Description Of Business And Summary Of Significant Accounting Policies Policies

LIQUIDITY - As of March 31, 2013 and 2012, the Company had a total stockholders’ deficiency of $29.9 million and $11.6 million, respectively, and a working capital deficit of $36.7 million and $14.7 million, respectively. For the years ended March 31, 2013 and 2012, the Company had net income (loss) of $(15.2) million and $7.5 million, respectively, and (negative) positive cash flow from operations of $(9.6) million and $4.5 million, respectively. At March 31, 2013, the Company had $5.0 million in additional availability under its revolving credit facility (Note 3). The Company anticipates making payments for provider fees and other expenses relating to the 2013 hospital quality assurance fee program of approximately $105.8 million and receiving approximately $235.5 million in revenues from the State ($79.4 million from the fee-for-service portion and $156.1 million from the managed care portion) (Notes 11 and 14).DESCRIPTION OF BUSINESS - Effective March 8, 2005, the Company acquired four hospitals (the "Hospitals") from subsidiaries of Tenet Healthcare Corporation (the "Acquisition"). The Company owns and operates the four community-based hospitals located in southern California, which are:

	●	282-bed Western Medical Center in Santa Ana
	●	188-bed Western Medical Center in Anaheim
	●	178-bed Coastal Communities Hospital in Santa Ana
	●	114-bed Chapman Medical Center in Orange

CONCENTRATION OF RISK

CONCENTRATION OF RISK - The Hospitals are subject to licensure by the State of California and accreditation by the Joint Commission. Loss of either licensure or accreditation would impact the ability to participate in various governmental and managed care programs, which provide the majority of the Company's revenues.

Substantially all patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans) and other State and local government payers, which combined accounted for 58% and 57% of the patient service revenues for the years ended March 31, 2013 and 2012, respectively. No other payers represent a significant concentration of the Company's patient services revenues.

The Company receives all of its inpatient services revenue from operations in Orange County, California. The economic conditions of this service area could affect the ability of patients and third-party payers to reimburse the Company for services through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs.

PATIENT SERVICE REVENUES

PATIENT SERVICE REVENUES – Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in the consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Since Medicare requires that a hospital's gross charges be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

The following is a summary of sources of patient service revenues (net of contractual allowances and discounts) before provision for doubtful accounts:

	Year ended March 31,
	2013		2012

Medicare	$	55,570	$	58,046
Medicaid		100,561		80,153
Managed care		203,058		201,758
Indemnity, self-pay and other		68,911		62,607
	$	428,100	$	402,564

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost-based revenues under these programs are subject to audit and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. The Company has established settlement (payables) receivables of $(179) and $190 as of March 31, 2013 and 2012, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $13.4 million and $14.3 million during the years ended March 31, 2013 and 2012, respectively. The related revenue recorded for the years ended March 31, 2013 and 2012, was $14.3 million and $15.4 million, respectively. As of March 31, 2013 and 2012, estimated DSH receivables were $5.9 million and $5.0 million, respectively, which are included as due from government payers in the accompanying consolidated balance sheets.

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $84.7 million and $84.2 million for the years ended March 31, 2013 and 2012, respectively), are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. The Hospitals estimate the discounts for contractual allowances utilizing billing data on an individual patient basis. Management believes the estimation and review process allows for timely identification of instances where such estimates need to be revised. The Company does not believe there were any adjustments to estimates of individual patient bills that were material to patient service revenues.

The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance are offered assistance in applying for Medicaid and other programs they may be eligible for, such as state disability, Victims of Crime, or county indigent programs. Patient advocates from the Hospitals' Medical Eligibility Program ("MEP") screen patients in the hospital and determine potential linkage to financial assistance programs. They also expedite the process of applying for these government programs. The estimated costs of charity care (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the years ended March 31, 2013 and 2012 were approximately $8.0 million and $7.0 million, respectively.

The Company is not aware of any material claims, disputes, or unsettled matters with any payers that would affect revenues that have not been adequately provided for in the accompanying consolidated financial statements.

CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – The following is a summary of the principal components of accounts receivable and due from/to government payers as of March 31, 2013 and 2012:

	March 31,
	2013			2012
Accounts receivable:
Patient accounts receivable	$	83,964		$	71,800
Allowance for doubtful accounts		(21,143	)		(18,201	)
Accounts receivable, net	$	62,821		$	53,599

Due from government payers:
DSH	$	5,882		$	4,993
Settlement receivables		–			190
	$	5,882		$	5,183

Due to government payers:
Settlement payables	$	179		$	–
	$	179		$	–

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 6.5% and 11.3% as of March 31, 2013 and 2012, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of March 31, 2013 and 2012, the allowance for doubtful accounts for self-pay uninsured was 95.2% and 90.3%, respectively, of self-pay uninsured patient accounts receivable. As of March 31, 2013 and 2012, the allowance for doubtful accounts for self-pay balance after insurance was 78.0% and 77.4%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of March 31, 2013 and 2012, the allowance for doubtful accounts for managed care was 20.3% and 16.1%, respectively, of managed care patient accounts receivable.

Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending under the MEP, with appropriate contractual allowances recorded. If the patient does not qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for bad debts. Reclassifications of pending Medicaid accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for bad debts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of March 31, 2013 and 2012 based on historical collections experience.

PROPERTY AND EQUIPMENT

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and any impairment write-downs related to assets held and used. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Capital leases are recorded at the beginning of the lease term as property and equipment and a corresponding lease liability is recognized. The value of the property and equipment under capital lease is recorded at the lower of either the present value of the minimum lease payments or the fair value of the asset. Such assets, including improvements, are amortized over the shorter of the lease term or their estimated useful life, where applicable.

The Company uses the straight-line method of depreciation for buildings and improvements, and equipment over their estimated useful lives of 25 years and 3 to 15 years, respectively.

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS - The Company's financial assets and liabilities recorded in the consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, debt, accounts payable, and other liabilities, all of which are recorded at book value which approximates fair value.

GAAP has established a hierarchy for ranking the quality and reliability of the information used to determine fair values and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

	Level 1:	Unadjusted quoted market prices in active markets for identical assets or liabilities.

	Level 2:	Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

	Level 3:	Unobservable inputs for the asset or liability.

The Company utilizes the best available information in measuring fair value. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company currently has no financial or nonfinancial assets or liabilities subject to fair value measurement on a recurring basis except for warrants issued in April 2010 and February 2013 (Note 4).

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are classified within the hierarchy as of March 31, 2013 and 2012:

	Total		Level 1		Level 2		Level 3

Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276
Warrant liability at March 31, 2012	$	1,641		–		.	$	1,641

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)

Balance at March 31, 2011	$	167
Change in fair value of warrant liability included in earnings		1,474
Balance at March 31, 2012		1,641
Fair value of warrants issued and vested, net		1,692
Fair value of warrants - loan discount on term loan		534
Change in fair value of warrant liability included in earnings		1,409
Balance at March 31, 2013	$	5,276

Additional quantitative information about Level 3 fair value measurements is discussed in Note 4.

INCOME (LOSS) PER COMMON SHARE

INCOME (LOSS) PER COMMON SHARE – Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds (Note 8).

INCOME TAXES

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. The Company assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. The Company recorded a 58% and 100% valuation allowance on its net deferred tax assets as of March 31, 2013 and 2012, respectively, since they did not meet the more-likely-than-not threshold.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Any penalties or interest arising from federal or state taxes are recorded as a component of the Company’s income tax provision.

NEW ACCOUNTING STANDARDS

NEW ACCOUNTING STANDARDS – Effective March 31, 2012, the Company adopted ASU 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which requires health care entities to present the provision for bad debts relating to patient service revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. Additional disclosures relating to sources of patient revenue and the allowance for doubtful accounts related to patient accounts receivable are also required. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.