PACIFIC HEALTH CARE ORGANIZATION INC - Quarter Report: 2010 March (Form 10-Q)

phco10q0310.htm

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2010

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to _________

Commission File Number 000-50009

PACIFIC HEALTH CARE ORGANIZATION, INC.

(Exact name of registrant as specified in its charter)

Utah		87-0285238
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1201 Dove Street, Suite 585
Newport Beach, California		92660
(Address of principal executive offices)		(Zip Code)

(949) 721-8272

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o No o

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)Yes o No x

As of May 6, 2010, the registrant had 802,424 shares of common stock, par value $0.001, issued and outstanding.

PACIFIC HEALTH CARE ORGANIZATION, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

	Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009	3

	(Unaudited) Statements of Operations for the Three Months Ended March 31, 2010 and 2009	4

	(Unaudited) Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009	5

	Notes to Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosure about Market Risk		19

Item 4T. Controls and Procedures		19

PART II — OTHER INFORMATION		20

Item 1. Risk Factors		20

Item 6. Exhibits		21

Signatures		22

PART I. FINANCIAL INFORMATION

Item 1. Financial Information

Pacific Health Care Organization, Inc.

Consolidated Balance Sheets
ASSETS
	March 31, 2010 (Unaudited)			December 31, 2009
Current Assets
Cash	$	464,058		$	604,022
Accounts receivable, net of allowance of $20,000		177,678			155,066
Deferred tax asset		12,469			12,469
Income tax receivable		11,523			11,523
Prepaid expenses		37,275			66,400
Total current assets		703,003			849,480
Property and equipment, net
Computer equipment		60,922			60,922
Furniture & fixtures		28,839			28,839
Total property & equipment		89,761			89,761
Less: accumulated depreciation		(86,463	)		(86,318	)
Net property & equipment		3,298			3,443

Office equipment under capital lease		25,543			-
Less: accumulated depreciation		(6,386	)		-
Net office equipment under capital lease		19,157			-
Total assets	$	725,458		$	852,923

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	24,474		$	6,672
Accrued expenses		67,439			169,054
Tax payable		625			100
Current obligations under capital lease		5,834			-
Unearned revenue		10,328			19,534
Total current liabilities		108,700			195,360

Long term liabilities
Noncurrent obligations under capital lease		18,312			-
Total long term liabilities		18,312			-
Total liabilities		127,012			195,360

Commitments and Contingencies		-			-

Shareholders' Equity
Preferred stock; 5,000,000 shares authorized at $0.001 par value; zero shares issued and outstanding		-			-
Common stock; 50,000,000 shares authorized at $0.001 par value; 802,424 shares issued and outstanding		802			802
Additional paid-in capital		623,629			623,629
Retained earnings (deficit)		(25,985	)		33,132
Total Stockholders' Equity		598,446			657,563
Total liabilities and stockholders' equity	$	725,458		$	852,923

The accompanying notes are an integral part of these consolidated financial statements

Pacific Health Care Organization, Inc.

Consolidated Statements of Operations

(Unaudited)

	For three months ended March 31,
	2010			2009
Revenues:
HCO fees	$	140,351		$	244,998
MPN fees		146,333			149,560
Other		60,874			126,797
Total revenues		347,558			521,355


Expenses:
Depreciation		6,531			146
Consulting fees		61,231			62,586
Salaries & wages		173,414			212,451
Professional fees		38,050			56,595
Insurance		31,709			28,671
Employment enrollment		-			15,000
Data maintenance		18,621			55,632
General & administrative		76,675			84,501

Total expenses		406,231			515,582

Income (loss) from operations		(58,673	)		5,773

Other income (expense)
Interest income		620			747
Interest (expense)		(439	)		-
Total other income (expense)		181			747

Income (loss) before taxes		(58,492	)		6,520

Income tax provision (benefit)		(625	)		1,468

Net income (loss)	$	(59,117	)	$	5,052

Basic and fully diluted earnings per share:
Earnings per share amount	$	(.07	)	$	.01
Weighted average common shares outstanding		802,424			802,424

