appears you are determining future volatility based on a three months period prior to the grant date and not historical or implied information over the expected term of the option.  The does not appear to be consistent with the guidance in paragraph (A32) of SFAS NO. 123(R) and SAB Topic 14D.  Please advise or revise.

 

RESPONSE:

We have considered the guidance provided in SFAS123(R) and SAB107 in developing assumptions underlying the fair value measurements of our share-based payment arrangements. In response to your inquiry, we noted that SAB 107, Topic 14C, states in the third sentence of the Staff’s Interpretive Response to Question #1:

 

 

 

COMMENT 3:

We note in March 2005 you refinanced the existing revolving credit facility with Aspen to increase the credit facility from $740,000 to $1.5 million.  As part of this transaction you issued a warrant to purchase 2,500,000 shares of common stock to Aspen which was recorded as a $131,337 discount to the credit facility. Please provide a detailed discussion of how the value of the warrants was determined (including the assumptions utilized).  Please note that when equity instruments are issued to secure borrowing capacity (i.e., revolving note, line of credit) the full fair value of the equity instruments should be charged to debt issue costs and amortized over the term of the loan.

 

RESPONSE:

The fair value of the warrants issued to Aspen was determined using the Black-Scholes option valuation model, based on the following factors, which were present on the date on which we reached agreement on the principal terms:

 

 

 

 

 

 

 

 

 

 

 

 

 

COMMENT 4:

We note that in January 2006 you entered into a binding letter agreement with Aspen which extended the maturity date of the credit facility, increased the credit facility by $200,000 and allowed Aspen to purchase an additional $200,000 of restricted common shares.  As compensation for each of these modifications you issued Aspen a total of 900,000 additional warrants to purchase shares of your common stock.  Please tell us how you accounted for the modification to the credit facility and cite the specific authoritative literature you utilized to support your accounting treatment.

 

RESPONSE:

In accordance with paragraph 4a of EITF Issue 98-14 “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”, because the borrowing capacity of the new arrangement was greater than the borrowing capacity of the old arrangement, the a) unamortized deferred costs from the original agreement (see response 3 above), together with b) the fair value of the additional warrants issued to Aspen issued in connection with increasing the credit facility and c) the change in the fair value of the original 2,500,000 warrants previously issued to Aspen as a result of the reduction in the exercise price (see response 5 below), were associated with the new arrangement.  Thus the sum of these three components were deferred and amortized over the remaining term of the new arrangement.

 

COMMENT 5:

It appears that the exercise price of the 2,500,000 warrants issued in March 2005 was modified from $0.50 to $0.31 in January 2006.  Please provide a detailed discussion of how this modification was accounted for in accordance with the guidance of paragraph (51) of SFAS NO. 123(R).

 

RESPONSE:

The difference, as of the date of modification, between the value of the warrants at an exercise price of $0.50, and their value at an exercise price of $0.31, amounting to $2,365, was credited to additional paid-in capital and included in deferred financing fees and amortized over the remaining term of the new arrangement (see response 4 above).

 

COMMENT 6:

We noted several issuances of warrants as compensation for the modification of existing agreements.  Please expand your disclosure here to describe all of the material terms of the warrants, including who has the rights to convert (i.e. the holder or the Company), the exercise feature (i.e. physical, net cash, or net share settlement, etc.), and any redemption features.  Please provide a description of the method and significant assumptions used to determine the fair value of the warrants issued.

 

RESPONSE:

We will expand our disclosure in the Liquidity and Capital Resources Section on page 30 and the Related Party Transactions Section on Page 65 of our FY 2006 10-KSB to include a new subparagraph g) which states:

 

All Waiver Warrants, the Existing Warrants and all warrants issued to Aspen and SKL in connection with the purchase of equity or debt securities are exercisable at the option of the holder and each such warrant contains provisions that allow for a physical exercise, a net cash exercise or a net share settlement.  We used the Black-Scholes pricing model to estimate the fair value of all such warrants as of the commitment date for each, using the following assumptions: dividend yield of 0 %, expected volatility of 14.6 – 19.3%,  risk-free interest rate of 4.5%, and a term of 3 - 5 years.”

 

 

 

 

COMMENT 7:

It appears that the fees associated with Standby Equity Distribution Agreement with Cornell Capital Partners were paid with equity instruments.  Please provide a detailed discussion of how you determined the fair value of the equity instruments.  In addition, it does not appear that these fees paid with shares of common stock were shown as a non-cash financing activity in your consolidated statement of cash flows on page 48.  Please clarify and revise.

 

RESPONSE:

The fees paid with equity instruments were recorded based on the fair value of the common stock issued on the date of issue.  The Supplemental Disclosure Of Non-Cash Investing And Financing Activities at the bottom of the Consolidated Statement of Cash Flows will be amended to include disclosure of the value of common stock issued in settlement of financing fees of $50,000 and $143,208, respectively in FY 2006 and FY 2005, respectively.

 

 

COMMENT 8:

We noted that in April 2007 you entered an agreement regarding the formation of a joint venture Contract Research Organization.  Please provide a detailed discussion on how you have accounted for this transaction and cite the specific authoritative literature you utilized to support your accounting treatment.

 

RESPONSE:

The Joint Venture Agreement for the Contract Research Organization (“CRO”) has not yet been written and the CRO has not yet been formed. To clarify, we disclosed that we entered into an agreement regarding the formation of a prospective joint venture.  At the bottom of the paragraph which discusses the CRO joint venture in our Form 10-KSB, we have already disclosed that “Subject to final negotiation, we will own a minimum of 60% and up to 80% of the new CRO venture which is anticipated to be launched in the third or fourth quarter of FY 2007”.  Upon its formation, we currently anticipate consolidating its results of operations, unless, ultimately, the final joint venture agreement embodies terms and conditions (such as, minority veto rights) that would suggest an alternative accounting treatment is more appropriate.