Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Summary of Significant Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING AND PRINCIPLES OF CONSOLIDATION

Going concern basis:

The consolidated financial statements are prepared on the basis that the Company will continue its operations as a going concern. As a result of certain conditions described in Note 7, our ability to continue as a going concern will be dependent upon the success of management’s plans, as set forth also in Note 7, and is subject to significant uncertainty. Except for the consideration in determining the valuation allowance for deferred tax assets from net operating loss carryforwards (Note 9), the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

The Company has elected to not adopt the option available under United States generally accepted accounting principles (“GAAP”) to measure any eligible financial instruments or other items at fair market value at this time. Accordingly, the Company measures all of its assets and liabilities on the historical cost basis of accounting, except as otherwise required by GAAP.

Inter-company accounts and transactions have been eliminated in consolidation. Certain minor reclassifications of prior period amounts have been made to conform to the current year presentation.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts. Actual results could differ from these estimates. Estimates involved in the determination of an allowance for doubtful accounts receivable and accrued claims payable, including incurred but not reported, are considered by management as particularly susceptible to material change in the next year. Other significant estimates relate to stock-based compensation, valuation of goodwill, warrants and beneficial conversion features.

ACCOUNTS RECEIVABLE

Accounts and notes receivable are carried net of an allowance at their estimated collectible value. Since customer credit is generally extended on a short-term basis, accounts receivable do not bear interest and are uncollateralized. We manage credit risk and determine necessary allowances by evaluating customers’ credit worthiness before extending credit and periodically for collectability, based primarily on customers’ past credit history and current financial conditions and general economic conditions, results of prior collection efforts, the relative strength of our relationship therewith and, in the event of a dispute, its legal position and the estimated cost of proposed collection proceedings. Management has not established a policy for when to charge off uncollectible accounts receivable or to use external collection agencies and makes such decisions on a case-by-case basis. The maximum losses that the Company would incur if a customer failed to pay would be limited to the carrying value of the receivable after any related allowances provided.

PROPERTY AND EQUIPMENT

Property and equipment (Note 3) is stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives ranging from 2 to 12 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life.

ACCRUED CLAIMS PAYABLE

Accrued claims payable includes estimated claims incurred but not yet reported (“IBNR”) to us, and any provisions for losses under our managed care contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We perform this loss accrual analysis on a contract-by-contract basis taking into consideration such factors as future contractual revenue, estimated future healthcare and maintenance costs, and each contract’s specific terms related to future revenue increases as compared to expected increases in healthcare costs. Future healthcare and maintenance costs are estimated based on historical trends and expected future cost increases.

Generally, we have the ability to cancel a managed care contract with 60 to 120 days’ written notice or to request a renegotiation of terms under certain circumstances, if the contract is not meeting our financial goals. Prior to a cancellation, we typically submit a request for a rate increase accompanied by supporting utilization data. Although historically, our clients have been generally receptive to such requests, no assurance can be given that such requests will be fulfilled in our favor in the future. If a rate increase is not granted, we have the ability, in some cases, to terminate the contract and thereby limit our exposure to risk.

We perform quarterly reviews of our portfolio of contracts for the purpose of identifying loss contracts (as defined in Accounting Standards Codification (“ASC”) 944-60, “Premium Deficiency and Loss Recognition”) and to develop a contract loss allowance, if applicable, for succeeding periods. At December 31, 2012, no contract loss allowance for future periods was deemed necessary.

FAIR VALUE MEASUREMENTS

The carrying amounts of cash, accounts receivable and accounts payable approximate their estimated fair value due to the short-term nature of these instruments. Since our other financial liabilities are not traded in an open market, we generally use a present value technique, which is a level 3 input, as defined in GAAP, to measure the estimated fair value of these financial instruments, except for valuing stock options and warrants (see below). The rate used for discounting expected cash flows is a risk-free rate adjusted for systematic and unsystematic risk.