The accompanying notes are an integral part of these consolidated financial statements

Pacific Health Care Organization, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	(59,117	)	$	5,052
Adjustments to reconcile net income to net cash:
Depreciation		6,531			145
Changes in operating assets & liabilities
(Increase) decrease in accounts receivable		(22,612	)		(92,280	)
(Increase) in deferred tax asset		-			-
(Increase) in prepaid state income tax		-			-
Decrease in prepaid expenses		29,125			2,273
Increase in accounts payable		17,802			1,940
Increase (decrease) in accrued expenses		(101,615	)		33,664
Increase (decrease) in tax payable		525			(30,532	)
(Decrease) in unearned revenue		(9,206	)		(5,467	)
Net cash provided by (used in) operating activities		(138,567	)		(85,205	)

Cash Flows from investing activities
Purchase of office equipment under capital lease		(25,543	)		-
Net cash used by investing activities		(25,543	)		-

Cash Flows from financing activities
Increase in obligations under capital lease		25,543			-
Payment of obligation under capital lease		(1,397	)		-
Net cash from financing activities		24,146			-

Decrease in cash		(139,964	)		(85,205	)

Cash at beginning of period		604,022			624,401
Cash at end of period	$	464,058		$	539,196

Supplemental cash flow information
Cash paid for:
Interest	$	149		$	-
Income taxes	$	100		$	32,000

The accompanying notes are an integral part of these consolidated financial statements

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Three Months Ended March 31, 2010

NOTE 1 -

BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2009 Annual Report on Form 10-K. Operating results for the three-months ended March 31, 2010 are not necessarily indicative of the results to be expected for year ending December 31, 2010.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Accounting

The Company used the accrual method of accounting for the period ended March 31, 2010.

B. Revenue Recognition

The Company applies the revenue recognition provisions pursuant to Accounting Standards Codification (“ASC”) 605.10, Revenue Recognition (“ASC 605”) (formerly SAB Topic 13A), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The guidance outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies.

In general, the Company recognizes revenue related to licensing fees on a monthly basis, over the life of the licensing agreement, and when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured.

Health care service revenues are recognized in the period in which fees are fixed or determinable and the related services are provided to the subscriber.

The Company’s subscribers generally pay in advance for their services by check for billings made in advance, revenue is then recognized ratably over the period in which the related services are provided. Advance payments from subscribers and billings made in advance are recorded on the balance sheet as deferred revenue. An allowance for uncollectible accounts is established for any customer who is deemed as possibly uncollectible.

C. Cash Equivalents

The Company considers all short term, highly liquid investments that are readily convertible, within three months, to known amounts as cash equivalents. The Company currently has no cash equivalents.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Three Months Ended March 31, 2010

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. Concentrations

Financial instruments that potentially subject Pacific Health Care Organization, Inc. (the Company) to concentrations of credit risks consist of cash and cash equivalents. The Company places its cash and cash equivalents at well-known, quality financial institutions. At times, such cash and investments may be in excess of the FDIC insurance limit.

E. Net Earnings (Per Share of Common Stock)

The computation of earnings (loss) per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements.

	For the Three Months Ended
	March 31,
	2010			2009
Basic Earnings per share:
Income (numerator)	$	(59,117	)	$	5,052
Shares (denominator)		802,424			802,424
Per share amount	$	(.07	)	$	.01

Fully Diluted Earnings per share:
Income (numerator)	$	(59,117	)	$	5,052
Shares (denominator)		802,424			802,424
Per share amount	$	(.07	)	$	.01

F. Depreciation

The cost of property and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements is depreciated over the lesser of the length of the lease of the related assets for the estimated lives of the assets. Depreciation is computed on the straight line method. The amount of equipment under capital lease is depreciated in the year the equipment was acquired under Internal Revenue Code Section 179. The equipment under capital lease was acquired and placed into service in January 2010 and is being depreciated in 12 equal installments during 2010.

G. Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles, in the United States of America, require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Three Months Ended March 31, 2010

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

I. Fair Value of Financial Instruments

On January 1, 2008, the Company adopted FASB ASC 820-10-50, “Fair Value Measurements. This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:

	•	Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•	Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	•	Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.

The carrying amounts reported in the balance sheets for the cash and cash equivalents, receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of convertible notes payable approximates fair value because negotiated terms and conditions are consistent with current market rates as of December 31, 2009 and 2008.

J. General and Administrative Costs

General and administrative expenses include fees for office space, compensated absences, travel expenses and entertainment costs.

K. Income Taxes

The Company utilizes the liability method of accounting of income taxes. Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statements and tax basis of assets and liabilities measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.

L. Capital Structure

The Company has two classes of stock. Preferred stock, 5,000,000 shares authorized, zero issued. Voting rights and liquidation preferences have not been determined. The Company also has voting common stock of 50,000,000 shares authorized, with 802,424 shares issued and outstanding. No dividends were paid in either 2010 or 2009, or in any prior years.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Three Months Ended March 31, 2010

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M. Stock Based Compensation

The Company has adopted the fair value method of accounting for stock-based employee compensation in accordance with statement of Financial Accounting Standards Board ASC Topic 718, “Stock Compensation.” This standard requires the Company to record compensation expense using the Black-Scholes pricing model.

N. Trade Receivables

The Company in the normal course of business extends credit to its customers on a short-term basis. Although the credit risk associated with these customers is minimal, the Company routinely reviews its accounts receivable balances and makes provisions for doubtful accounts. The Company ages its receivables by date of invoice. Management reviews bad debt reserves quarterly and reserves specific accounts as warranted or sets up a general reserve based on amounts over 90 days past due. When an account is deemed uncollectible, the Company charges off the receivable against the bad debt reserve. At March 31, 2010, the Company’s bad debt reserve of $20,000 is a general reserve for balances over 90 days past due and for accounts that are potentially uncollectible.

The percentages of the amounts due from major customers to total accounts receivable as of March 31, 2010 are as follows:

Customer A 31%

Customer B 17%

Customer C 14%

Customer D 13%

O. Subsequent Events

In accordance with ASC 855-10 Company management reviewed all material events through the date of this report and there are no material subsequent events to report.

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities in and out of Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This update is effective for companies with interim and annual reporting periods after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for interim and annual reporting periods beginning after December 15, 2010. We are currently evaluating the potential impact of this new guidance on our consolidated financial statements.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Three Months Ended March 31, 2010

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In October 2009, the FASB issued guidance that establishes the accounting and reporting provisions for arrangements including multiple revenue-generating activities. This guidance provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this guidance also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this guidance are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the potential impact of this new guidance on our consolidated financial statements.

In May 2009, FASB issued FASB ASC 855-10 (Prior authoritative literature: SFAS No. 165, "Subsequent Events"). FASB ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. FASB ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of FASB ASC 855-10 did not have a material effect on our financial statements.

In June 2009, the FASB ASC 860-10 (Prior authoritative literature: issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”), which eliminates the concept of a qualifying special-purpose entity (“QSPE”), clarifies and amends the de-recognition criteria for a transfer to be accounted for as a sale, amends and clarifies the unit of account eligible for sale accounting and requires that a transferor initially measure at fair value and recognize all assets obtained and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. This standard is effective for fiscal years beginning after November 15, 2009. The adoption of FASB ASC 860-10 did not have a material effect on our financial statements.

In June 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) which amends the consolidation guidance applicable to a variable interest entity (“VIE”). This standard also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. Previously, the standard required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. This standard is effective for fiscal years beginning after November 15, 2009, and for interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements, but does not expect it to have a material effect.

