PACIFIC HEALTH CARE ORGANIZATION INC - Annual Report: 2012 (Form 10-K)

pacifichealthcare10k123112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2012

o 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 0-50009

PACIFIC HEALTH CARE ORGANIZATION, INC.

(Exact name of registrant as specified in its charter)

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

1201 Dove Street, Suite 300 Newport Beach, California		92660
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (949) 721-8272

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

$.001 par value, common voting shares

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
				Yes		o	No	x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
				Yes		o	No	x

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 past 12 months (or for such 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 such shorter period that the registrant was required to submit and post such files).
				Yes		x	No	o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
									x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the 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
		o
	Non-accelerated filer		Smaller reporting company		x
	(Do not check if smaller reporting company)

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of June 30, 2012 was approximately $1,156,122.

As of March 13, 2013 the issuer had 802,424 shares of its $.001 par value common stock outstanding.

Documents incorporated by reference: None

Table of Contents

		Page
	PART I

Item 1.	Business	5

Item 1A.	Risk Factors	12

Item 1B.	Unresolved Staff Comments	13

Item 2.	Properties	13

Item 3.	Legal Proceedings	13

Item 4.	Mine Safety Disclosures	13

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14

Item 6.	Selected Financial Data	15

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	15

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 8.	Financial Statements and Supplementary Data	22

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	35

Item 9A.	Controls and Procedures	35

Item 9B.	Other Information	36

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	37

Item 11.	Executive Compensation	41

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	45

Item 13.	Certain Relationships and Related Transactions, and Director Independence	46

Item 14.	Principal Accounting Fees and Services	47

	PART IV

Item 15.	Exhibits, Financial Statement Schedules	48

	SIGNATURES	50

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PACIFIC HEALTH CARE ORGANIZATION, INC.

Throughout this annual report on Form 10-K, 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”), Industrial Resolutions Coalition, Inc. (“IRC”), Arissa Managed Care, Inc. (“Arissa”), Medex Managed Care, Inc. (“MMC”), Medex Legal Support, Inc., (“MLS”) and Medex Medical Management, Inc. (“MMM”).

Forward-Looking Statements

This annual report on Form 10-K 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 annual report on Form 10-K that is not a statement of historical fact may be deemed to be forward-looking, including, but not limited to statements about future demand for the products and services we offer, changes in the composition of the products and services we offer, future revenues, expenses, results of operations, liquidity and capital resources or cash flows, or our actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “believe,” “expect,” “project,” “intend,” “estimate,” “budget,” “plan,” “forecast,” “predict,” “may,” “will,” “could,” “should,” or “anticipate” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements or the industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such 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. 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. These forward-looking statements speak only as of their dates and should not be unduly relied upon. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise (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 annual report on Form 10-K and in our other filings with the Securities and Exchange Commission.

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PART I

ITEM 1. BUSINESS

Company History

Pacific Health Care Organization, Inc. was incorporated under the laws of the state of Utah on April 17, 1970 under the name Clear Air, Inc. The Company changed its name to Pacific Health Care Organization, Inc. on January 31, 2001. On February 26, 2001, we acquired Medex Healthcare, Inc. a California corporation organized March 4, 1994, in a share for share exchange. Medex is a wholly-owned subsidiary of the Company. Medex is in the business of managing and administering both Health Care Organizations and Medical Provider Networks in the state of California. On August 14, 2001, we formed the corporation now known as Industrial Resolutions Coalition, Inc. as a wholly-owned subsidiary of PHCO. IRC participates in the business of creating legal agreements for the implementation and administration of Workers’ Compensation Carve-Outs for California employers with collective bargaining units. On June 30, 2010 we acquired Arissa Managed Care, Inc. a Nevada corporation organized September 1, 2009 by purchasing all of its outstanding common stock. On February 2, 2012 Arissa changed its name to Medex Legal Support, Inc. MLS provided lien representation services to clients during the year until legislative changes negatively impacted the economics of this business. On March 16, 2011 we incorporated Medex Managed Care, Inc. in the state of Nevada, as a wholly owned subsidiary of the Company. MMC is responsible for overseeing and managing our utilization review and managed bill review business. On February 13, 2012 we incorporated Medex Medical Management, Inc. in the state of Nevada, as a wholly owned subsidiary of the Company. MMM oversees and manages our nurse case management services,

Business of the Company

We are a specialty workers’ compensation managed care company providing a range of services for California employers and claims administrators. Workers’ compensation costs continue to increase due to rising medical costs, inflation, fraud and other factors. Medical and indemnity costs associated with workers’ compensation in the state California are billions of dollars annually. Our focus goes beyond the medical cost of claims. Our goal is to reduce the entire cost of the claim, including medical, legal and administrative costs. Through our wholly-owned subsidiaries we provide a range of effective workers’ compensation cost containment services, including but not limited to:

·	Health Care Organizations (“HCOs”)

·	Medical Provider Networks (“MPNs”)

HCO + MPN

·	Workers’ Compensation Carve-Outs

·	Utilization Review (“UR”)

·	Medical Bill Review (“MBR”)

·	Nurse Case Management (“NCM”)

Medex Healthcare, Inc.

Health Care Organizations

HCOs are networks of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training. HCOs were created to appeal to employees, while providing substantial savings to the employer clients. In most cases, the HCO program gives the employer client 180 days of medical control in a provider network within which the employer client has the ability to direct the claim. The injured worker may change physicians once, but may not leave the network. The increased length in control is designed to decrease the incidence of fraudulent claims and disability awards and is also based upon the notion that if there is more control over medical treatment there will be more control over getting injured workers back on the job and therefore, more control over the cost of claims and workers’ compensation premiums.

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Medex holds two HCO licenses. Through these licenses we cover the entire state of California. We offer injured workers a choice of enrolling in an HCO with a network managed by primary care providers requiring a referral to specialists or a second HCO where injured workers do not need any prior authorization to be seen and treated by specialists.

Our two HCO networks have contracted with over 3,900 individual providers and clinics, as well as hospitals, pharmacies, rehabilitation centers and other ancillary services making our HCOs capable of providing comprehensive medical services throughout California. We are continually developing these networks based upon the nominations of new clients and the approvals of their claims’ administrators. Provider credentialing is performed by Medex.

HCO guidelines impose certain reporting, information delivery and fee collection obligations upon HCO. These requirements increase the administrative costs and obligations on HCOs as compared the MPNs, although the obligations and cost differentials are not as substantial as they were in the past.

Medical Provider Networks

Like an HCO, an MPN is a network of health care professionals, but MPN networks do not require the same level of medical expertise in treating work place injuries. Under an MPN program, the employer client 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. Under the MPN program, however, for as long as the employee seeks treatment for his injury, he can only seek treatment from physicians within the MPN network.

The MPN program seems to allow medical control for the life of the claim because the employee must stay within the MPN network for treatment, however, the employer client has control of only the initial treatment before the employee can treat with anyone in the network. In addition, the MPN statute and regulations allow the injured worker to dispute treatment decisions, leading to second and third opinions, and then a review by an Independent Medical Reviewer, whose decision can end up with the employer client losing medical control.

Unlike HCOs, MPNs are not assessed annual fees and no annual enrollment notice delivery requirements. MPN’s are only required to provide an enrollment notice at the time the employee first joins the MPN and a second notice must be delivered to the employee at the time he suffers a workplace injury. As a result, there are fewer administrative costs associated with administering an MPN program, which allows MPNs to market their services at a lower cost than HCOs. As a result, many clients opt to use the less complicated MPN even though the employer client has less control over the employee’s claim.

HCO + MPN

As a licensed HCO and MPN, in addition to offering HCO and MPN programs, we are also able to offer our clients a combination of the HCO and MPN programs. Under this plan model an employer can enroll its employees in the HCO program, and 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. We believe that we are currently the only entity that offers both programs together in a combination program.

Ancillary Services

We have access to a full range of ancillary services to cover all requirements of the California Department of Industrial Relations (“DIR”). This includes interpreter services, ambulances, physical therapy, occupational therapy, pharmacies and much more. The ancillary services are vital to ensure there is a complete network capable of independently providing all care that may be necessary.

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Industry Background and Regulation

Medex maintains direct contractual agreements with the primary and specialist healthcare providers in its networks for treatment of the injured workers of employer clients of Medex who are enrollees under the HCO or covered employees under the MPN. These agreements govern the relationship between Medex and the provider, including the obligations of the provider relating to hours of accessibility, reporting requirements, referral procedures, regulatory compliance, methodology for authorizations, compensation schedules, insurance requirements, utilization review, and grievance procedures. All agreements are in compliance with the requirements of the California Division of Workers’ Compensation (“DWC”) and have been approved through the HCO certification process.

The providers within our networks are paid in accordance with the appropriate California Workers’ Compensation Fee Schedule, unless such provider has entered into a discounted contract with a preferred provider organization (“PPO”), and the employer (through the payer) has contractually accessed those discounted rates for the employer client. The California Workers’ Compensation Fee Schedule, which is created by the DWC, regulates the maximum allowable fees payable under workers’ compensation for procedures performed by a variety of health treatment providers. The fee schedule also includes fees for hospital treatments. The purpose of the fee schedule is to standardize the billing process by using uniform procedure descriptions and to set maximum reimbursement levels for such covered services.

The providers within our networks are paid by the payer, either the workers’ compensation insurance carrier with whom the employer contracts, or a permissibly self-insured employer authorized by the DIR Self Insurance Plan. Either of these entities may utilize a third party administrator (“TPA”).

Care-related decisions are dictated by the care providers within our networks. Our network providers are expected to treat within the provisions of state-approved evidence-based guidelines. Requests for authorization for services and/or procedures may be subject to utilization review pursuant to the guidelines and procedures found in the California Labor Code.

All applications for HCO license certification are processed by the DIR. All applications for MPN license certification are processed by the DWC. The application process is time consuming and requires descriptions of applicant’s organization and planned methods of operation.

The applicant for HCO certification or MPN approval must develop a contracted network of providers for all of the necessary medical services that injured workers may need. An HCO network must be developed to the satisfaction of the DIR, and an MPN network must meet the satisfaction of the DWC. Given the wide range of medical providers needed over a large geographical area, this is a significant undertaking. The network of providers must be under direct contract with the HCO applicant and be willing to provide the various services in their specialty. All contracts must be approved by the DIR or DWC, as applicable, so as to assure the best of care will be provided to the injured worker.

The HCO or MPN applicant must develop committees of providers that will ensure the injured worker receives the best of care. For an HCO applicant this requirement includes the development of Quality Assurance, Utilization, Work Safety, Educational and Grievance committees. For an MPN applicant this includes the geographic service areas of the provider, employee notification process, continuity of care policy, transfer of care policy and economic profiling statement.

