PACIFIC HEALTH CARE ORGANIZATION INC - Quarter Report: 2012 September (Form 10-Q)

pacifichealth10q093012.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 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 000-50009

PACIFIC HEALTH CARE ORGANIZATION, INC.

(Exact name of registrant as specified in its charter)

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

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

(949) 721-8272

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes x No o

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

As of November 9, 2012, the registrant had 802,424 shares of common stock, par value $0.001, issued and outstanding.

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PACIFIC HEALTH CARE ORGANIZATION, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements		3

	Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011	3

	(Unaudited) Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011	4

	(Unaudited) Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011	5

	Notes to Financial Statements	6

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk		16

Item 4. Controls and Procedures		16

PART II — OTHER INFORMATION

Item 1A. Risk Factors		17

Item 6. Exhibits		17

Signatures		18

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PART I. FINANCIAL INFORMATION

Item 1. Financial Information

Pacific Health Care Organization, Inc.

Condensed Consolidated Balance Sheets

	September 30, 2012 (Unaudited)			December 31, 2011
ASSETS
Current Assets
Cash	$	407,754		$	368,459
Accounts receivable, net of allowance of $20,000		1,359,467			523,864
Income tax receivable		3,998			3,998
Prepaid income tax		61,511			-
Commission draw		503			29,853
Prepaid expenses		49,127			53,947
Total current assets		1,882,360			980,121

Property and equipment, net
Computer equipment		106,732			80,963
Furniture & fixtures		80,230			56,471
Office equipment		26,560			12,537
Office equipment under capital lease		25,543			25,543
Total property & equipment		239,065			175,514
Less: accumulated depreciation and amortization		(123,898	)		(104,294	)
Net property & equipment		115,167			71,220

Other assets		8,158			8,158
Total assets	$	2,005,685		$	1,059,499

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	32,769		$	86,482
Accrued expenses		240,216			126,770
Income tax payable		363,555			1,611
Current obligation under capital lease		6,947			6,592
Deferred rent expense		25,032			21,903
Deferred tax liability		5,404			5,404
Unearned revenue		4,757			7,803
Total current liabilities		678,680			256,565

Long term liabilities
Noncurrent obligation under capital lease		1,814			7,069
Total liabilities		680,494			263,634

Commitments and Contingencies		-			-

Shareholders’ Equity
Preferred stock; 5,000,000 shares authorized at $0.001 par value; zero shares issued and outstanding		-			-
Common stock; 50,000,000 shares authorized at $0.001 par value; 802,424 shares issued and outstanding		802			802
Additional paid-in capital		623,629			623,629
Retained earnings (deficit)		700,760			171,434
Total stockholders' equity		1,325,191			795,865
Total liabilities and stockholders’ equity	$	2,005,685		$	1,059,499

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

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Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	For three months ended September 30,						For nine months ended September 30,
	2012			2011			2012			2011

Revenues:
HCO fees	$	301,077		$	205,362		$	691,574		$	565,831
MPN fees		205,238			171,092			569,584			455,761
Other		820,486			487,943			2,255,011			1,006,308
Total revenues		1,326,801			864,397			3,516,169			2,027,900

Expenses:
Depreciation & amortization		7,153			3,903			19,605			9,691
Consulting fees		143,326			93,946			354,019			279,173
Salaries & wages		440,890			363,206			1,236,088			791,842
Professional fees		77,558			49,428			195,833			146,380
Insurance		54,854			40,766			152,761			107,947
Outsource service fees		114,550			57,199			259,972			120,825
Data maintenance		31,285			19,370			51,969			36,463
General & administrative		143,285			107,987			356,349			301,512
Total expenses		1,012,901			735,805			2,626,596			1,793,833

Income from operations		313,900			128,592			889,573			234,067

Other income (expense):
Loss on disposal of assets		-			-			-			(1,564	)
Interest income		170			224			551			760
Rental income		250			-			1,750
Interest (expense)		(173	)		(285	)		(604	)		(934	)
Total other income (expense)		247			(61	)		1,697			(1,738	)

