PACIFIC HEALTH CARE ORGANIZATION INC - Quarter Report: 2011 March (Form 10-Q)

phco10q033111.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, 2011

[ ]	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 300
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 definitions 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 9, 2011, 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. Condensed Consolidated Financial Statements

	Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010	3

	(Unaudited) Statements of Operations for the Three Months Ended March 31, 2011 and 2010	4

	(Unaudited) Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		7

Item 3. Quantitative and Qualitative Disclosure about Market Risk		14

Item 4. Controls and Procedures		14

PART II — OTHER INFORMATION

Item 1. Risk Factors		15

Item 6. Exhibits		15

Signatures		16

PART I. FINANCIAL INFORMATION

Item 1. Financial Information

Pacific Health Care Organization, Inc.

Condensed Consolidated Balance Sheets
ASSETS
	March 31, 2011			December 31, 2010
	(Unaudited)
Current Assets
Cash	$	351,991		$	349,552
Accounts receivable, net of allowance of $20,000		264,569			239,205
Deferred tax asset		5,182			10,582
Income tax receivable		33,146			35,100
Commission draw		19,341			24,000
Prepaid expenses		39,121			70,112
Total current assets		713,350			728,551
Property and equipment, net
Computer equipment		72,390			60,922
Furniture & fixtures		48,811			28,839
Office equipment		8,410			-
Office equipment under capital lease		25,543			25,543
Total property & equipment		155,154			115,304
Less: accumulated depreciation		(92,806	)		(92,009	)
Net property & equipment		62,348			23,295

Other assets		8,158			8,158
Total assets	$	783,856		$	760,004

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	15,496		$	30,038
Accrued expenses		99,923			100,392
Income tax payable		7,146			100
Current obligations under capital lease		6,256			6,148
Deferred rent expense		8,093			-
Unearned revenue		10,347			12,035
Total current liabilities		147,261			148,713
Long term liabilities
Noncurrent obligations under capital lease		12,056			13,661
Total liabilities		159,317			162,374

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)		108			(26,801	)
Total stockholders' equity		624,539			597,630
Total liabilities and stockholders’ equity	$	783,856		$	760,004

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

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	For three months ended March 31,
	2011			2010

Revenues:
HCO fees	$	173,256		$	140,351
MPN fees		137,307			146,333
Other		239,263			60,874
Total revenues		549,826			347,558


Expenses:
Depreciation		2,106			6,531
Consulting fees		79,345			61,231
Salaries & wages		208,662			173,414
Professional fees		46,182			38,050
Insurance		28,969			31,709
Outsource service fees		32,661			-
Data maintenance		7,844			18,621
General & administrative		106,302			76,675

Total expenses		512,071			406,231

Income (loss) from operations		37,755			(58,673	)

Other income (expense)
Interest income		284			620
Interest (expense)		(338	)		(439	)
Loss on disposal of assets		(1,564	)		-
Total other income (expense)		(1,618	)		181

Income (loss) before taxes		36,137			(58,492	)

Income tax provision		(9,228	)		(625	)

Net income (loss)	$	26,909		$	(59,117	)

Basic and fully diluted earnings per share:
Earnings per share amount	$	.03		$	(.07	)
Weighted average common shares outstanding		802,424			802,424

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

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2011			2010

Cash flows from operating activities:
Net income (loss)	$	26,909		$	(59,117	)
Adjustments to reconcile net income to net cash:
Depreciation		2,106			6,531
Loss on disposition of assets		1,564			-
Changes in operating assets & liabilities
(Increase) in accounts receivable		(25,364	)		(22,612	)
Decrease in deferred tax asset		5,400			-
Decrease in income tax receivable		1,954			-
Decrease in commission draw		4,659			-
Decrease in prepaid expenses		30,991			29,125
Increase (decrease) in accounts payable		(14,542	)		17,802
Increase in deferred rent expense		8,093			-
(Decrease) in accrued expenses		(469	)		(101,615	)
Increase in tax payable		7,046			525
(Decrease) in unearned revenue		(1,688	)		(9,206	)
Net cash provided by (used in) operating activities		46,659			(138,567	)

Cash Flows from investing activities
Purchase of furniture and office equipment		(42,723	)		-
Purchase of office equipment under capital lease		-			(25,543	)
Net cash used in investing activities		(42,723	)		(25,543	)

Cash Flows from financing activities
Increase in obligations under capital lease		-			25,543
Payment of obligation under capital lease		(1,497	)		(1,397	)
Net cash provided by (used in) financing activities		(1,497	)		24,146

Increase (decrease) in cash		2,439			(139,964	)

Cash at beginning of period		349,552			604,022
Cash at end of period	$	351,991		$	464,058

Supplemental cash flow information
Cash paid for:
Interest	$	347		$	149
Income taxes paid (refunded)	$	(5,172	)	$	100

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

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2011

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Pacific Health Care Organization, Inc. (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 consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2010 Annual Report on Form 10-K. Operating results for the three-months ended March 31, 2011 are not necessarily indicative of the results to be expected for year ending December 31, 2011.

