SecProbe.io

CORRESP
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filename1.htm

    letter.htm

    April 29,
2009

    VIA EDGAR
TRANSMISSION

                Securities
      and Exchange Commission

                Division
      of Corporation Finance

                450
      Fifth Street, N.W.

                Washington,
      D.C. 20549

                Attn:
      John Reynolds, Assistant
Director

              Re:

              Hythiam,
      Inc.

              Form
      10-K for Fiscal Year Ended December 31, 2008

              Filed
      March 31, 2009

              File
      No. 001-31932

                Ladies
      and Gentlemen:

    Reference
is made to the letter received by Hythiam, Inc. (the “Company”) from Tia
Jenkins, Senior Assistant Chief Accountant of Office of Beverages, Apparel, and
Health Care Services (the “Staff”), dated April 15, 2009 (the “Comment Letter”)
relating to the Staff’s comments on the 2008 Form 10-K. The Company’s responses
to the Staff’s comments contained in the Comment Letter are set forth below. For
the convenience of the Staff, each of the Staff’s comments has been duplicated
below and is set forth in italics immediately prior to the corresponding
response.

    Form 10-K for Fiscal Year
Ended December 31, 2008

    Management’s Discussion and
Analysis of Financial Condition and Results of Operations

    Healthcare Services, page
36

              1.

              We have reviewed your response
      to our prior comment one, noting that you do not plan on using "cash
      operating expenditure" in future filings.  And if you do decide
      to use a non-GAAP measure you will provide a definition of the measure as
      well as all of the requirements of Item 10(e) of Regulation
      S-K.  We note on page 38 of your Form 10-K filed March 31, 2008
      you disclose cash operating expenditures.  Please revise your
      disclosure to include:

              ●

              a
      definition of how you calculate this
measure,

                ●

              a
      presentation, with equal or greater prominence, of the most directly
      comparable financial measure calculated and presented in accordance with
      GAAP, and

                ●

              a
      reconciliation (by schedule or other clearly understandable method), which
      shall be quantitative for historical non-GAAP measures presented, and
      quantitative for forward-looking information, of the differences between
      the non-GAAP financial measure disclosed with the most directly comparable
      financial measure calculated and presented in accordance with
      GAAP.

    RESPONSE:

    Our
reference to the term “cash operating expenditures” on page 38 within MD&A
was inadvertent. The figures being discussed here represent the amount of
operating expenses that we reduced in our 2009 budget compared to Q3 2008. In
the other two instances that we discuss the actions taken to streamline our
operations within MD&A, on pages 44 & 51, we refer to the GAAP term
“operating expenses”. We plan to correct the error on page 38 and replace the
term “cash operating expenditures” with “operating expenses” by amending our
Form 10-K filing.

                2.

                We note that on page 37 you
      disclose that you plan to incur approximately $400,000 for research and
      development expenses in 2009.  This disclosure appears to be
      inconsistent with your
contractual

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              commitments
      for clinical studies of $1,257,000 due in less than one year on page
      55.  Please revise or
advise.

    RESPONSE:

    The
disclosure on page 37 relates to the amount of research and development expense
we expect to incur in
2009, while the amount on page 55 represents the amount of research and
development expense that we expect to pay in cash during 2009. As of December
31, 2008, we had $857,000 of accrued, but unpaid research and development
expense which is expected to be paid during 2009 and accounts for the difference
between the two figures.

    Notes to Consolidated
Financial Statements

    Note 1.  Summary
of Significant Accounting Policies

    Description of Business,
F-8

                3.

                We note that you sold your
      interest in CompCare in January 2009 for $1.5 million, there was
      substantial doubt regarding the ability of CompCare to continue as a going
      concern, and management was considering various strategic alternatives
      including the sale of CompCare during the year ended December 31,
      2008.  Tell us how you considered the guidance in paragraph 30
      of SFAS 144 regarding the reporting and disclosure of assets to be
      disposed of by sale.  Please revise or
      advise.

    RESPONSE:

    According
to paragraph 30 of SFAS 144, all six criteria must be met before a disposal
group can be considered as “held for sale”. At December 31, 2008, we had not met
the first criteria, “management, having the authority to approve the action,
commits to a plan to sell the asset (disposal group)”. Authority to sell
CompCare rested with our board of directors and management did not present the
plan and seek approval to sell CompCare to the board of directors until January
2009.