Income before taxes		314,147			128,531			891,270			232,329

Income tax provision		127,574			53,671			361,944			85,182

Net income	$	186,573		$	74,860		$	529,326		$	147,147

Basic and fully diluted earnings per share:
Earnings per share amount	$	.23		$	.09		$	.66		$	.18
Weighted average common shares outstanding		802,424			802,424			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.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	529,326		$	147,147
Adjustments to reconcile net income to net cash:
Depreciation and amortization		19,604			9,691
Loss on disposition of assets		-			1,564
Changes in operating assets & liabilities
(Increase) in accounts receivable		(835,603	)		(274,120	)
Decrease in deferred tax asset		-			5,400
(Increase) in prepaid income tax		(61,511	)		(108,800	)
Decrease in income tax receivable		-			35,100
Decrease (increase) in commission draw		29,350			(5,760	)
Decrease in prepaid expenses		4,820			26,203
(Decrease) increase in accounts payable		(53,713	)		30,714
Increase in accrued expenses		113,446			91,969
Increase in income tax payable		361,944			84,854
Increase in deferred rent expense		3,129			18,414
(Decrease) in unearned revenue		(3,046	)		(4,720	)
Net cash provided by operating activities		107,746			57,656

Cash flows from investing activities
Purchases of furniture & equipment		(63,551	)		(50,443	)
Net cash used by investing activities		(63,551	)		(50,443	)

Cash flows from financing activities
Payment of obligation under capital lease		(4,900	)		(4,570	)
Net cash provided by (used in) financing activities		(4,900	)		(4,570	)
Increase in cash		39,295			2,643
Cash at beginning of period		368,459			349,552
Cash at end of period	$	407,754		$	352,195
Supplemental Cash Flow Information
Cash paid (refunded) for:
Interest	$	604		$	649
Taxes refunded	$	-		$	(38,718	)
Taxes paid	$	61,511		$	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 Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2012

NOTE 1 – BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the nine-months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

NOTE 2 – SUBSEQUENT EVENTS

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

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

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

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

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

Throughout this quarterly report on Form 10-Q, 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”), Medex Managed Care, Inc. (“MMC”), Medex Legal Support, Inc., (“MLS”) and Medex Medical Management, Inc. (“MMM”).

Overview

Through our subsidiary Medex, we engage in the business of managing and administering Health Care Organizations (“HCOs”) and Medical Provider Networks (“MPNs”) in the state of California. For many years, workers’ compensation costs in California have been high. Under the traditional model of workers’ compensation insurance coverage, the employer controls the selection of the medical provider for the first 30 days after the injury is reported. Thereafter the employee chooses the treating physician and the employer has no further control over the treatment of the patient. Since 1993, the legislature in California has enacted various laws designed to introduce alternatives to the traditional model of workers’ compensation aimed at controlling costs by giving employers greater control over the medical treatment of injured workers for a longer period of time.

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

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Under the HCO guidelines, all HCOs are required to pay certain annual fees to the California Division of Workers’ Compensation (“DWC”). This annual fee is based on the number of employees enrolled in the HCO.

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

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

Through our wholly-owned subsidiary IRC we participate in the business of creating legal agreements for the implementation and administration of Carve-Outs for California employers with collective bargaining units.

Our wholly-owned subsidiary MMC oversees and manages our utilization review (“UR”) and medical bill review (“MBR”). Through our wholly-owned subsidiaries MLS and MMM we offer lien representation services and nurse case management (“NCM”) services, respectively.

Results of Operations

Comparison of the three months ended September 30, 2012 and 2011

Revenue

The total number of employee enrollees increased 27% during three months ended September 30, 2012 compared to September 30, 2011. Total revenues increased 53% to $1,326,801. As of September 30, 2012, we had approximately 442,000 total enrollees. Enrollment consisted of approximately 76,000 HCO enrollees and 366,000 MPN enrollees. By comparison as of September 30, 2011 we had approximately 348,000 total enrollees, including approximately 55,000 HCO enrollees and approximately 293,000 MPN enrollees.