NOTE 2 - SUBSEQUENT EVENTS

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

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”), Arissa Managed Care, Inc. (“Arissa”), Medex Managed Care, Inc. (“Medex Managed Care”) 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.

On March 16, 2011 we incorporated Medex Managed Care, Inc., in the State of Nevada, as a wholly owned subsidiary of the Company. Effective April 1, 2011, Medex Managed Care took over the responsibilities of overseeing and managing the utilization review and managed bill review business previously managed by our other subsidiary, Medex Healthcare, Inc.

Results of Operations

Comparison of the three months ended March 31, 2011 and 2010

Revenue

The total number of employee enrollees increased 17% during three months ended March 31, 2011 compared to March 31, 2010. Total revenues increased 58% to $549,826. As of March 31, 2011, we had approximately 288,000 total enrollees. Enrollment consisted of approximately 45,000 HCO enrollees and 243,000 MPN enrollees. By comparison as of March 31, 2010 we had approximately 247,000 enrollees, including approximately 33,000 HCO enrollees and approximately 214,000 MPN enrollees.

The net increase in HCO and MPN enrollees of approximately 12,000 and 29,000, respectively, was mainly the result of adding one major customer in each of the categories. Although the continuing economic slowdown impacted us in 2010, there are signs that our revenues during 2011 will increase moderately.

In the current economic environment, we anticipate businesses will continue to 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. During the quarter ended March 31, 2011, we were able to increase our managed bill review (MBR) and utilization review (UR) services fee revenues during the quarter ended March 31, 2011.

HCO Fees

During the three months ended March 31, 2011 and 2010, HCO fee revenues were $173,256 and $140,351 respectively. This 23% increase in revenue from HCO fees during the three months ended March 31, 2011 was the primarily the result of a 36% increase in HCO enrollment resulting from the addition of a significant new customer.

MPN Fees

MPN Fee revenues for the three months ended March 31, 2011 were $137,307 compared to $146,333 for the three months ended March 31, 2010. Although in March 31, 2011 we realized a 14% increase in MPN enrollment when compared the same period 2009 revenues declined by $12,253 because of differing fee terms, unbundling of services, price competition and similar factors as compared to 2010,

Other Revenue

During the three months ended March 31, 2011, other revenue increased 293% to $239,263 from $60,874 in the same period a year earlier. The primary components of other revenue are nurse case management (NCM), MBR and UR fees. Our MBR and UR revenues increased by $94,558 and $57,965 respectively, when compared to the same period 2010. During the period ended March 31, 2010 we did not realize any MBR service revenue and we realized UR service fees totaling $2,058. MBR and UR service revenues grew largely as a result of increased marketing efforts by Arissa in these areas of our business. NCM revenues increased $23,808 to $65,151 resulting primarily from increased customer employee enrollment. 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.

Expenses

Total expenses for the three months ended March 31, 2011 and 2010 were $512,071 and $406,231, respectively. The increase of $105,840 was the result of increases in consulting fees, outsource service fees, salaries and wages, professional fees, and general and administrative expense, offset by decreases in depreciation and insurance expense.

Consulting Fees

During the three months ended March 31, 2011, consulting fees increased to $79,345 from $61,231 during the three months ended March 31, 2010. This increase of approximately $18,114 in consulting fees was due mainly to an increase in fees paid to Medex’s legal consultant, the addition of a UR consultant during third quarter of 2010 and hiring an administrative consultant during January 2011. 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 increased $35,248 or 20% to $208,662 from $173,414 during the three months ended March 31, 2011 compared with the three months ended March 31, 2010. The increase in salaries and wages was primarily due to the hiring of a manager of bill review and electronic data interchange (“EDI”) operations in June 2010 and a nurse case manager in September 2010.

Professional Fees

For the three months ended March 31, 2011, we incurred professional fees of $46,182, compared to $38,050 during the three months ended March 31, 2010. This 21% increase in fees is primarily the result of increased nurse case management fees and an increase in the monthly fees paid to our medical director.

Insurance

During the three months ended March 31, 2011, we incurred insurance expenses of $28,969, a $2,740 decrease over the prior year three months. The decrease in 2011 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 2011.