Pacific Health Care Organization, Inc.

Notes to Financial Statements

For the Three Months Ended March 31, 2010

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In June 2009, FASB issued ASC 105-10 (Prior authoritative literature: SFAS No. 168, "The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10 establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. FASB ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending September 30, 2009. Adoption of FASB ASC 105-10 did not have a material effect on the Company’s financial statements.

In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update provides amendments to Topic 820 for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). It is effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. The Company does not expect the provisions of ASU 2009-12 to have a material effect on the financial position, results of operations or cash flows of the Company.

In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP. This amendment has eliminated that residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.

Item 2. Management’s Discussion and Analysis of Financial Statements and Results of Operations

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. For this purpose any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including statements about our revenue, spending, cash flow, products, actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “may,” “hope,” “will,” “expect,” “believe,” “anticipate,” “estimate” “projected” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainty, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industry in which we and our customers participate; competition within our industry, including competition from much larger competitors; legislative requirements or changes which could render our services less competitive or obsolete; our failure to successfully develop new services and/or products or to anticipate current or prospective customers’ needs; price increases or employee limitations; and delays, reductions, or cancellations of contracts we have previously entered.

Forward-looking statements are predictions and not guarantees of future performance or events. The forward-looking statements are based on current industry, financial and economic information, which we have assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements. We undertake no obligation to amend this report or revise publicly these forward looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Securities Exchange Act of 1934) to reflect subsequent events or circumstances.

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Securities and Exchange Commission.

Throughout this report, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”) and Industrial Resolutions Coalition, Inc. (“IRC”).

Overview

We are in the business of managing and administering Health Care Organizations (“HCOs”) and Medical Provider Network (“MPNs”) in the state of California. For many years, workers’ compensation costs in California have been high. Since 1993, the legislature in California has enacted various laws designed to introduce alternatives to the traditional model of worker’s compensation aimed at controlling costs by giving employers greater control over the medical treatment of injured workers for a longer period of time.

Under the traditional model of workers’ compensation insurance coverage, the employer controls the selection of the medical provider for the first 30 days after the injury is reported. Thereafter the employee chooses the treating physician and the employer has no further control over the treatment of the patient.

In 1993 the California legislature passed a bill that established Health Care Organizations. An HCO is a network of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training. The benefit of the HCO to an employer is two-fold. First, the employer is able to control the medical treatment of the injured employee for 90 to 180 days rather than just during the first 30 days. Second, the HCO provides the employer a network of trained providers to which it can refer its injured employees who specialize in treating work place injuries.

Under the HCO guidelines, all HCOs are required to pay certain annual fees to the California Division of Workers’ Compensation (“DWC”). These fees, prior to January 1, 2010, included an annual fee per employee enrolled in the HCO at the end of the calendar year. Effective January 1, 2010, the annual fee was reduced to a stepped amount based on the number of employees enrolled in the HCO.

In 2004, the California legislature enacted new laws that created MPNs. Like an HCO, an MPN is a network of health care professionals, but MPN networks are not required to have the same level of medical expertise in treating employees’ work place injuries. Under an MPN program, the employer dictates which physician the injured employee will see for the initial visit. Thereafter, the employee can choose to treat with any physician within the MPN network.

By virtue of our continued certification as an HCO, we were statutorily deemed to be qualified as an approved MPN on January 1, 2005. As a licensed HCO and MPN, we are able to offer our clients an HCO program, an MPN program and a combination of the HCO and MPN programs. Under this combination model, an employer can enroll its employees in the HCO program then, prior to the expiration of the 90 or 180 day treatment period under the HCO program, the employer can enroll the employee into the MPN program. This allows employers to take advantage of both programs. To our knowledge, we are currently the only entity that offers both programs together.