Due to the inherent nature of related party transactions, we have not attempted to estimate the fair value of liabilities payable to related parties of the Company. As such, promissory notes payable with carrying values of $3,000,000 and $3,090,000, respectively, at December 31, 2012 and 2011, are excluded from the following table. The carrying amounts and estimated fair values of other financial instruments (all are liabilities) at December 30, 2012 and 2011, are as follows (in thousands):

	December 31
	2012					2011
	Carrying Amount			Estimated Fair  Value		Carrying Amount			Estimated Fair  Value
Promissory notes	$	3,280		$	3,248	$	830		$	816
Zero-coupon promissory notes		230			225		230			225
Debentures		537			515		549			557
Senior promissory notes		1,771			1,757		1,759			1,786
Long-term promissory notes		125			120		2,600			2,648
Less unamortized discount		(80	)		—		(361	)		—
	$	5,863		$	5,865	$	5,607		$	6,032

REVENUE RECOGNITION

Revenue under our contractual agreements to provide behavioral healthcare and pharmacy management services to subscribing members is earned regardless of services actually provided and, therefore, recognized monthly based on the number of qualified members. The information regarding qualified members is supplied by our clients subject to our periodic review of their member eligibility records and other reported information to verify its accuracy and determine the amount of revenue to be recognized. Similar to our other at-risk arrangements, pharmacy drug management revenue is recognized monthly based on a contracted rate per eligible member.

COSTS OF REVENUES

Costs of revenues consist of three major components: claims costs, pharmacy costs and healthcare operating expense. Claims costs are recognized in the period in which an eligible member actually receives services and includes an estimate for costs of behavioral health services that have been incurred but not yet reported.

We also incur pharmacy costs under contracts pursuant to which we manage the drug benefit. Pharmacy costs are recognized in the period in which an eligible member actually receives medications. The health plan’s PBM periodically reports the cost of drugs used, which is subtracted from our pharmacy management premium to yield a net payment to us or payment to the health plan, depending on actual drug usage. Healthcare operating expenses are any expenses associated with care administration, which are recognized in the period that they incur.

LEGAL DEFENSE COSTS

We accrue an estimate of incurred legal defense costs to be incurred in connection with pending disputes and litigation matters as part of our estimated minimum probable losses (see Note 7c).

INCOME TAXES

We are subject to the income tax jurisdictions of the U.S., Puerto Rico and multiple state tax jurisdictions. However, our provisions for income taxes for 2012 and 2011 include only state income taxes (see Note 9).

Management has evaluated our tax positions taken or to be taken on income tax returns that remain subject to examination (i.e., tax years 2008 and thereafter federally), and has concluded that there have been no uncertain tax positions (as defined in GAAP) taken that require recognition or disclosure in the consolidated financial statements. In the event of any income tax-related interest or penalties are incurred, they would be included in general and administrative expense.

STOCK OPTIONS AND WARRANTS

We grant stock options and warrants (see Note 8) to our employees, non-employee directors, note holders and certain consultants and clients allowing them to purchase our common stock pursuant to approved terms. The estimated value of the warrants issued with debt instruments is recorded as a discount on notes payable and amortized as interest expense over the term of the notes using the effective interest method.

We use a Black-Scholes valuation model to estimate the fair value of options and warrants on the measurement date and for determining the allocation of the relative values of debt and warrants. In applying the model, we use level 3 inputs, as defined by GAAP, consisting of historical data and management judgment to estimate the expected terms of the instruments. Expected volatility is based on the historical volatility of our traded stock. We do not expect to pay dividends for the period of the expected life of the instruments, and therefore we assume no expected dividend. The assumed risk-free rates used are based on the U.S. Treasury yield curve with the same expected terms as those of the equity instruments at the time of grant.

The following table lists the assumptions utilized in applying the Black-Scholes valuation model for options and warrants.

	Year ended December 31
	2012			2011
Expected volatility		160	%		160	%
Expected life (in years) of options		5			1-10
Expected life (in years) of warrants		2-3			3-10
Risk-free interest rate range, options		0.64	%		0.10-2.03	%
Risk-free interest rate range, warrants		0.24-0.57	%		0.62-1.97	%
Expected dividend yield		0	%		0	%

PER SHARE DATA

For the periods presented, since losses would produce anti-dilution, no diluted loss per common share is presented. The following table sets forth the computation of basic loss per common share (amounts in thousands, except per share data):

	Year ended December 31,
	2012			2011
Numerator:
Net loss attributable to common stockholders	$	(6,990	)	$	(14,088	)
Denominator:
Weighted average common shares		59,270			57,031
Basic loss per share attributable to common stockholders	$	(0.12	)	$	(0.25	)