Finally, an HCO or MPN applicant must demonstrate to the satisfaction of the DIR or the DWC, as applicable, that it has the resources necessary to manage and administer a large network of providers. To establish the HCO applicant’s ability to administer a network, it requires the applicant to furnish the details of its operating system to the DIR or DWC in writing.

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We are required to renew our HCO certifications every three years. Both licenses are current and will be extended to 2015 subsequent to submission of material modifications, primarily for changes throughout the application which refer to the Medical Director. Although time consuming, the renewal process is relatively straight forward. These modifications should be completed by April 15, 2013. Given that we have historically always been successful in renewing our licenses, barring a change in policy or practice, we do not anticipate problems in renewing our licenses when they come up for renewal.

We maintain ongoing discussions with insurance brokers, carriers, third party administrators, managed care organizations and with representatives of self-insured employers, both as partners and potential clients. Based on potential cost savings to employers and the approximately fourteen million workers eligible for our services, we expect that employers will continue to sign contracts with us to retain our services. The amounts we charge employers per enrollee may vary based upon factors such as employer history and exposure to risk; for instance, a construction company would likely pay more than a payroll service company. In addition, employers who have thousands of enrollees are more likely to get a discount.

Because we contract with medical providers, who own their own medical equipment, we have not incurred significant capital expenditures. We do, however, incur fixed costs such as liability insurance and other usual costs of running a business.

Industrial Resolutions Coalition, Inc.

Workers’ Compensation Carve-outs

Through IRC we seek to create legal agreements for the implementation of Workers’ Compensation Carve-Outs for California employers with collective bargaining units, and the administration of such programs within the statutory and regulatory requirements.

The California legislature permits employers and employees to engage in collective bargaining over alternative systems to resolve disputes in the workers’ compensation context. These systems are called carve-outs because the employers and employees covered by such collective bargaining agreements are carved out from the state workers’ compensation system. The goals of a carve-out include:

·	improving safety programs and having fewer injury and illness claims;

·	increasing access to quality medical providers and medical evaluators;

·	lowering costs of medical care;

·	reducing disputes;

·	improving collaboration between unions and employers;

·	increasing satisfaction of all parties; and

·	providing the opportunity for continuous improvement by renegotiating the terms of the carve-out on an as-needed basis.

Unions and employers are allowed to agree on the following through collective bargaining:

·	an alternative dispute resolution process in place of most hearings before a workers’ compensation judge;

·	a mutually agreed upon list of medical providers and medical evaluators; and

·	a mutually agreed upon list of vocational rehabilitation providers.

California law mandates a number of requirements including:

·	that the carve-out process does not diminish compensation to injured workers; and

·	that the alternative dispute resolution process retain the right to appeal to the reconsideration unit of the Workers’ Compensation Appeals Board (“WCAB”) and, ultimately, to the state courts of appeal.

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Only unions may initiate the carve-out process by petitioning the Administrative Director of the DWC (the “AD”). The AD will review the petition according to the statutory requirements and issue a letter allowing each employer and labor representative a one-year window for negotiations. The parties may jointly request a one-year extension to negotiate the labor-management agreement. No labor-management agreement may deny the right to representation by counsel at any stages during the alternative dispute resolution process.

Many critical issues in workers’ compensation are legal questions determined by medical findings. This is referred to as the medical-legal process and is distinct from medical treatment. Medical-legal evaluations may become necessary when any question of the employee’s entitlement to benefits is not satisfactorily resolved by the reports of the treating physician. Improved communication with the treating physician may reduce the need for a separate medical-legal evaluation. The carve-out agreement may provide for a list of physicians to be used when a medical-legal exam is needed.

IRC will contractually establish an alternative dispute resolution process that is negotiated by labor and management for individual unions and joint-trust committees with whom it has negotiated agreements. IRC will perform, administer or employ ombudsmen, mediators, and arbitrators in the dispute resolution process. In some cases, IRC will train and administer employers and/or union members acting as ombudsmen and mediators.

Generally, the process starts with an ombudsman. Carve-out agreements typically provide that the ombudsman will be a neutral person available to all parties, who can provide information to injured workers and who attempts to avert or resolve disputes at an early stage. For example, the ombudsman may provide information on whether an injury is eligible for workers’ compensation and on benefits and may resolve any problems with the delivery of medical benefits.

If resolution of a workers’ compensation problem is unsuccessful at the level of the ombudsman, the injured worker may move the matter to the next step, which typically is formal mediation by an independent, neutral mediator. If mediation is unsuccessful, the parties may turn to an outside neutral arbitrator – often a retired worker's compensation administrative law judge. In addition, injured workers may at any stage hire an attorney to advise them in the dispute resolution process, although the attorney’s role may be limited in construction industry carve-out agreements, where legislation allows labor and management to proceed up to the arbitration portion of the dispute resolution process without representation of legal counsel. This helps to significantly limit the percentage of matters that are actually litigated.

Legislative statute requires that an appeals process be maintained in a carve-out. Therefore, the arbitrator’s decision may be appealed to the reconsideration unit of the Workers’ Compensation Appeals Board and, ultimately, to the state courts of appeal. IRC is trained to appear at these WCAB hearings.

IRC has expertise in the development of legal contracts, knowledge of negotiations of labor-management committees, and professional understanding of the medical and legal aspects of California workers’ compensation.

Because we already have established health care networks, we considered pursuing this market directly through Medex. Workers’ unions, however, have historically been opposed to HCO programs, including Medex. Medex has been largely unable to place its services into employers with union participation in both the private and public sectors because the HCO statute requires that the unions authorize the use of the HCO program. Unions have been opposed to authorizing the use of HCO programs because the HCO program is selected by the employer with no input whatsoever from labor participants. The major unions, especially those involved in schools and governmental entities (municipalities, etc.), have historically refused to allow employers to implement the HCO. All the unions in the California Labor Federation have also refused to participate in HCO programs. The same objections have been raised regarding the use of the MPN, i.e., no input from labor representatives.

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Medex Managed Care, Inc.

Utilization Review

Through MMC we provide UR and MBR services. Utilization review includes utilization review or utilization management functions that prospectively, retrospectively, or concurrently review and approve, modify, delay, or deny, based in whole or in part on medical necessity to cure and relieve, treatment recommendations by physicians, prior to, retrospectively, or concurrent with the provision of such medical treatment services pursuant to California Workers’ Compensation law, or other jurisdictional statutes.

We provide UR to self-insured clients, insurance companies and public entities. UR helps to reduce costs for the payer and determine if the recommended treatment is appropriate. MMC offers automated review services that can cut the overhead costs of our client and increase payer savings. Our UR staff is experienced in the workers’ compensation industry and dedicated to provide a high standard of customer service.

Medical Bill Review

Medical bill review refers to professional analysis of medical provider, services, or equipment billing to ascertain the proper reimbursement. Such services include, but are not limited to, coding review and rebundling, reasonable and customary review, fee schedule analysis, out-of-network bill review, pharmacy review, PPO management, and repricing.

In connection with our MBR services, we provide bill review (cost containment) services to self-insured employers, insurance companies and the public sector to help reduce medical expenses paid by our customers. In providing these services we provide network savings on top of State Fee Schedule savings allowing top provider networks to achieve savings.

We offer our clients with quick turnaround, state of the art software and the expertise of our bill review staff. We are committed to service and believe the reputation of our staff sets us apart from our competition.

Medex Medical Management, Inc.

Nurse Case Management

Through MMM we provide NCM services. Nurse case management is a collaborative process that assesses, plans, implements, coordinates, monitors, and evaluates the options and services required to meet an injured worker’s health needs. Our nurse case managers use communication and available resources to promote quality, cost-effective outcomes with the goal of returning the injured worker to gainful employment and maximum medical improvement as soon as medically appropriate.

Our credentialed registered nurses have expertise in various clinical areas and extensive backgrounds in workers’ compensation. This combination allows our nurses the opportunity to facilitate medical treatment while understanding the nuances of workers’ compensation up to and including litigation. By providing these services, we contribute to effective delivery of medical treatment assuring the injured worker receives quality treatment in a timely and appropriate manner to return the worker to gainful employment.

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Medex Legal Support, Inc.

Lien Representation Services

Through MLS we began offering our customers all aspects of lien defense from negotiation to lien litigation, including filing petitions for reconsideration in February 2012. MLS ceased operations in September 2012 as a result of the potential negative impact of Senate Bill 863. Signed into law on August 31, 2012, Senate Bill 863 reactivated significant lien filing fees. Any lien filed after January 1, 2013, must be accompanied by an electronic filing fee to the DWC of $150. Liens filed prior to January 1, 2013 must pay a $100 activation fee prior to any conference or trial. In addition, SB 863 created statutes of limitation for liens: three years for services performed prior to July 1, 2013, and 18 months for services subsequent to that date.

The DWC had previously instituted a lien filing fee of only $100 in 2002 (this program only lasted 2 years), and the immediate result of such fees reduced the number of liens filed in California by approximately 40%. Assuming at least the same percentage of reduction for the new $150 fee, coupled with the restriction of the new statutes of limitation, has led industry leaders to project an approximate 50 % reduction in liens filed. MLS generated approximately $75,000 in gross revenues during the nine months ended September 30, 2012.

Significant Customers

During 2012 we had three customers that accounted for more than 10% of our total sales. The following table sets forth details regarding the percentage of total sales attributable to our significant customers in the past two years:

	Year ended December 31,
Customer:	2012			2011

Customer A		12	%		14	%
Customer B		7	%		12	%
Customer C		14	%		11	%
Customer D		13	%		8	%

While customer D has been a customer of Medex for the past several years, the additional UR and MBR revenues generated by MMC during 2012 resulted in this customer contributing 13% of our total sales.

Competition

Although we are one of the first commercial enterprises capable of offering HCO services and MPN services, there are new companies that are currently setting up similar services as those we offer. Many of these competitors may have greater financial, research and marketing experience and resources than we do, and they may therefore represent substantial long-term competition. As of December 2012, in California there were nine certified health care organization licenses issued to six companies, (two of which belong to the Company.) This translates into five direct HCO competitors. However, very few of these HCO competitors are currently writing HCO business. By contrast, there were 1,968 approved MPNs in the State of California, 77 of which are administered by the Company. Additionally, our customers may establish the in-house capability of performing the services we offer. If we are unable to compete effectively, it will be difficult for us to add and retain customers, and our business, financial condition and results of operations could be materially and adversely affected.

We contract directly with a network of providers based on quality determinations rather than the provision of discounted medical services. We believe this provides us a competitive advantage because we can market a direct relationship with providers who have demonstrated expertise in treating work related injuries and writing credible medical reports, rather than relying on third party relationships or discounts alone.