    Fair Value Measurements,
F-16

                4.

                We note that you have utilized
      an income-based approach to estimate the fair market value of your ARS and
      that the Level III inputs were the most sensitive to determining the
      overall fair value.  You state that the estimated price was
      derived as the present value of the expected cash flows over and estimated
      period of illiquidity, using a risk-adjusted discount
      rate.  Please tell us what period of illiquidity you utilized,
      and what risk adjusted discount rate you used.  If the period of
      illiquidity is greater than 12 months, provide us with qualitative
      information that supports a period greater than 12 months considering your
      auditors have placed substantial doubt on your ability to continue as a
      going concern.  Tell us if the discount rate was adjusted for
      credit risk and liquidity risk of the enterprise and/or the
      securities.  Please disclose whether the fair value was computed
      assuming it is more-likely-than-not that you have to sell these securities
      prior to June 30,
2010.

    Given
your reference to the use of a third-party valuation firm to assist in
determining the fair market value of your ARS, please explain the extent of your
reliance on the third party.

    RESPONSE:

    A term of
5 years was assumed in estimating model prices for the ARS. Model prices were
calculated by the third-party valuation firm using term assumptions of 3-6
years, which it found reasonable to assume, based on its experience and
communications with market participants. Management preferred to assume a term
that was in the upper half of this range, due to uncertainty about the time at
which the principal would be available to investors, and it independently
selected the valuation estimates calculated under the 5-year term assumptions
for use in valuing the ARS portfolio. Additionally, we noted the 5-year term
assumption is consistent with the life of comparable forms of capital
instruments that other student loan issuers with similar credit quality have
issued.

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    The term
assumptions, as well as assumptions and inputs to the pricing model, were based
on market-specific data and not on company-specific conditions. The company’s
financial condition is considered irrelevant since it has no impact on the
assumptions market participants would use to value such securities.
Additionally, a longer term assumption produces a lower, more conservative
valuation, which management believes is appropriate given the uncertainties
about the ARS market.

    The
discount rates assumed by the third-party valuation firm in calculating the
model prices ranged from 6.81% to 7.18%, depending on the specific security that
was valued, and reflect the combination of a base rate and an
index-representative spread over the base rate and a security-specific discount
adjustment to account for credit risk and liquidity risk. The discount rates
also reflect an additional 150 basis point adjustment to account for the lack of
ARS marketability. The 150 basis point adjustment was assumed by the third-party
valuation firm, based on their experience and communications with market
participants. The increase in the required rate of return decreases the model
prices of the securities.

    As
mentioned above, the model prices were calculated based on market-specific data
and not on company-specific conditions, so the estimate of how long we can hold
the ARS until we have to sell them was not factored into the estimation
process.

    The third
party valuation firm, Duff & Phelps, was retained to calculate model prices
for three of the eight securities comprising our ARS portfolio using various
term assumptions ranging between 3-6 years. The three securities chosen for
valuation by management were representative of the securities comprising the
portfolio, considering the extent of underlying collateral guaranteed by the
federal government, credit quality and contractual terms. Management decided to
utilize the pricing estimates based on the 5-year term assumption for the three
selected securities and then used the values to extrapolate pricing for the
remaining five securities, based on the extent of underlying collateral
guaranteed by the federal government, credit quality and contractual
terms.

                5.

                We note your table that
      summarizes the fair value measurements using Level III
      inputs.  Your table does not appear consistent with your
      disclosure (i.e. your table discloses a realized gain of $11.5 million and
      an unrealized loss of $1.4 million).  Please
      revise.

    RESPONSE:

    The table
contains inadvertent errors that need to be corrected, by reporting the $11.5
million in “Transfers into Level III” and the $1.4 million in “Net realized
losses”.  We plan to make these corrections with an amended Form 10-K
filing.

    Goodwill, page
F-17

                6.