Revisions to the HCO regulations were filed with the Secretary of State on November 4, 2009 and became effective January 1, 2010. These revisions make HCOs more competitive with medical provider networks, providing a viable network option for workers’ compensation care. DWC has reported that studies have shown that network care is associated with lower costs for employers and better return to work outcomes for injured workers.

The revised regulations reduce HCO fees and eliminate duplicative HCO reporting requirements. Annual HCO enrollment fees have been $1.50 per enrollee through calendar year 2006, and were $1.00 per enrollee from January 1, 2007 through December 31, 2009. Effective in 2010, the annual assessments are $250 for HCOs with enrollments of 0-1000, $350 for 1001-5000, and $500 for 5001 and above. The 2010 assessments for Medex Healthcare will be $500 for Medex’s network of primary care providers and $250 for Medex’s network of primary and specialized care providers. The HCO enrollment fees were retroactively applied to 2009 assessments.

Liquidity and Capital Resources

As of March 31, 2010, we had cash on hand of $464,058 compared to $604,022 at December 31, 2009. The $139,964 decrease in cash on hand is primarily the result of decreases in accrued expenses, tax payable, unearned revenues, and increases in accounts receivable, partially offset by increases in current and long term debt, prepaid expense and decreases in prepaid expenses. We believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating costs over the next twelve months. We do not anticipate needing to find other sources of capital at this time. However, if our revenues are less than anticipated we may need to find other sources of capital to continue operations.

We do not currently have any significant capital expenditures planned for the next twelve months that we anticipate will require us to seek outside sources of funding. We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We have not identified any suitable opportunity at the current time. An expansion or acquisition of this sort may require greater capital resources than we possess. Should we need additional capital resources, we most likely would seek to obtain such through debt and/or equity financing. We do not currently possess a financial institution source of financing. Given current credit conditions, there is no assurance that we could be successful in obtaining additional debt financing on favorable terms, or at all. Similarly, given current market and economic conditions there is no guarantee that we could negotiate appropriate equity financing.

Results of Operations

Comparison of the three months ended March 31, 2010 and 2009

Revenue

The total number of employee enrollees increased 16% during three months ended March 31, 2010 compared to March 31, 2009. Despite the increase in employee enrollees total revenues decreased 33% to $347,558. As of March 31, 2010, we had approximately 247,000 total enrollees. Enrollment consisted of approximately 33,000 HCO enrollees and 214,000 MPN enrollees. By comparison as of March 31, 2009 we had approximately 213,000 enrollees, including approximately 59,000 HCO enrollees and approximately 154,000 MPN enrollees.

The net increase in MPN enrollees of approximately 60,000 was mainly the result of adding one customer with approximately 73,000 enrollees offset against an approximate reduction of 13,000 enrollees from other customers. The new customer with 73,000 enrollees, generates revenues for the Company based upon a percentage of savings it realizes from the enrollment into Medex’s program by its employees. During the three months ended March 31, 2010, revenues generated from this new customer on a percentage of savings basis were significantly lower per enrollee when compared to those revenues generated on monthly or annual service fee per number of enrollees. The decrease in HCO enrollment of approximately 26,000 enrollees was primarily the result of a non-renewal by one of our major customers effective August 1, 2009. The economic slowdown has, and we expect will continue to impact us, as employers seek to address the effects of the current economic environment on their individual businesses. As a result of the economic slowdown, employers are reducing their workforce. However, this may lead to an increase in workers’ compensation claims.

In the current economic environment, we anticipate businesses will seek ways to reduce their workers’ compensation program costs. As a result, we expect to experience client turnover, in the form of existing employer clients seeking to terminate or renegotiate the scope and terms of existing services. We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house. As a result, the market is currently subject to restructuring in the type and pricing of services provided in our industry. In January 2010 we received notice from a significant customer that it would not be renewing its contract with Medex when it terminated at the end of March 2010. This customer accounted for 11% of Medex’s revenues in 2009 and 13% during the three months ended March 31, 2010. We believe this non-renewal is the result of companies seeking to reduce expenses wherever possible and is representative of what is happening throughout the industry. We expect these factors may continue to erode HCO Fees, MPN Fees and Other Revenue until economic conditions improve.