Medex offers both HCO and MPN programs to potential clients, as well as an HCO/MPN combination model, which we believe also gives Medex a competitive advantage, because of the manner in which the network was created. To our knowledge, no other business offers this type of combination model, nor do they have the legal expertise to administer one.

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We also offer Nurse Case Management, Utilization Review, and Bill Review Services. While there are virtually hundreds of much larger competitors in these areas, the Company focuses its business primarily to those employers and payers who use the HCO and/or MPN services. We believe this keeps the majority of this business stable and renewable.

Governmental Regulation

Managed care programs for workers’ compensation are subject to various laws and regulations. The nature and degree of applicable regulation varies depending upon the specific services provided. Parties that provide or arrange for the provision of healthcare services are subject to numerous complex regulatory requirements that govern many aspects of their conduct and operations. Because managed healthcare is a rapidly changing and expanding industry and the cost of providing healthcare continues to increase, it is possible that the applicable federal and state regulatory frameworks will expand to have a greater impact upon the conduct and operation of our business.

As discussed above, the provision of workers’ compensation managed care in the state of California is governed by legislation. The services we provide have developed largely in response to legislation or other governmental action. The fees we charge for a number of the services we provide are governed by maximum permissible fee schedules set by the DWC. Changes in the legislation regulating workers’ compensation may create greater or lesser demand for the services we offer or require us to develop new or modified services to meet the needs of the marketplace and compete effectively in the marketplace. We could also be materially and adversely affected if the state of California were to elect to reduce the extent of medical cost containment strategies available to insurance companies and other payers, or adopt other strategies for cost containment that would not support demand for our services.

There has been considerable discussion of healthcare reform at both the federal level and in the state of California in recent years. Due to uncertainties regarding the ultimate features of reform initiatives and the timing of their enactment, we cannot predict which, if any, reforms will be adopted, when they may be adopted, or what impact they may have on our business or within the industry in which we participate.

Employees

Including the employees of our subsidiaries, as of March 2013 we employed 34 people on a full-time basis. We also use the services of a number of consultants. In addition, all officers work on a full-time basis and directors work on a part-time basis, as needed, with no commitment for full-time employment. Over the next twelve months, we anticipate hiring additional employees only if business revenues increase and our operating requirements warrant such hiring.

Reports to Security Holders

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and other filings pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934, and amendments to such filings with the United States Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains its internet site www.sec.gov, which contains reports, proxy and information statements and our other SEC filings.

ITEM 1A. RISK FACTORS

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act of 1934, as amended, and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

ITEM 2. PROPERTIES

Our principal executive offices are located at 1201 Dove Street, Suite 300, in Newport Beach, California where we lease approximate 6,700 square feet of office space. This office serves as the offices of the Company and our subsidiaries. We believe this space will be adequate for our needs for the next twelve months. For a description of our annual base rent throughout the remaining term of the lease please see Note 6 “Operating Leases” to our Consolidated Financial Statements included in this annual report on Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in Note 11 “Litigation” to our Consolidated Financial Statements included in this annual report on Form 10-K and is incorporated by reference into this Item 3 by reference.

ITEM 4. MINE SAFETY DISCLOSURES

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock currently trades on the OTCQB under the symbol “PFHO.PK”. The following table presents the high and low bid quotations for the fiscal years ended December 31, 2012 and 2011. The published high and low bid quotations were furnished to us by OTC Markets Group Inc. These quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

	High		Low

Fiscal year ended December 31, 2012

Fourth Quarter	$	5.05	$	4.37
Third Quarter	$	4.75	$	3.00
Second Quarter	$	3.58	$	1.55
First Quarter	$	1.74	$	.86

Fiscal year ended December 31, 2011

Fourth Quarter	$	.87	$	.27
Third Quarter	$	.56	$	.26
Second Quarter	$	.53	$	.30
First Quarter	$	.30	$	.01

Holders

As of March 13, 2013 we had approximately 307 shareholders holding 802,424 shares of our common stock. The number of record shareholders was determined from the records of our stock transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing houses.

Dividends

We have not declared a cash dividend on any class of common equity during the past two fiscal years. Our ability to pay dividends is subject to limitations imposed by Utah law. Under Utah law, dividends may not be made if, after giving effect to the dividend: a) the company would be unable to pay its debts as they become due in the usual course of business; or b) the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed to satisfy the rights of any holders of preferential rights whose rights are superior to those receiving the dividend. Our board of directors does not anticipate paying dividends in the foreseeable future; it intends to retain the earnings that could be distributed, if any, for the operation, expansion and development of our business.

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding securities authorized for issuance under our equity compensation plans is set forth under Equity Compensation Plans of Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters on page 60 of this annual report on Form 10-K.

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Performance Graph

Recent Sales of Unregistered Securities

No instruments defining the rights of the holders of any class of registered securities have been materially modified, limited or qualified during the quarter ended December 31, 2012.

During the quarter ended December 31, 2012 we did not sell any securities which were not registered under the Securities Act.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Neither we, nor any affiliated purchaser, purchased any of our equity securities during the year ended December 31, 2012.

ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our consolidated financial condition and results of operations for the years ended December 31, 2012 and 2011 and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our Consolidated Financial Statements and related notes beginning on page 26 of this annual report on Form 10-K.

Some of the statements set forth in this section are forward-looking statements relating to our future results of operations. Our actual results may vary from the results anticipated by these statements. Please see “Forward-Looking Statements” on page 4 of this annual report on Form 10-K.

Results of Operations

Comparison of the years ended December 31, 2012 and 2011

Revenue

Total revenues during the year ended December 31, 2012 increased 70% to $4,826,765 compared to the year ended December 31, 2011. The total number of employee enrollees increased 39% during 2012 compared to 2011. As of December 31, 2012, we had approximately 516,000 total enrollees. Enrollment consisted of approximately 68,000 HCO enrollees and 448,000 MPN enrollees. By comparison as of December 31, 2011 we had approximately 370,000 enrollees, including approximately 65,000 HCO enrollees and approximately 305,000 MPN enrollees.

The net increase in HCO and MPN enrollees of approximately 3,000 and 143,000, respectively, was mainly the result of existing major HCO and MPN customers increasing their enrollments during 2012. Although we realized growth in our revenues during 2012 there are no assurances that we will continue our growth rate during 2013 at the same rate as 2012.

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Our business generally has a long sales cycle, typically in excess of one year. Once we have established a customer relationship, our revenue adjusts with the growth or retraction of our customers’ managed headcount volume. New customers are added throughout the year and other customers terminate from the program for a variety of reasons.

In the current economic environment, we anticipate businesses will continue to seek ways to further reduce their workers’ compensation program costs. Even though the HCO and MPN programs have been shown to create a favorable return on investment for employers, (as our services are a significant component of the employers’ loss prevention programs), it is always a challenge to justify our fees to our customers, especially in this economy. In order to convince employers that HCO and/or MPN fees are well-spent, we must continue to provide a framework for expeditiously returning employees back to work at the lowest cost. As a result, we may experience some 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.

Total revenues increased 70% during 2012 to $4,826,765. When compared to 2011, revenues for HCO, MPN and other revenues increased by 22%, 19% and 118%, respectively. The primary reason for the growth in other revenues was primarily the continuing growth in MBR and UR revenues.

HCO Fees

During the years ended December 31, 2012 and 2011 HCO fee revenues were $945,823 and $770,303, respectively. While HCO enrollment increased 4% during the 2012 fiscal year, we realized a 23% increase in revenue from HCO fees when compared to the same period 2011. While enrollment increased at only 4%, as a result of the non-renewal of six of our smaller HCO customers, the percentage increase in revenues outpaced the percentage increase in enrollment by 19%. Revenue growth outpaced enrollment growth principally as a result of an increase in the volume of claims network fees to a number of new clients.

MPN Fees

MPN fee revenues for 2012 were $749,250 compared to $627,341 for year ended in 2011. Although we had an increase in MPN enrollment of 47% during the year ended December 31, 2012, because of factors such as differing fee terms, unbundling of services, price competition and other similar factors as compared to 2011, resulted in only a 19% increase in MPN revenues compared to 2011.

Other Fees

Other fees consist of revenues derived from MBR, NCM, UR, lien service and network claims repricing services provided by Medex, MMC, MMM and MLS. Other fee revenues for the year ended December 31, 2012 and 2011 were $3,131,692 and $1,434,149, respectively.

UR and MBR Fees

During the year ended December 31, 2012, UR and MBR revenues increased by $582,259 and $508,541 to $1,131,900 and $934,071, respectively, when compared to the same period a year earlier. UR and MBR service revenues grew largely as a result of our increased marketing efforts in these areas of our business.

NCM Fees

During the year ended December 31, 2012 and 2011, NCM revenue was $722,766 and $370,114, respectively. This increase of $352,652 was the result from increased customer employee enrollment primarily by existing customers.

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Network Repricing Fees

Our network claims repricing fees are generated from certain customers who have access to our network and split with Medex their cost savings generated from their PPO. During the years ended December 31, 2012 and 2011, network access fee revenues generated were $266,457, and $88,863, respectively. This increase of $177,594 when compared to 2011, was the result of increased savings realized from three of our existing customers during 2012.

Lien Representation Fees

MLS commenced offering lien representation services in February 2012 and recorded revenues totaling $76,498 for the year ended December 31, 2012. We did not offer lien representation services during the 2011 fiscal year. MLS ceased offering lien representation services in September 2012 resulting from the potential negative impact of Senate Bill 863. Signed into law on August 31, 2012, Senate Bill 863 reactivated significant lien filing fees. Any lien filed after January 1, 2013, must be accompanied by an electronic filing fee to the Division of Workers’ Compensation of $150. Liens filed prior to January 1, 2013 must pay a $100 activation fee prior to any conference or trial. In addition, SB 863 created statutes of limitation for liens: 3 years for services performed prior to July 1, 2013, and 18 months for services subsequent to that date.

From 2002 to 2004, the DWC instituted a $100 lien filing fee. The immediate result of such fees reduced the number of liens filed in California by approximately 40%. Assuming at least the same percentage of reduction for the new $150 fee, and adding the restriction of new statutes of limitation, has led industry leaders to project an approximate 50 % reduction in liens filed. We do not anticipate recommencing our lien representation services until we have had an opportunity to fully assess the impacts of the new filings fees and statute of limitations and how those impact on the ability of MLS to operate profitably.

Expenses

Total expenses for the years ended December 31, 2012 and 2011 were $3,593,647 and $2,509,510, respectively. The increase of $1,084,137 was primarily the result of increases in depreciation, consulting fees, salaries and wages, professional fees, insurance, outsource service fees, data maintenance and miscellaneous general and administration expenses.