Outsource service fees

Outsource service fees consist of costs incurred by Medex and IRC in outsourcing its MBR services and certain UR services. Medex and IRC do not, at this time, have enough volume to justify creating their own MBR and UR in-house staff. We utilize outside vendors to provide specific services for our clients, charging additional fees over and above those paid to said vendors for administration and coordination of MBR and UR services directly to the clients. We commenced outsourcing these services during the second half of 2010 and incurred approximate $32,661 in outsource service fees during the three months period ended March 31, 2011.

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 year and 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, 2011, we experienced a 36% increase in HCO enrollees and a 14% increase in MPN enrollees, resulting in an overall enrollment increase of 17%. Data maintenance fees decreased 58% from $18,621 to $7,844 during first quarter ended 2011 when compared to 2010. The decrease in data maintenance fees is primarily attributable to lower data maintenance costs associated with the renewal of MPN enrollees and lower prices negotiated with third party service providers.

General and Administrative

General and administrative expenses increased approximately 39% to $106,302 during the three months ended March 31, 2011 when compared to the same period a year earlier. The increase in general and administrative expense of $29,627 was primarily attributable to increases in costs totaling $17,592 associated with moving our offices to our new location in Newport Beach, California and other 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, 2011, total revenues of $549,826 were higher by $202,268 when compared to the same period in 2010. This increase in total revenues was partially offset by increases in total expenses of $105,840 resulting in a profit from operations of $37,755 compared to a loss from operations of $58,673 during three months ended March 31, 2010. Correspondingly, we realized a net profit of $26,909 for the three months ended March 31, 2011, compared to a net loss of $59,117, during the three months ended March 31, 2010. We expect moderate increases in revenues to continue in the second quarter of 2011, when compared to the the first quarter of 2011, 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.

Liquidity and Capital Resources

As of March 31, 2011, we had cash on hand of $351,991 compared to $349,552 at December 31, 2010. The $2,439 increase in cash on hand is primarily the result of the growth in our net income, deferred rent expense and decrease in prepaid expenses, partially offset by increases in prepaid expense and decreases in accounts payable. 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 revenue is lower than anticipated we may need to find other sources of capital to fund 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 an institutional 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.

Cash Flow

During the three months ended March 31, 2011 cash was primarily used to fund operations. We had a net increase in cash of $2,439 during the three months ended March 31, 2011. See below for additional discussion and analysis of cash flow.

	For the three months ended March 31,
	2011			2010
	(unaudited)			(unaudited)

Net cash provided by (used in) operating activities	$	46,659		$	(138,567	)
Net cash used in investing activities		(42,723	)		(25,543	)
Net cash provided by (used in) financing activities		(1,497	)		(24,146	)

Net increase (decrease) in cash	$	2,439		$	(139,964	)

During the three months ended March 31, 2011, net cash provided by operating activities was $43,786, compared to net cash used in operating activities of $138,567 during the three months ended March 31, 2010. As discussed herein we realized a net profit of $26,909 during the three months ended March 31, 2011, compared to a net loss of $59,117 during the three months ended March 31, 2010.

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, 2011:

	Payments Due By Period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Equipment Leases(1)	$	28,576	$	7,564	$	21,012	$	-	$	-
Office Leases(2)		516,639		66,977		209,043		240,619		-
Total	$	545,215	$	74,541	$	230,055	$	240,619	$	-

(1)

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 arrangement is for a term of 48 months at level operating rents with capital interest rate at 7%.

(2)

On March 1, 2011 we commenced a new office lease agreement that runs to February 29, 2016. Unlike our previous arrangements, the new office space is sufficient for PHCO and each of our subsidiaries. Following is our annual base rent for the new office space throughout the term of the lease:

Rent Period	Annual Rent Payments
Mar. 1 to Dec. 31, 2011	$	66,977
Jan. 1 to Dec. 31, 2012	$	102,977
Jan. 1 to Dec. 31, 2013	$	106,066
Jan. 1 to Dec. 31, 2014	$	109,246
Jan. 1 to Dec. 31, 2015	$	112,526
Jan. 1 to Feb. 29, 2016	$	18,847
Total	$	516,639

Off-Balance Sheet Financing Arrangements

As of March 31, 2011 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.

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.

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 4. 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, 2011, 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, 2011. 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, 2011, 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, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. 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 16, 2011	By:	/s/ Tom Kubota
		Tom Kubota
		Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Fred Odaka
Date: May 16, 2011		Fred Odaka
		Chief Financial Officer (Principal Financial Offier)