HCO Fees

During the three months ended March 31, 2010 and 2009, HCO fee revenues were $140,351 and $244,998, respectively. This 43% decrease in revenue from HCO fees during the three months ended March 31, 2010 was the result of a 44% decrease in HCO enrollment. This was attributable to decreased employee enrollment, primarily due to non-renewal by one of our major customers effective August 1, 2009.

MPN Fees

MPN Fee revenues for the three months ended March 31, 2010 were $146,333 compared to $149,560 for the three months ended March 31, 2009. As of March 31, 2010 we realized a 28% increase in MPN enrollment when compared the same period 2009. As discussed above, however, while MPN enrollment increased, because of differing fee terms, unbundling of services, price competition and similar factors as compared to 2009, we actually realized a 2% decrease in MPN revenues.

Other Revenue

During the three months ended March 31, 2010, other revenue decreased 52% to $60,874 from $126,797 in the same period a year earlier. The primary component of other revenue is nurse case management. We retain nurses on our staff who, at the request of our customers, will review the medical portion of a claim on behalf of our employer clients, claims managers and injured workers. We offer nurse case management services to our customers on an optional basis. We charge an additional fee for nurse case management services. The decrease in other revenue of $65,923 was mainly the result of lower nurse case management service fees resulting from a non-renewal by one of our major customers effective August 1, 2009.

Expenses

Total expenses for the three months ended March 31, 2010 and 2009 were $406,231 and $515,582, respectively. The decrease of $109,351 was the result of decreases in salaries and wages, professional fees, data maintenance, employment enrollment and general and administrative expense, offset by increases in depreciation and insurance expense.

Consulting Fees

During the three months ended March 31, 2010, consulting fees decreased to $61,231 from $62,586 during the three months ended March 31, 2009. This decrease of approximately $1,400 in consulting fees was due to reduced marketing consulting fees of $2,600 offset by increased corporate development fees of approximately $1,200. Consulting fees will increase during fiscal 2010 as a result of an increase, effective April 1, 2010, in the monthly retainer fee paid to Medex’s president who is compensated as a consultant. Additionally, in the event we see an increased level of services requested from our customers, especially for nurse case management services which would require us to engage additional nurse case managers, we could experience higher consulting fees.

Salaries and Wages

Salaries and wages decreased $39,037 or 18% to $173,414 from $212,451 during the three months ended March 31, 2010 compared with the three months ended March 31, 2009. The decrease in salaries and wages was primarily due to a 10% reduction in wages for all salaried employees that went into effect in May 2009 and the termination of Medex’s former president on August 3, 2009. The decrease resulting from the termination of Medex’s former president was partially offset by Medex hiring a Vice President in October 2009, who terminated in March 2010. Medex also hired a new President in December 2009. He is compensated as a consultant and his monthly fees are recorded as consulting fees rather than salaries and wages.

Professional Fees

For the three months ended March 31, 2010, we incurred professional fees of $38,050 compared to $56,595 during the three months ended March 31, 2009. This 33% decrease in fees is primarily the result of decreased accounting and nurse case management fees, partially offset by increases in other professional fees. The decrease in accounting fees was the result of incurring lower levels of audit fees during the three months ended March 31, 2010.

Insurance

During the three months ended March 31, 2010, we incurred insurance expenses of $31,709, a $3,038 increase over the prior year three months. The increase in 2010 was primarily due to adjustments made to the Company’s property and general liability insurance premiums. We do not expect insurance expense to increase materially in 2010.