Consulting Fees

During the year ended December 31, 2012 consulting fees increased approximately 36% to $486,736 from $358,996 during the 2011. This increase in consulting fees of $127,740 was due mainly to contracting with two IT consulting firms during the year, increased fees paid to website consultant, the addition of three administrative consultants in January, June and September of 2012 and an accounting consultant in September 2012, additional fees paid to an existing consultant of MMC and the hiring of a lien service consultant in MLS in February 2012.

Salaries and Wages

Salaries and wages increased $523,035 or 46% to $1,655,386 from $1,132,351 during 2012 compared with 2011. The increase in salaries and wages was primarily due to the Company hiring new employees during 2012 as follows:

Medex added four MPN Program Administrators, one in June 2012, one in July 2012 and two in September 2012 and hired a provider relations administrator in September 2012. PHCO added an accounting manager in August 2012, an accounting clerk in September 2012 and a receptionist in October 2012. MMM hired a nurse case manager in July 2012 and one in August 2012. MMC hired a bill review analyst and a UR program coordinator in September 2012, and a bill review specialist in October 2012.

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Also contributing to the increase in salaries and wages during 2012 when compared to 2011 were the salary increases given to our Company’s CEO and CFO, and the COO of Medex, and the increase in annual bonuses paid to our employees and consultants in December 2012.

Professional Fees

For the year ended December 31, 2012 we incurred professional fees of $267,434 compared to $212,572 during 2011. This 26% increase in professional fees was primarily the result of increased professional fees paid for nurse case management services, partially offset by lower accounting, legal and medical consultant fees.

Insurance

During the year 2012 we incurred insurance expenses of $203,251, an increase of $52,024 over the year 2011. The increase in insurance expense was mostly the result of increased group health, vision and dental insurance costs resulting from the hiring of new employees in PHCO, Medex, MMC and MMM and increases in our workers compensation and network security liability insurance.

Outsource Service Fees

Outsource service fees consist of costs incurred mainly by MMC in outsourcing its MBR services and certain UR services. We incurred $385,368 and $190,917 in outsource service fees during the years ended December 31, 2012 and 2011, respectively. The increase of $194,451 in 2012 when compared to 2011 was the result increased of MBR and UR bills processed by our outsource service companies.

Data Maintenance

During the year ended December 31, 2012 we experienced a 4% increase in HCO enrollment and a 47% increase in MPN enrollment, resulting in an overall enrollment increase of 39% when compared to December 31, 2011. Maintenance fees increased by 32% to $75,530 during the year ended December 31, 2012. This increase in data maintenance fees is primarily attributable to higher data maintenance costs associated with the overall increase in enrollees partially offset by lower prices negotiated with third party service providers.

General and Administrative

General and administrative expenses increased 25% to $490,663 during the year ended December 31, 2012. The increase in general and administrative expense of $98,256 was primarily attributable to increases in IT and internet expenses, office supplies, dues and subscriptions, employment agency fees, internet expense, office supplies, postage and delivery expense, rent, and vacation expense partially offset by decreases in equipment and repairs, moving expenses, telephone expense and miscellaneous general administrative expenses. We expect current levels of general and administrative expenses to increase starting with the first quarter of 2013.

Income from Operations

As a result of the 70% increase in total revenue during fiscal 2012, which was only partially offset by the 43% increase in total expenses during fiscal 2012, our income from operations increased nearly 283% during the fiscal year ended December 13, 2012.

Income Tax Provision

Because we realized income from operations of $1,233,118 during the year ended December 31, 2012, compared to $322,283 during the year ended December 31, 2011 we realized a 326% increase in our income tax provision.

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Net Income

During the year ended December 31, 2012 we recorded total revenues of $4,826,765 which were higher by $1,994,972 when compared to 2011. This increase in total revenues was partially offset by a $1,084,137 increase in total expenses which resulted in income from operations of $1,233,118 compared to an income from operations of $322,283 during the 2011 fiscal year. During the 2012 fiscal year we realized total other income of $319, compared to total other expense of $1,549 during fiscal 2011, primarily as a result of the recognition of a loss on the disposal of an asset during fiscal 2011. We recorded provisions for income tax of $522,048 and $122,499 during the years ended December 31, 2012 and 2011, respectively. Correspondingly, we realized net income of $711,389, or $0.89 per share, for the year ended December 31, 2012 compared to a net income of $198,235 or $0.25 per share, for the year ended December 13, 2011. We expect revenues to moderately increase starting the first quarter of 2013 from the services we offer our existing and new customers, mainly in the areas of MBR and UR.

Liquidity and Capital Resources

As of December 31, 2012 we had cash on hand of $479,674 compared to $368,459 at December 31, 2011. The $111,215 increase in cash on hand is the result primarily to increases in revenue from operations, accounts payable, depreciation, income tax payable, deferred rent expense, and decreases in income tax receivable and commission draw. These changes were partially offset by increases in accounts receivable and other receivables and decreases in accrued expenses and unearned revenues. Barring a significant downturn in the economy, 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 currently have planned certain capital expenditures during the next twelve months to accommodate our growth. We do not anticipate this 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 equity and/or debt financing. We do not currently possess a financial institution source of financing. Given current credit market conditions, there is no assurance that we could be successful in obtaining 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 year ended December 31, 2012 cash was primarily used to fund operations. We had net increases in cash of $111,215 and $18,907 during the years ended December 31, 2012 and 2011, respectively. See below for additional discussion and analysis of cash flow.

	December 31, 2012			December 31, 2011

Net cash provided by operating activities	$	210,602		$	88,139
Net cash (used in) investing activities		(126,344	)		(63,084	)
Net cash provided by (used in) financing activities		26,957			(6,148	)
Net increase in cash	$	111,215		$	18,907

Net cash provided in operating activities was $210,602 and $88,139 in 2012 and 2011, respectively. The increase in cash flow from operating activities is primarily the result of increased revenues, which was only partially offset by increased operating expenses.

Net cash used in investing activities was $126,344 and $63,084 in 2012 and 2011, respectively. This increase in net cash used in investing activities in 2012 was the result of purchasing furniture and equipment for our offices.

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Net cash provided by financing activities was $26,957 in fiscal 2012. Net cash used in financing activities was $6,148 in fiscal 2011. The increase in 2012 was principally the result of financing our new office server equipment for $38,380, partially offset by payments toward obligations under capital leases of $11,423.

Summary of Material Contractual Commitments as of December 31, 2012

	Payments Due By Period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Equipment Leases(1)	$	67,259	$	34,495	$	32,764	$	-	$	-
Office Leases(2)		457,550		140,343		292,457		24,750		-
Total	$	524,809	$	174,838	$	325,221	$	24,750	$	-

(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%. In August 2012 we entered into a capital lease arrangement whereby we leased office server equipment for $38,380. 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 36 months at level operating rents with capital interest rate at 7.5%.

(2)

Following is our annual base rent for our office space throughout the remaining term of the lease:

Rent Period	Annual Rent Payments
Jan. 1 to Dec. 31, 2013	$	140,343
Jan. 1 to Dec. 31, 2014	$	144,508
Jan. 1 to Dec. 31, 2015	$	147,949
Jan. 1 to Feb. 29, 2016	$	24,750
Total	$	457,550

Off-Balance Sheet Financing Arrangements

As of December 31, 2012 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 our long-lived assets and our 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 our attention that may vary our outlook for the future. Actual results may differ from these estimates under different assumptions.

Management suggests that our Summary of Significant Accounting Policies, as described in Note 2 of our Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe the critical accounting policies that most impact our Consolidated Financial Statements are described below.

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Basis of Accounting — We used the accrual method of accounting for the period ended December 31, 2012.

Revenue Recognition — We apply 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, we recognize revenue related to program management fees on a monthly basis, over the life of the management 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.

Our subscribers generally pay for their services by check and 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.

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Morrill & Associates, LLC

Certified Public Accountants

1448 North 2000 West, Suite 3

Clinton, Utah 84015

801-820-6233 Phone; 801-820-6628 Fax

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Pacific Health Care Organization, Inc.

Newport Beach, CA

We have audited the accompanying consolidated balance sheets of Pacific Health Care Organization, Inc. as of December 31, 2012 and 2011 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Health Care Organization, Inc. as of December 31, 2012 and 2011 and the consolidated results of its operations and cash flows for the years ended December 31, 2012 and 2011 in conformity with generally accepted accounting principles in the United States of America.

/s/ Morrill & Associates

Morrill & Associates

Clinton, Utah 84015

March 30, 2013

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Pacific Health Care Organization, Inc.

Consolidated Balance Sheets

ASSETS
	December 31,			December 31,
	2012			2011

Current Assets
Cash	$	479,674		$	368,459
Accounts receivable, net of allowance of $20,000		1,332,499			523,864
Income tax receivable		-			3,998
Commission draw		-			29,853
Receivable other		7,344			-
Prepaid expenses		52,988			53,947
Total current assets		1,872,505			980,121

Property & Equipment, net
Computer equipment		127,667			80,963
Furniture & fixtures		83,708			56,471
Office equipment		26,560			12,537
Office equipment under capital lease		63,923			25,543
Total property & equipment		301,858			175,514
Less: accumulated depreciation and amortization		(133,573	)		(104,294	)

Net property & equipment		168,285			71,220
Other assets		8,158			8,158

Total assets	$	2,048,948		$	1,059,499

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	120,787		$	86,482
Accrued expenses		98,074			126,770
Income tax payable		249,162			1,611
Current obligations under capital lease		19,294			6,592
Deferred rent expense		24,951			21,903
Deferred tax liabilities		5,659			5,404
Unearned revenue		2,443			7,803
Total current liabilities		520,370			256,565
Long term liabilities
Noncurrent obligation under capital lease		21,324			7,069
Total liabilities		541,694			263,634

Commitments and Contingencies		-			-

Shareholder's 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		882,823			171,434
Total stockholders' equity		1,507,254			795,865

Total liabilities and stockholders' equity	$	2,048,948		$	1,059,499

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

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Pacific Health Care Organization, Inc.