                We have reviewed your response
      to our prior comment three, noting your statement that the two fair value
      estimates are not directly comparable since they were determined using
      different valuation approaches under different contexts.  Note
      that paragraph 21 of SFAS 142 states that the implied fair value of
      goodwill should be determined in the same manner as the amount of goodwill
      recognized in a business combination.  Therefore, the fair value
      estimate of your reporting unit as of September 30, 2008 needs to be
      determined in a comparable manner with the January 2007 post-acquisition
      fair value estimate.  Please
  advise.

    RESPONSE:

    The
concept of implied fair value of goodwill comes into consideration only as part
of Step 2 of the goodwill impairment test. Step 2 was not necessary to perform
at September 30, 2008 since Step 1 results indicated that the goodwill was
recoverable.

    Additionally,
we do not believe paragraph 21 of SFAS 142 requires us to calculate the fair
value of the healthcare services reporting unit in the same manner that we did
at the acquisition date. The guidance

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    only
requires that we allocate whatever fair value that is calculated at the goodwill
impairment test date and determine the implied fair value of the
goodwill in the same manner as we would if we had acquired the reporting unit on
that date.

                7.

                In addition, it appears that
      you changed your methodology for estimating the fair value of a reporting
      unit.  You state that the fair value of the reporting units at
      June 30, 2008 and September 30, 2008 were determined primarily using the
      market approach.  However, you also state that the fair value as
      of December 31, 2008 is based on the income approach.  Please
      tell us and disclose whether you are being consistent in the valuation
      methods used to estimate fair value or if you changed methods, explain how
      the new method provides a better estimate of fair value as well as discuss
      the catalyst for the
change.

    RESPONSE:

    The
company has used the market price of its publicly-traded common stock (and thus
the market capitalization) as an efficient way to approximate the fair value of
the reporting unit for purposes of completing Step 1 of the goodwill impairment
test at each quarter end (including June 30, September 30, and December 31,
2008). Since the market capitalization includes the value of CompCare, we made
an adjustment to exclude the estimated fair value of the behavioral health
managed care reporting unit, which was estimated using quoted market prices of
CompCare’s common stock. We believe that using market capitalization is an
appropriate approach for confirming that Step 1 of the impairment test has been
passed.

    At
December 31, 2008, we failed Step 1 and Step 2 of the goodwill impairment test
was necessary to measure the amount of the impairment loss on goodwill. We
decided to perform a more detailed valuation of the reporting unit, based on the
income approach, as part of the Step 2 test to insure that the measurement was
accurate. This is consistent with the approach that we used to measure the value
of the reporting unit when we initially recorded the goodwill.

    Had we
used the income approach to perform Step 1 of the goodwill impairment test, the
results would not have been any different for any of the reporting periods since
use of this method prior to December 31, 2008 would have produced estimated
values well in excess of the carrying value of the reporting unit. That is, we
would have passed the Step 1 tests for all prior reporting periods, except the
December 31, 2008 reporting date.

                8.

                We note that you recorded $9.8
      million of goodwill as an impairment charge during the fourth
      quarter.  You state that the healthcare services reporting unit
      had been impaired mainly resulting from the decline in the value of the
      reporting unit that arose from the downward re-pricing of risk that
      occurred broadly in the equity markets.  However, you also state
      that the estimated fair value of the healthcare services reporting unit
      was based on an income approach.  Please revise or explain how a
      decline in the equity markets affected the discounted cash flows used to
      compute fair value of your healthcare services reporting
      unit.

    RESPONSE:

    As
discussed in the response to Item 7 above, we used the market price of our
publicly-traded common stock (and thus the market capitalization) to approximate
the fair value of the reporting unit for purposes of completing Step 1 of the
goodwill impairment test at December 31, 2008. The recent decline in the equity
markets resulted in a sharp decline in the values of our reporting unit under
that method and caused us to fail Step 1of the goodwill impairment test,
requiring us to perform Step 2 of the impairment test. We used the income
approach to perform a more detailed valuation of the reporting unit for purposes
of completing Step 2 of the goodwill impairment test to ensure that accurately
determined the amount of goodwill impairment.

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    Note
5.  Intangible Assets, F-25

                9.

                We note that you report
      intangible assets subject to amortization of $3,800,000 as of December 31,
      2008, which you have concluded, have not been impaired based on SFAS 144
      testing and the estimated useful
      lives reflect the current remaining economic useful lives of these
      assets.  Please explain how you have determined