Employment Enrollment

As an HCO, we were required to pay a fee to the DWC for each person enrolled at the end of the calendar year in our HCO program. Because employee enrollment expenses are not determined until year end, we had been accruing expenses during the year based on our estimation of what enrollment will be at year end. Effective January 1, 2010, the annual HCO assessment moved to a flat fee basis. Effective in 2010, the annual assessments became $250 for HCOs with enrollments of 0-1000, $350 for enrollments of 1001-5000, and $500 for enrollments above 5000. The revisions to the HCO regulations became effective on January 1, 2010, and the change to the HCO enrollment fees was retroactively applied to 2009 assessments. As a result of this change, employee enrollment decreased by $15,000 during the three months ended March 31, 2010 when compared to the previous year’s period. The changes in the HCO enrollment fee structure represents a significant decrease compared to the employee enrollment expenses we have historically paid.

Data Maintenance

Under regulations applicable to HCOs and MPNs we are required to comply with certain data reporting and document delivery obligations. We currently contract out much of these data reporting and document delivery obligations to third parties. The costs we incur to meet these data reporting and document delivery requirements are reflected in our financial statements as data maintenance.

Data maintenance costs are impacted by several factors, including the overall mix of enrollees in our HCO and MPN programs and the number of new enrollees during the year. HCOs are required to deliver enrollment notices annually to each HCO enrollee. By comparison, MPNs are required to deliver an enrollment notice only at the time of initial enrollment and at the time an enrollee is injured. As a result, after the first year, data maintenance fees for MPN enrollees are consistently about 50% lower than data maintenance costs per HCO enrollee. Therefore, depending on the mix of HCO and MPN enrollees and the number of new MPN enrollees versus ongoing MPN enrollees, our data maintenance costs may vary significantly from year to year even in years when our overall enrollment does not change materially.

Data maintenance fees may also vary significantly from employee enrollment fees in any given year. Employee enrollment fees are determined based on the number of HCO enrollees at the end of the calendar. Employee enrollment fees do not take into account fluctuations in HCO enrollees during the year. By comparison, data maintenance fees are billed as services are provided. Therefore, we may have years when HCO enrollment is higher during the year than it is at the end of the calendar year, resulting in variances in data maintenance fees and employee enrollment fees in a given year.

Finally, data maintenance fees are also impacted by the prices we can negotiate with our third party service providers.

During the three months ended March 31 2010, we experienced a 44% decrease in HCO enrollees and a 28% increase in MPN enrollees when compared the same period a year earlier, resulting in an overall enrollment increase of 16%. Data maintenance fees decreased 67% from $55,632 to $18,621 during the three months ended March 31, 2010 when compared to the same period in 2009. The decrease in data maintenance fees is primarily attributable to changing our primary service provider in August 2009. Under an agreement with our new primary service provider, the Company agreed to pay a flat fee of $5,000 per month for the use of their associate development system until a cumulative amount of approximately $53,000 is paid, at which time the monthly $5,000 fee will cease and under the terms of the agreement the Company will own the system without further payments. Any additional software improvements or updates costs, if any, will be negotiated with the provider.

General and Administrative

General and administrative expenses decreased 9% to $76,675 during the three months ended March 31, 2010. The decrease in general and administrative expense of $7,826 was primarily attributable to decreases in expenses associated with MPN notification printing costs and was partially offset by increases in other miscellaneous general and administrative expenses. We expect current levels of general and administrative expenses to remain constant unless we realize a significant increase in new revenues.

Net Income

During the three months ended March 31, 2010, total revenues of $347,558 were lower by $173,797 when compared to the same period in 2009. This decrease in total revenues was partially offset by the $109,351 decrease in total expenses resulting in a loss from operations of $58,673 compared to an income from operations of $5,773 during three months ended March 31, 2009. Correspondingly, we realized a net loss of $59,117 for the three months ended March 31, 2010, compared to a net income of $5,052, during the three months ended March 31, 2009. While the current recession has had an adverse impact on our gross revenues during the three month period ending March 31, 2010, we expect moderate increases in revenues beginning in the second quarter of 2010, (compared to the the first quarter of 2010), to be generated from new services offered by the Company to existing and new customers in the areas of managed bill review and clinical and non-clinical utilization reviews. There are no assurances that the new services will materialize to a level that will allow us to become profitable.