Consolidated Statements of Operations

	December 31,			December 31,
	2012			2011
Revenues
HCO fees	$	945,823		$	770,303
MPN fees		749,250			627,341
Other		3,131,692			1,434,149
Total revenues		4,826,765			2,831,793

Expenses
Depreciation		29,279			13,595
Consulting fees		486,736			358,996
Salaries & wages		1,655,386			1,132,351
Professional fees		267,434			212,572
Insurance		203,251			151,227
Outsource service fees		385,368			190,917
Data maintenance		75,530			57,445
General & administrative		490,663			392,407

Total expenses		3,593,647			2,509,510

Income from operations		1,233,118			322,283

Other income (expense)
Loss on disposal of assets		-			(1,564	)
Interest income		704			957
Rental income		1,500			250
Interest (expense)		(1,885	)		(1,192	)
Total other income (expense)		319			(1,549	)

Income (loss) before income tax provision		1,233,437			320,734

Income tax provision		522,048			122,499

Net income	$	711,389		$	198,235

Basic and fully diluted earnings per share:
Earnings per share amount	$	.89		$	.25
Weighted average common shares outstanding		802,424			802,424

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

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Pacific Health Care Organization, Inc.

Consolidated Statements of Stockholders’ Equity

From January 1, 2011 to December 31, 2012

	Preferred Stock				Common Stock				Paid in		Retained Earnings
	Shares		Amount		Shares		Amount		Capital		(Deficit)
Balance, January 1, 2011		-	$	-		802,424	$	802	$	623,629	$	(26,801	)

Net income for the year ended December 31, 2011		-		-		-		-		-		198,235

Balance, December 31, 2011		-	$	-		802,424	$	802	$	623,629	$	171,434

Net income for the year ended December 31, 2012		-		-		-		-		-		711,389

Balance, December 31, 2012		-	$	-		802,424	$	802	$	623,629	$	882,823

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

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Pacific Health Care Organization, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31

	2012			2011
Cash Flows from Operating Activities
Net income	$	711,389		$	198,235
Adjustments to reconcile net income to net cash:
Depreciation		29,279			13,595
Loss on disposition of assets		-			1,564
Changes in operating assets & liabilities:
(Increase) in accounts receivable		(808,635	)		(284,659	)
Decrease in income tax receivable		3,998			31,102
Decrease (increase) in commission draw		29,853			(5,853	)
(Increase) in receivable other		(7,344	)		-
Decrease in deferred tax asset		-			10,582
Decrease in prepaid expenses		959			16,165
Increase in accounts payable		34,305			56,444
(Decrease) increase in accrued expenses		(28,696	)		26,378
Increase in income tax payable		247,551			1,511
Increase in deferred rent expense		3,048			21,903
Increase in deferred tax liabilities		255			5,404
(Decrease) in unearned revenue		(5,360	)		(4,232	)
Net cash provided by operating activities		210,602			88,139

Cash Flows from Investing Activities
Purchase of furniture & equipment		(87,964	)		(63,084	)
Purchase equipment under capital lease		(38,380	)		-
Net cash used by investing activities		(126,344	)		(63,084	)
Cash Flows from Financing Activities
Increase in obligation under capital lease		38,380			-
Payment of obligations under capital lease		(11,423	)		(6,148	)
Net cash provided by (used in) financing activities		26,957			(6,148	)

Increase in cash		111,215			18,907

Cash at beginning of period		368,459			349,552
Cash at end of period	$	479,674		$	368,459

Supplemental Cash Flow Information
Cash paid (refunded) for:
Interest		703			1,191
Income taxes refunded		-			(38,718	)
Income taxes paid		260,000			107,346

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

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Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 1 – CORPORATE HISTORY

Pacific Health Care Organization, Inc. (the “Company”) is a specialty workers’ compensation managed care company providing a range of services for California employers and claims administrators. The Company was incorporated under the laws of the state of Utah on April 17, 1970 under the name Clear Air, Inc. The Company changed its name to Pacific Health Care Organization, Inc., on January 31, 2001. On February 26, 2001 the Company acquired Medex Healthcare, Inc. (“Medex”), a California corporation organized March 4, 1994 in a share for share exchange. Medex is a wholly-owned subsidiary of the Company. Medex is in the business of managing and administering both Health Care Organizations (“HCOs”) and Managed Provider Networks (”MPNs”) in the state of California. On August 14, 2001 we formed Workers Compensation Assistance, Inc., a California corporation, as a wholly-owned subsidiary of PHCO. Workers Compensation Assistance changed its name to Industrial Resolutions Coalition, Inc. (“IRC”) in January 2008. IRC oversees and manages the Company’s Workers’ Compensation Carve-Outs services. The Company acquired Arissa Managed Care, Inc., (“Arissa”) a Nevada corporation organized September 1, 2009 by purchasing all of its outstanding common stock. On February 2, 2012 Arissa changed its name to Medex Legal Services, Inc. (“MLS”). MLS began offering lien representation services to clients in 2012. Due to legislative changes that became effective on August 31, 2012, and significantly negatively impacted the economics of the lien representation services offered by MLS, MLS ceased operations on September 30, 2012. On February 13, 2012 we incorporated Medex Medical Management, Inc., in the state of Nevada, as a wholly owned subsidiary of the Company. Medex Medical Management (“MMM”) is responsible for overseeing and managing nurse case management services. On March 16, 2011 we incorporated Medex Managed Care, Inc. in the state of Nevada, as a wholly owned subsidiary of the Company. MMC oversees and manages the Company’s utilization review and managed bill review services.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Accounting

The Company used the accrual method of accounting for the periods ended December 31, 2012 and 2011.

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 program management fees on a monthly basis, over the life of the management 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.

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Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

D. Concentrations

Financial instruments that potentially subject 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 per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements.

	For the Years Ended December 31,
	2012		2011
Basic Earnings per share:
Income (numerator)	$	711,389	$	198,235
Shares (denominator)		802,424		802,424
Per share amount	$	.89	$	.25
Fully Diluted Earnings per share:
Income (numerator)	$	711,389	$	198,235
Shares (denominator)		802,424		802,424
Per share amount	$	.89	$	.25

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.

G. Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles, in the United States of America, requires 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.

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.

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Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

J. General and Administrative Expenses

General and administrative expenses include fees for office space and supplies, insurance, IT and internet expenses, postage and delivery expenses, compensated absences, travel expenses and entertainment costs.

K. Income Taxes

The Company utilizes the liability method of accounting for 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 and outstanding. 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 2012 or 2011, or in any prior years.

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.

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Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 the 2012 fiscal year end, 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 December 31, 2012 and 2011 are as follows:

	12/31/12			12/31/11
Customer A		12	%		12	%
Customer B		22	%		15	%
Customer C		8	%		12	%
Customer D		4	%		13	%

O. Subsequent Events

In February 2013 the Company entered into new Employment Agreements with Fred Odaka, the Company’s Chief Financial Officer, and David Kim, the Chief Operating Officer of the Company’s subsidiaries Medex, MMC and MMM. At that time the Company also entered into a new Consultant Agreement with Balzano & Associates for services rendered by Donald Balzano as the President of the Company’s subsidiaries, IRC and MLS. These agreements set forth the terms and conditions of their employment or consultancy with the Company, or its subsidiaries and are terminable by either party at will at any time.

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

NOTE 3 – RECENTLY ISSUED ACCOUNTING STANDARDS

The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its current or future earnings or operations.

NOTE 4 – FIXED ASSETS

The Company capitalizes the purchase of equipment and fixtures for major purchases in excess of $1,000 per item. Capitalized amounts are depreciated over the useful life of the assets using the straight line method of depreciation which is 3 and 7 years for the office equipment, and furniture and fixtures, respectively. Scheduled below are the assets, costs and accumulated depreciation at December 31, 2012 and 2011.

	Cost						Depreciation Exp. & Amort.				Accum. Depre. & Amort.
Assets	December 31, 2012			December 31, 2011			December 31, 2012		December 31, 2011		December 31, 2012			December 31, 2011
Computer equipment	$	127,667		$	80,963		$	7,284	$	2,342	$	70,548		$	63,264
Furniture & fixtures		87,781			60,544			11,245		4,678		41,901			30,656
Disposal of furniture		(4,073	)		(4,073	)		-		-		(1,309	)		(1,309	)
Office equipment		26,560			12,537			4,362		1,465		5,827			1,465
Office equipment under capital lease		63,923			25,543			6,388		5,109		16,606			10,218
Totals	$	301,858		$	175,514		$	29,279	$	13,594	$	133,573		$	104,294

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Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 5 – INCOME TAXES

The Company accounts for corporate income taxes in accordance with FASB ASC 740-10 “Income Taxes.” FASB ASC 740-10 requires an asset and liability approach for financial accounting and reporting for income tax purposes.

The tax provision for the year-ended December 31, 2012 and the year ended December 31, 2011 consisted of the following:

	2012			2011
Current:
Federal	$	403,153		$	86,511
State		118,640			20,002
Deferred
Federal		(6,370	)		12,389
State		6,625			3,597
Total tax provision	$	522,048		$	122,499

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances at December 31, 2012 and December 31, 2011 are as follows:

	2012			2011

Depreciation
Federal	$	(65,841	)		(20,858	)
State		(14,601	)		(5,858	)
Reserve for bad debts
Federal		8,000			6,200
State		1,800			1,800
State tax deductions		37,659			-
Vacation accrual
Federal		22,365			9,790
State		4,959			2,842

Deferred tax asset (liability)	$	(5,659	)	$	(5,404	)

The reconciliation of income tax computed at statutory rates of income tax benefits is as follows:

	2012		2011

Expense at federal statutory rate	$	419,369	$	101,905
State tax effects		82,675		24,281
Non deductible expenses		11,572		16,270
Effects of rate change		7,982		-
Taxable temporary differences		450		(19,957	)
Income tax provision	$	522,048	$	122,499

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Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 5 – INCOME TAXES (CONTINUED)

The Financial Accounting Standards Board (FASB) has issued FASB ASC 740-10 (Prior authoritative literature: Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48)). FASB ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with prior literature FASB Statement No. 109, Accounting for Income Taxes. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FASB ASC 740-10.

The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations in the provision for income taxes. As of December 31, 2012, the Company had no accrued interest or penalties.

NOTE 6 – OPERATING LEASES

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 a capital interest rate of 7%. In August 2012 we entered into a capital lease arrangement whereby we leased office server equipment for $38,380. 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 36 months at level operating rents with a capital interest rate of 7.5%.

The Company’s principal executive offices are located at 1201 Dove Street, Suites 300 and 375, in Newport Beach, California, where it leases approximately 6,740 square feet of office space. The Company’s lease runs through February 29, 2016. This space also serves as the principal offices of our operating subsidiaries, Medex, IRC, MLS, MMM and MMC. Following is our base annual rent payment schedule for the office space.

Rent Period	Annual Rent Payments
Jan. 1 to Dec. 31, 2013	$	140,343
Jan. 1 to Dec. 31, 2014	$	144,508
Jan. 1 to Dec. 31, 2015	$	147,949
Jan. 1 to Feb. 29, 2016	$	24,750
Total	$	457,550

Total Lease Commitments as of December 31, 2012

	Payments Due By Period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Equipment Leases	$	67,259	$	34,495	$	32,764	$	-	$	-
Office Leases		457,550		140,343		292,457		24,750		-
Total	$	524,809	$	174,838	$	325,221	$	24,750	$	-

Rent expense for office space for the years ended December 31, 2012 and December 31, 2011 was $136,731 and $109,889, respectively.

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Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 7 – MAJOR CUSTOMERS

	Year ended December 31,
Customer:	2012			2011

Customer A		12	%		14	%
Customer B		7	%		12	%
Customer C		14	%		11	%
Customer D		13	%		8	%

NOTE 8 – ACCRUED AND OTHER LIABILITIES

Accrued liabilities consist of the following:

	2012		2011

Customer overpayment of accounts receivables		1,108		-
Compensated absences		55,913		29,287
Legal fees		3,200		52,000
Accounting fees		37,108		43,812
Sales commissions		427		930
Other		318		741
Total	$	98,074	$	126,770

NOTE 9 – OPTIONS FOR PURCHASE OF COMMON STOCK

2002 Stock Option Plan

In August 2002, the Company adopted a stock option plan. The Company adopted a plan which provides for the grant of options to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant. Options are exercisable six months after the grant date and expire five years from the grant date. The plan calls for a total of 50,000 shares to be held for grant. Options to purchase 4,250 common shares were granted in August 2002. Options to purchase 938 common shares were exercised, the balance of the outstanding options expired unexercised in August 2007. No securities were awarded under this plan in 2012 or 2011.

2005 Stock Option Plan

On November 18, 2005, at the annual meeting of stockholders of the Company, the Company and its shareholders adopted the Pacific Health Care Organization, Inc., 2005 Stock Option Plan. The plan provides for the grant of Company securities, including options, warrants and restricted stock to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant. Options are exercisable six months after the grant date and expire five years from the grant date. The plan permits the granting of up to 50,000 common shares of the Company. To date, no securities have been granted under this plan.

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Pacific Health Care Organization, Inc.

Notes to Consolidated Financial Statements

NOTE 10 – STOCKHOLDERS’ EQUITY

The Company held a special meeting of stockholders on April 11, 2008 at which the Company’s stockholders voted on the proposal to amend the Company’s Article of Incorporation to effect a 1 for 50 reverse split of the Company’s common stock, with a cash-out of all resulting fractional shares followed by a 2.5 for 1 forward split of our common stock. The Company did incur significant legal, proxy notification and mailing cost in connection with the meeting. The shareholders voted 12,365,710 shares in favor, 394,516 shares against and 379 shares abstained from voting on the proposed transaction.

As permitted under Utah law and as approved by the Company’s stockholders at the special meeting, 12,568 pre-reverse split shares of common stock were reduced to fractional shares (less than one whole share) by the reverse split and such fractional shares were not reissued. Rather, the fractional shares were cancelled and converted into the right to receive a cash payment for the value of the fractional share. The transaction resulted in reduced shareholder record keeping and mailing expenses, as well as providing holders of fewer than the 50 pre-reverse split shares with an efficient, cost-effective way to cash-out their investments. As of December 31, 2008, the Company had paid an aggregate amount of $1,005 owed to cashed-out fractional share shareholders.

As a result of the reverse and forward splits, the Company has restated its outstanding shares on the balance sheets for December 31, 2012 and 2011 and in Note 2E. Neither the authorized common stock of the Company, nor the par value of the common stock was affected by the splits. The outstanding shares at December 31, 2007 were 15,427,759 before the splits, following the splits; the outstanding shares of the Company were 802,424. For the year end December 31, 2008, $14,626 was reclassified from common stock to additional paid-in-capital.

NOTE 11 – LITIGATION

To the knowledge of management, there is no material litigation or governmental agency proceeding pending or threatened against the Company or any of its subsidiaries. Further, the Company is not aware of any material proceeding to which any director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent of any class of voting securities of the Company, or any associate of any such director, officer or affiliate of the Company or security holder is a party adverse to the Company of any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

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ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. 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”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2012 our disclosure controls and procedures were effective in ensuring that: (1) information required to be disclosed by us in the reports filed or submitted by us to the Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (2) accumulated and communicated to our management, including our principal executive and financial officers, or persons performing similar functions, in a manner that allows for timely decisions regarding required disclosure.

The effectiveness of our or any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable assurance that the objectives of the system will be met and is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating controls and procedures and the assumptions used in identifying the likelihood of future events.

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. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are system constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will achieve its stated objectives under all future conditions.

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Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. 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 December 31, 2012, our internal control over financial reporting is effective based on those criteria.

Attestation Report of Independent Registered Public Accounting Firm

This annual report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the year ended December 31, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth, as of March 13, 2013, the executive officers and directors of the Company, their ages, and all offices and positions they hold with the Company. Directors are elected for a period of one year and thereafter serve until their successor is duly elected by the stockholders and qualified. Officers and other employees serve at the will of the board of directors.

Name	Age	Positions with the Company	Director Since	Executive Officer Since

Tom Kubota	73	Chief Executive Officer, President and Chairman of the Board of Directors	Sept. 2000	Sept. 2000

Fred Odaka	76	Chief Financial Officer and Secretary		Aug. 2008

David Wang	50	Independent Director	Nov. 2007

Thomas Iwanski	55	Independent Director	Nov. 2004

The following sets forth certain biographical information relating to the Company’s executive officers and directors:

Tom Kubota. Mr. Kubota has thirty years of experience in the investment banking, securities and corporate finance field. He held the position of Vice President at Drexel Burnham Lambert; at Stem, Frank, Meyer and Fox; and at Cantor Fitzgerald. Mr. Kubota is the president of Nanko Investments, Inc., which specializes in capital formation services for high technology and natural resources companies. He has expertise in counseling emerging public companies and has previously served as a director of both private and public companies. Since 2000, Mr. Kubota has been primarily engaged in the operations of PHCO and running his consulting firm Nanko Investments, Inc. During the past ten years, Mr. Kubota also served as CEO of Fabrics International, Ltd., a privately held corporation. Fabrics International, and each of its three wholly-owned subsidiaries, terminated operations and filed for bankruptcy in 2005. Mr. Kubota is not currently, nor has he in the past five years been, a nominee or director of any other SEC registrant. In concluding that Mr. Kubota was an appropriate candidate to serve on the Company’s board of directors, the board considered his experience as the Company’s president and chief executive officer, his many years of investment banking and corporate finance experience and his prior management experience.

Fred Odaka. Mr. Odaka joined PHCO as CFO in August 2008. He has held senior level management positions in corporate finance for over 30 years and served as CFO for private and public companies. Most recently, from 1998 to May 2008, Mr. Odaka was CFO of Rx for Africa, Inc. (“RXAF”), f/k/a Diamond Entertainment Corporation (“DMEC”) – OTCBB. In May 2007, DMEC merged with RXAF and changed its name to Rx for Africa, Inc. RXAF owns and operates a large pharmaceutical plant in Addis Ababa, Ethiopia. Prior to the merger, DMEC marketed and sold DVD titles to the home video market primarily through mass merchandisers and department stores. For four years, Mr. Odaka was a Financial Consultant and Analyst for Kibel, Green Inc., a leading West Coast business advisory and financial service firm specializing in corporate re-structure and crisis intervention. Mr. Odaka was also a co-founder of Rexon Inc., a manufacturer of computers and computer peripheral equipment and from 1978 to 1984 held the position of Vice President/CFO and was instrumental in taking the company public. Mr. Odaka also served as Controller of the computer division of Perkin-Elmer, a NYSE traded company. Mr. Odaka received his Bachelor of Science degree in Finance from Fresno State College, Fresno, California.

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David Wang. Mr. Wang co-founded and has served as the President of Aces Fuel Technology in Santa Monica, California since 2005. Aces Fuel Technology specializes in marketing and selling a fuel and oil catalyst. Mr. Wang is responsible for overseeing the day-to-day operations of the Aces Fuel Technology. From 2001 through 2003, Mr. Wang worked as a Proprietary Trader for Schonfeld Securities in Santa Monica, California where he was responsible for trading U.S. equities. Mr. Wang earned a BS in computer Science/Mathematics from the University of California, Los Angeles (UCLA) in 1985. He earned an MBA degree in Financial and Entrepreneurial Studies from the Anderson School at UCLA in 2000. Mr. Wang is not currently, nor has he in the past five years been, a nominee or director of any other SEC registrant. In concluding that Mr. Wang was an appropriate candidate to serve on the Company’s board of directors, the board considered his education background, his experience in entrepreneurial business enterprises and his favorable history of attracting venture capital funds through his established contacts in the investment banking community.

Thomas Iwanski. Since September 2010 Mr. Iwanski has been self-employed as a consultant specializing in corporate financing and operations improvement. In addition, since May 2007, Mr. Iwanski has served as Director and Chief Executive Officer of Live-Vu Communications, Inc, a company that specializes in turnkey telemedicine and telehealth solutions for hospitals, clinics, long-term care facilities and homes incorporating proprietary video technology. From September 2006 through May 2007, Mr. Iwanski served as Chief Financial Officer of SyncVoice Communications, Inc. From April 2005 through July 2006, Mr. Iwanski served as Senior Vice President, Corporate Secretary and Chief Financial Officer of IP3 Networks, Inc. From February 2003 through April 2005 Mr. Iwanski served as a Special Advisor to the CEO of Procom Technology, Inc., where he played a prominent role in the development and implementation of business and financial strategies. Mr. Iwanski has also served in various positions including, Vice President Finance, Chief Financial Officer, Director and Secretary for a number of companies, including Cognet, Inc., NetVantage, Inc., Kimalink, Inc., Xponent Photonics, Inc., Prolong, Inc., and Memlink, Inc. Mr. Iwanski also has approximately ten years of public accounting experience having worked for KPMG, LLP, as a Senior Audit Manager and a Certified Public Accountant. Mr. Iwanski received a Bachelor of Business Administration from the University of Wisconsin-Madison in 1980. Mr. Iwanski is not, nor has he in the past five years been, a nominee or director of any other SEC registrant. In concluding that Mr. Iwanski was an appropriate candidate to serve on the Company’s board of directors, the board considered his years of experience in management and as a director of various start-up ventures. The board also considered his experience in financial and strategic planning and his strong accounting background.

Family Relationships

There are no family relations among any of our executive officers and directors.