Cash Flow

During the three months ended March 31, 2010 cash was primarily used to fund operations. We had a net decrease in cash of $139,964 during the three months ended March 31, 2010. See below for additional discussion and analysis of cash flow.

	For the three months ended March 31,
	2010			2009
	(unaudited)			(unaudited)
Net cash used in operating activities	$	(138,567	)	$	(85,205	)
Net cash used in investing activities		(25,543	)		-
Net cash provided by financing activities		24,146			-

Net Change in Cash	$	(139,964	)	$	(85,205	)

During the three months ended March 31, 2010, net cash used in operating activities was $138,567, compared to net cash provided by operating activities of $85,205 during the three months ended March 31, 2009. As discussed herein we realized a net loss of $59,117 during the three months ended March 31, 2010, compared to a net income of $5,052 during the three months ended March 31, 2009.

In January 2010 we entered into a capital lease arrangement whereby we leased an office copy machine for $25,543. The asset was recorded on our balance sheet under office equipment under capital lease and our liability incurred under the lease was recorded as current and noncurrent obligations under capital lease. The lease arrangements is for a term of 48 months at level operating rents with capital interest rate at 7%.

Summary of Material Contractual Commitments

The following is a summary of our material contractual commitments as of March 31, 2010:

	Payments Due By Period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating Leases:
Office Leases	$	105,677	$	105,677	$	-	$	-	$	-
Total operating leases	$	105,677	$	105,677	$	-	$	-	$	-
Capital Leases:
Office Equipment Leases	$	38,662	$	10,086	$	28,243		-		-
Total capital leases	$	38,662	$	10,086	$	28,243	$	-	$	-

Off-Balance Sheet Financing Arrangements

As of March 31, 2010 we had no off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the financial statements and the revenues recognized and expenses incurred during the reporting period. Our estimates and assumptions affect our recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. We evaluate the reasonableness of these estimates and assumptions continually based on a combination of historical information and other information that comes to its attention that may vary its outlook for the future. Actual results may differ from these estimates under different assumptions.

We believe the critical accounting policies that most impact our consolidated financial statements are described below.

Basis of Accounting — We use the accrual method of accounting.

Revenue Recognition — The Company applies the revenue recognition provisions pursuant to Accounting Standards Codification (“ASC”) 605.10, Revenue Recognition (“ASC 605”) (formerly SAB Topic 13A), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The guidance outlines the basic criteria that must be met to recognize the revenue and provides guidance for disclosure related to revenue recognition policies.

Health care service revenues are recognized in the period in which fees are fixed or determinable and the related services are provided to the subscriber.

Our subscribers generally pay in advance for their services by check payment, and revenue is then recognized ratably over the period in which the related services are provided. Advance payments from subscribers are recorded on the balance sheet as deferred revenue. In circumstance where payment is not received in advance, revenue is only recognized if collectability is reasonably assured. An allowance for uncollectible accounts is established for any customer who is deemed as possibly uncollectible.

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

We are a smaller reporting company, as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, and accordingly we are not required to provide the information required by this Item.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of March 31, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2010, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) ensuring that information disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on this assessment, our management concluded that as of March 31, 2010, our internal control over financial reporting is effective based on those criteria.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Risk Factors

Item 6. Exhibits

Exhibits. The following exhibits are included as part of this Quarterly Report:

	Exhibit Number		Title of Document

	Exhibit 31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

	Exhibit 31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	Exhibit 32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PACIFIC HEALTH CARE ORGANIZATION, INC.

Date: May 17, 2010	By:	/s/ Tom Kubota
		Tom Kubota
		Chief Executive Officer


Date: May 17, 2010	By:	/s/ Fred Odaka
		Fred Odaka
		Chief Financial Officer