Involvement in Certain Legal Proceedings

Except as disclosed in Mr. Kubota’s biographical information above, during the past ten years none of our executive officers or directors has been involved in any of the following events that could be material to an evaluation of his or her ability or integrity, including:

(1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

(2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting the following activities:

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(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity poll operator, floor broker, leverage transaction merchant, and other person regulated by the Commodity Futures Trading Commission (“CFTC”), or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliate person, director or employee of any investment company, bank savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

(ii) Engaging in any type of business practice; or

(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

(4) Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the rights of such person to engage in any activity described in (3)(i) above, or to be associated with persons engaged in any such activity;

(5) Being found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not be subsequently reversed, suspended or vacated;

(6) Being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated;

(7) Being the subject of, or a party to any Federal or State judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

(i) Any Federal or State securities or commodities law or regulations; or

(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

(8) Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26)))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and any persons who own more than 10% of the common stock of the Company to file with the Securities and Exchange Commission reports of beneficial ownership and changes in beneficial ownership of common stock. Officers and directors are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of such reports furnished to us or written representations that no other reports were required, we believe that during fiscal 2012 all filing requirements applicable to our executive officers and directors were met on a timely basis.

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Code of Ethics

Our board of directors has adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer or controller and to persons performing similar functions. The code of ethics is designed to deter wrongdoing and to promote honest and ethical conduct, full, fair, accurate, timely and understandable disclosure, compliance with applicable laws, rules and regulations, prompt internal reporting of violations of the code and accountability for adherence to the code. We will provide a copy of our code of ethics, without charge, to any person upon receipt of written request for such delivered to our corporate headquarters. All such requests should be sent care of Pacific Health Care Organization, Inc., Attn: Corporate Secretary, 1201 Dove Street, Suite 300, Newport Beach, California 92660.

Director Nominations Procedures

There have been no material changes to the procedures by which shareholders may recommend nominees to our board of directors since March 30, 2012, the date we last provided information with regard to our director nomination process.

Audit Committee of the Board of Directors

The Company does not have a separately-designated standing audit committee. Our board of directors has determined that it is in the Company’s best interest to have the full board fulfill the functions that would be performed by an audit committee.

As we do not currently have a standing audit committee, we do not at this time have an “audit committee financial expert” as defined under the rules of the Securities and Exchange Commission. The board does believe, however, that should the Company form a standing audit committee in the future, Mr. Thomas Iwanski, an independent director, could qualify as an audit committee financial expert.

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ITEM 11. EXECUTIVE COMPENSATION

The table below summarizes compensation paid to or earned by: (i) all individuals serving as our principal executive officer or acting in a similar capacity during the last completed fiscal year (“PEO”) regardless of compensation level; (ii) our only executive officers other than our PEO who was serving as an executive officer at the end of the last completed fiscal year, whose total compensation exceeded $100,000; and (iii) the two next most highly compensated individuals who were not serving as executive officers of the Company at the end of the last fiscal year, whose total compensation exceeded $100,000. These individuals are referred to herein collectively as our “named executive officers” or “NEOs.”

SUMMARY COMPENSATION TABLE

Name and Principal Position	Year	Salary ($)		Bonus ($)		All Other Compensation ($)			Total ($)
Tom Kubota	2012		159,600		25,000		28,747	(1)		213,347
Chief Executive Officer,	2011		135,450		-0-		4,493	(2)		139,943
President and Director, PHCO

Fred Odaka	2012		92,160		10,000		10,827	(3)		112,987
Chief Financial Officer, PHCO	2011		86,250		10,000		5,264	(2)		101,514

Donald Balzano	2012		-0-		10,000		146,567	(4)		156,567
President, IRC and MLS	2011		-0-		6,000		151,600	(4)		157,600

David Kim	2012		117,333		15,000		10,242	(5)		142,575
Chief Operating Officer,	2011		92,622		10,000		21,968	(5)		124,590
Medex, MMC and MMM

(1) Reflects health insurance premiums, accrued vacation pay and director’s fees of $4,347, $20,000, and $4,400, respectively.

(2) Reflects health insurance premiums.

(3) Reflects health insurance premiums and fees for attending board meetings of $6,427 and $4,400, respectively.

(4) Mr. Balzano provides services to Medex and IRC as a consultant, through his company Balzano & Associates, and not as an employee. This compensation represents consulting fees paid to Mr. Balzano.

(5) Reflects health insurance premiums paid by the Company on behalf of Mr. Kim in the amounts of $4,242 and $2,322 during 2012 and 2011 respectively, and commissions resulting from the addition of new clients in the amounts of $6,000 and $19,646 during 2012 and 2011, respectively.

Employment Agreements

We have employment agreements with Mr. Odaka and Mr. Kim. We also entered into a consulting agreement with Balzano & Associates, Mr. Balzano’s company, pursuant to which, Mr. Balzano provides services to the Company. We do not have an employment or a consulting agreement with Mr. Kubota. Each of our NEOs are employed/retained on an at will basis and each can terminate their employment/consulting arrangement with the Company at any time, with or without cause. Likewise, the Company can terminate their employment at any time with or without cause.

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Base Salary

Base salary is used to recognize the experience, skills, knowledge and responsibilities required of our NEOs. The base salary for each NEO is typically set at the time the individual is hired based on the factors discussed in the preceding sentence and the negotiation process between the Company and the NEO. We also take into consideration the individual’s past performance, experience and expertise, Company need and local market and labor conditions. Changes to base salary, if any, are determined based on several factors, including evaluation of performance, anticipated financial performance of the Company, economic condition and local market and labor conditions.

In August 2012 the board awarded salary increases to Mr. Kubota, Mr. Odaka, and Mr. Kim which became effective on September 1, 2012 as follows:

·	Mr. Kubota from $12,000 per month to $14,400 per month;

·	Mr. Odaka from $7,200 per month to $8,640 per month; and

·	Mr. Kim from $8,417 per month to $12,500 per month. This increase was in connection with his promotion to Chief Operating Officer of Medex, MMC and MMM effective September 1, 2012.

In addition to base salary, Mr. Kim also receives commissions from certain sales he has generated. We previously agreed to pay commission to Mr. Kim for a period of one year from the anniversary date of the initial sale made to the customers. We terminated Mr. Kim’s commission arrangement in March 2011, with the exception that he would continue to receive commissions at 5% on customer paid sales made prior to March 1, 2011 up to the customer’s one year anniversary date. During 2012, Mr. Kim was paid $6,000 in commissions. As the one year anniversary date for all customer paid sales has expired, Mr. Kim is no longer entitled to commissions.

Pursuant to Mr. Balzano’s consulting agreement we pay him $10,833 per month for the services he renders to the Company. In addition, under a Workers’ Compensation Medical Provider Network Agreement between Medex and one of its customers, Mr. Balzano is entitled to a portion of PPO fee savings in the amount of 3% of the total monthly PPO savings realized by one Medex customer. Mr. Balzano is also entitled to reimbursement for reasonable expenses incurred in a manner similar to employees of the Company.

Nonequity incentive compensation

From time to time we may make cash awards to our employees, including the NEOs. Such awards may be designed to incentivize employees over a specified period of time pursuant to pre-established, performance-based criteria, the accomplishment of which is substantially uncertain at the time the criteria are established. In the event this type of cash award were made, it would be reflected in the “Summary Compensation Table” under a separate column entitled “Nonequity Incentive Plan Compensation.” We may use non-equity incentive compensation to incentivize our employees. The criteria for earning such non-equity incentive bonuses may be based on corporate financial performance measures that would be developed by our board of directors at the time such non-equity incentive plan is established. Our board has discretion to determine the applicable performance measures and the appropriate weighting of such measures at the time it establishes any non-equity incentive plan. Our board of directors did not establish a non-equity incentive compensation plan during the fiscal years ended December 31, 2012 or 2011 and no non-equity incentive compensation was awarded during these years.

Bonuses

We may also make cash awards to employees that are not part of any pre-established, performance-based criteria. Awards of this type are completely discretionary and subjectively determined by our board of directors at the time they are awarded. Such awards are reported in the “Summary Compensation Table” in the column entitled “Bonus.”

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During fiscal 2012 the board of directors, in recognition of the improved operating results of the Company, awarded cash bonuses to the following NEOs in the following amounts:

·	Mr. Kubota - $25,000

·	Mr. Odaka - $10,000;

·	Mr. Balzano - $10,000; and

·	Mr. Kim - $15,000.

As noted above, these cash bonuses were completely discretionary and were not based on any pre-established criteria. The board of directors was under no contractual or other obligation to award cash bonuses.

Equity Incentive Compensation

Our equity incentive award program is the primary vehicle for offering long-term incentives to our employees. From time to time, we may also make equity incentive awards to our NEOs in the form of stock options, restricted stock grants or some other form of equity award. Equity incentive awards would be reflected in the “Summary Compensation Table” under the columns entitled “Stock Awards” or “Option Awards” as appropriate. Our board of directors did not award equity incentive compensation to any of our NEOs during the fiscal years ended December 31, 2012 or 2011, and we are under no contractual obligation to award equity incentive compensation in the future.

While our board of directors has not awarded equity incentive compensation in either of the past two fiscal years and is under no obligation to make any such awards in the future, that does not mean the board of directors may not, as it deems appropriate, award equity incentive compensation in the future.

Benefits and Other Compensation

The Company currently provides health care benefits, including medical, vision and dental insurance, subject to certain deductibles and co-payments to its full time employees. The Company also provides for paid time off (“PTO”), which includes vacation, sick leave and other out-of-the-office time and is accrued and paid in accordance with the Company’s PTO policy. The Company may also provide group life and disability insurance to employees who are eligible to participate in such programs.

The Company also offers a 401(k) profit sharing plan for employees who meet the eligibility requirements. Pursuant to the plan, the Company may make discretionary matching contributions and/or discretionary profit sharing contributions to the plan. All such contributions must comply with federal pension laws, non-discrimination requirements and the terms of the plan. In determining whether to make a discretionary contribution, the board of directors evaluates current and future prospects and management’s desire to reward and retain employees and attract new employees. To date, the Company has never made matching contributions and/or discretionary profit sharing contributions to any plan.

Other than the foregoing, the Company does not offer any retirement or other benefit plans to its employees, including the named executive officers, at the present time; however, the board of directors may adopt plans as it deems to be reasonable under the circumstances.

Mr. Kubota, Mr. Odaka and Mr. Kim are entitled to participate, if eligible under such plans, in any insurance programs offered by the Company to its employees, are eligible for PTO and to participate in such other fringe benefit programs as the Company may make available to its other employees.

Nonqualified Deferred Compensation

We offer no defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified to any of our employees including our NEOs.

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Pension Benefits

We offer no pension or other specified retirement payments or benefits, including but not limited to tax-qualified deferred benefit plans and supplemental executive retirement plans to our NEOs.

Termination and Change in Control

We do not have agreements, plans or arrangements, written or unwritten, with any of our NEOs that would provide for payments or other benefits to any of our NEOs following, or in connection with, the resignation, retirement or other termination of any NEO or change in control of the Company or a change in the responsibilities of any NEO following a change in control of the Company.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

None of the NEOs held an outstanding equity award at our fiscal year end.

DIRECTOR COMPENSATION

We offer cash compensation to attract and retain candidates to serve on our board of directors.

Meeting Fees

Our directors and certain officers receive a fee of $1,200 per meeting for each meeting attended in person. Additionally, all directors and certain officers are paid $1,000 for attendance at the annual meeting of stockholders, plus airfare and hotel expense.

Equity Compensation

We do not currently have a fixed plan for the award of equity compensation to our directors, nor did we award any equity compensation to any of our directors during fiscal 2012.

Director Compensation Table

The following table sets forth a summary of the compensation we paid to our directors for services on our board during our 2012 fiscal year.

Name	Fees Earned or Paid in Cash ($)			All Other Compensation($)			Total ($)
Thomas Iwanski		4,400	(1)		1,500	(2)		4,450

David Wang		4,400	(1)		1,500	(2)		4,450

Tom Kubota		4,400	(1)		208,947	(3)		213,347

(1) Includes four directors’ meetings attended in person at $500 per meeting and two directors’ meetings attended in person at $1,200 per meeting during 2012.

(2) Discretionary cash bonus paid to directors in December 2012.

(3) Mr. Kubota is employed as the Company’s CEO and President. For details regarding All Other Compensation paid to Mr. Kubota, please see “Summary Compensation Table” above. (1)

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth as of March 13, 2013, the name and the number of shares of our common stock, par value $0.001 per share, held of record or beneficially by each person who held of record, or was known by us to own beneficially, more than 5% of the 802,424 issued and outstanding shares of our common stock, and the name and shareholdings of each director and of all executive officers and directors as a group.

Type of Security	Name and Address	Amount & Nature of Beneficial Ownership		% of Class

Common	Tom Kubota(1)(2)		474,944		59.2	%
	1201 Dove Street, Suite 300
	Newport Beach, CA 92660

Common	Fred Odaka(1)		-0-		*
	1201 Dove Street, Suite 300
	Newport Beach, CA 92660

Common	Thomas Iwanksi(1)		-0-		*
	1551 Bullard Lane
	Santa Ana, CA 92705

Common	David Wang(1)		-0-		*
	138 Ocean Way
	Santa Monica, CA 90402

Common	Donald P. Balzano(1) (3)		54,165		6.8	%
	5422 Michelle Drive
	Torrance, CA 90503

Common	David Kim(1)		-0-		*
	1201 Dove Street, Suite 300
	Newport Beach, CA 92660

Common	Nanko Investments, Inc.(2)		432,626		53.9	%
	1280 Bison, Suite B9-596
	Newport Beach, CA 92660

Common	Janet Zand		54,165		6.8	%
	1505 Rockcliff Road
	Austin, TX 78796

Common	Ronald A. Zlatniski		49,843		6.2	%
	4206 Cypress Grove Lane
	Greensboro, NC 27455

All executive officers and directors as a group (4 persons)			529,109		65.9	%

	TOTAL		633,117		78.9	%

* Less than 1%.

(1) Mr. Kubota, Mr. Iwanski and Mr. Wang are directors of the Company. Mr. Kubota, Mr. Odaka, Mr. Balzano and Mr. Kim are named executive officers (as defined in Item 402(a) of Regulation S-K) of the Company.

(2) The number of shares attributed to Mr. Kubota includes 42,318 shares held of record or beneficially by Mr. Kubota and 432,626 shares held of record or beneficially by Nanko Investments, Inc. Mr. Kubota is the President of Nanko Investments, Inc. As such, Mr. Kubota may be deemed to have voting and/or investment power over the shares held by Nanko Investments and therefore may be deemed to be the beneficial owner of those shares.

(3) Mr. Balzano is the President of our wholly-owned subsidiaries Industrial Resolutions Coalition, Inc. and Medex Legal Support, Inc.

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Change in Control

To the knowledge of the management, there are no present arrangements or pledges of our securities, the operation of which may at a subsequent date result in a change in control of the Company.

Equity Compensation Plans

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		0	$	0.00		95,750
Equity compensation plans not approved by security holders		0	$	0.00		-0-
Total		0	$	0.00		95,750

2002 Stock Option Plan

On August 13, 2002 we adopted the Pacific Health Care Organization, Inc. 2002 Stock Option Plan (the “2002 Plan”) which calls for a total of 50,000 shares to be held for grant. Unless terminated by the Board, this plan shall continue to remain effective until such time as no further awards may be granted and all awards granted under the plan are no longer outstanding. Notwithstanding the foregoing, grants of incentive stock options may only be made during the ten-year period following August 13, 2002. In August 2002, we granted options to purchase approximately 4,250 restricted common shares to four employees pursuant to the 2002 Plan, the adoption of which was subsequently ratified by our shareholders. Options to acquire 938 restricted common shares were exercised, the balance expired unexercised in August 2007.

2005 Stock Option Plan

On November 18, 2005 our shareholders adopted the Pacific Health Care Organization, Inc., 2005 Stock Option Plan (the “2005 Plan”). The 2005 Plan provides for the grant of Company securities, including options, warrants and restricted stock to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant. Options are exercisable six months after the grant date and expire five years from the grant date. The 2005 Plan permits the granting of up to 50,000 common shares of the Company. To date, no securities have been granted under the 2005 Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Except as disclosed in Item 11 Executive Compensation, during fiscal 2012 and 2011 we did not engage in transactions with related persons (as defined by Rule 404 of Regulation S-K (Instructions to Item 404(a)) that exceeded the lesser of $120,000 or 1% of the average of our total assets at year end for the last two fiscal years in which any such related person had or will have a direct or indirect material interest.

Director Independence

The board has determined that Mr. Iwanski and Mr. Wang would qualify as independent directors as that term is defined in the listing standards of the NYSE Amex. Such independence definition includes as series of objective tests, including that the director is not an employee of the company and has not engaged in various types of business dealings with the company. In addition, as further required by the NYSE Amex listing standards, the board of directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees for professional services provided by our independent registered public accounting firms in each of the last two fiscal years, in each of the following categories, were as follows:

	2012		2011

Audit	$	50,257	$	43,043
Audit related		-0-		-0-
Tax		-0-		-0-
All other		-0-		-0-

Total	$	50,257	$	43,043

Audit Fees. Audit fees were for professional services rendered in connection with the audit of the financial statements included in our annual report on Form 10-K and review of the financial statements included in our quarterly reports on Form 10-Q and for services normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings or engagements.

Board of Directors Pre-Approval Policies and Procedures. At its regularly scheduled and special meetings, our board of directors, in lieu of an established audit committee, considers and pre-approves any audit and non-audit services to be performed by our independent registered public accounting firm. The board of directors has the authority to grant pre-approvals of non-audit services.

Our full board of directors is responsible for selection, review and oversight of our independent registered public accounting firm. The board of directors has not, as of the time of filing this annual report on Form 10-K with the Securities and Exchange Commission, adopted policies and procedures for pre-approving audit or permissible non-audit services performed by our independent registered public accounting firm. Instead, the board of directors as a whole has pre-approved all such services, except for services meeting a “de minimus” exception. To qualify for the “de minimus” exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than 5% of the total amount of revenues paid by us to our independent registered public accounting firm during the fiscal year in which the non-audit services are provided; such services were not recognized by us at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the board and approved prior to the completion of the audit by the board or by one or more members of the board to whom authority to grant such approval has been delegated. In the future, our board of directors may approve the services of our independent registered public accounting firm pursuant to pre-approval policies and procedures adopted by the board of directors, or an audit committee if one is standing, provided the policies and procedures are detailed as to the particular service, the board of directors is informed of each service, and such policies and procedures do not include delegation of the board of director’s responsibilities to our management.

The board of directors has determined that the provision of services by Morrill & Associates, LLC, described above are compatible with maintaining their independence as our independent registered public accounting firm.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as a part of this report:

(1) Financial Statements

The following financial statements of the Registrant are included in response to Item 8 of this annual report:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets as of December 31, 2012 and 2011.

Consolidated Statements of Operations for the years ended December 31, 2012 and 2011.

Consolidated Statements of Stockholders’ Equity From January 1, 2011 to December 31, 2012.

Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011.

Notes to Consolidated Financial Statements.

(2) Financial Statement Schedules

Schedules are omitted because the required information is either inapplicable or presented in the consolidated financial statements or related notes.

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(b) Exhibits

Exhibit No.		Exhibit Description

3.1		Articles of Incorporation and Amendments thereto(1)
3.2		Bylaws(1)
3.3		Bylaws(2)
3.4		Articles of Amendment to Articles of Incorporation to effect 1 share for 50 shares reverse split(3)
3.5		Articles of Amendment to Articles of Incorporation to effect 2.5 shares for 1 share forward split(3)
4.1		Pacific Health Care Organization, Inc., 2002 Stock Option Plan(1)+
4.2		Pacific Health Care Organization, Inc., 2005 Stock Option Plan(4)+
10.1		Employment Agreement, dated February 1, 2013, between Pacific Health Care Organization, Inc. and Fred Odaka*+
10.2		Employment Agreement, dated February 1, 2013, between Pacific Health Care Organization, Inc. and David Kim*+
10.3		Consultant Agreement, dated February 1, 2013, between Pacific Health Care Organization, Inc. and Balzano & Associates*+
14.1		Code of Ethics(5)
21.1		List of Subsidiaries*
31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

+ Indicates management contract, compensatory plan or arrangement of the Company.

(1)	Incorporated by reference to Registrant’s Registration Statement on Form 10-SB as filed with the Commission on September 19, 2002.

(2)	Incorporated by reference to Registrant’s Registration Statement on Form 10-SB/A-2 as filed with the Commission on July 13, 2004.

(3)	Incorporated by reference to Registrant’s Proxy Statement on Schedule 14A as filed with the Commission on May 15, 2008.

(4)	Incorporated by reference to Registrant’s Proxy Statement on Schedule 14A as filed with the Commission on October 21, 2005.

(5)	Incorporated by reference to Registrant’s Annual Report on Form 10-KSB as filed with the Commission on April 17, 2007.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: April 1, 2013 By: /s/ Tom Kubota

Tom Kubota

Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dated indicated.

Signatures	Title	Date


/s/ Tom Kubota	Chief Executive Officer, President and Director	April 1, 2013
Tom Kubota


/s/ Fred U. Odaka	Chief Financial Officer	April 1, 2013
Fred U. Odaka


/s/ Thomas Iwanski	Director	April 1, 2013
Thomas Iwanski


/s/ David Wang	Director	April 1, 2013
David Wang

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