The net increase in HCO and MPN enrollees of approximately 21,000 and 73,000, respectively from September 30, 2011 to September 30, 2012, was mainly the result of increased enrollment realized by our existing customers and the addition of four new HCO customers and three new MPN customers. Even through HCO revenues increased approximately 47%, compared to the quarter ended September 30, 2011, HCO enrollment only increased by 38%. By comparison, MPN revenues increased by 20% and enrollment increased by 25%. While the economic slowdown impacted our revenue throughout fiscal 2011, we anticipate HCO and MPN revenues will continue to be slightly higher during the fourth quarter of fiscal 2012.

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In the current economic environment, we anticipate businesses will continue to seek ways to reduce their workers’ compensation program costs. As a result, we expect to experience client turnover, in the form of existing employer clients seeking to terminate or renegotiate the scope and terms of existing services. We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house. In response to the changing market, we have sought to expand our marketing efforts for some of the additional services we now offer our clients. As a result, during the quarter ended September 30, 2012, we realized increases in our MBR and UR services fee revenues.

HCO Fees

During the three months ended September 30, 2012 and 2011, HCO fee revenues were $301,077 and $205,362, respectively. While HCO enrollment increased 38% during the quarter ended September 30, 2012, we realized a 47% increase in revenue from HCO fees when compared to the same period last year. The percentage increase in revenues outpaced the percentage increase in enrollment by 8%. This was the result of an increase in the volume of claims network fees to a number of new clients which resulted in increased revenues. We expect HCO revenues in the fourth quarter of 2012 to be slightly higher when compared to the quarter ended September 30, 2012 resulting mainly from increased network claims fees and network access fees.

MPN Fees

MPN Fee revenues for the three months ended September 30, 2012 were $205,238 compared to $171,092 for the three months ended September 30, 2011. During the quarter ended September 30, 2012 we realized a 25% increase in MPN enrollment when compared the same period 2011 and a corresponding 20% increase in revenues. Although MPN enrollment increased 25%, MPN revenues increased by only 20% because of differing fee terms, unbundling of services, price competition and similar factors during the three months ended September 30, 2012. MPN fee revenue for the fourth quarter of fiscal 2012 is expected to increase over the 3rd quarter 2012 due to increases in MPN enrollment.

Other Fees

Other fees consist of revenues derived from MBR, NCM, UR, lien representation services and network claims repricing services provided by Medex, MMC, MMM and MLS. Other fee revenues for the three months ended September 30, 2012 and 2011 were $820,486 and $487,943, respectively.

Our MBR and UR revenues increased by $82,436 and $70,786 during the third fiscal quarter 2012, respectively, when compared to the same period of fiscal 2011. MBR and UR service revenues grew largely as a result of increased marketing efforts by MMC in these areas of our business. We expect MBR and UR revenues for the fourth quarter of 2012 to remain constant when compared to the third quarter of 2012 resulting from lower levels of hospital PPO fees offset by higher employee enrollment when compared to the third quarter of 2012.

NCM revenues increased $113,394 to $220,371 primarily as a result of increased customer employee enrollment. We retain nurses on our staff who, at the request of our customers, will review the medical portion of a claim on behalf of our employer clients, claims managers and injured workers. We offer nurse case management services to our customers on an optional basis. We charge an additional fee for nurse case management services. NCM revenues for the fourth quarter of 2012 is expected to remain constant when compared to the third quarter of 2012 due to decreased revenue expected from one customer and increased estimated revenue from two new customers.

Our network claims repricing fees are generated from certain customers’ split cost savings generated from their PPO. Network claims repricing fees increased from $20,668 during the three months ended September 30, 2011 to $62,160 during the three months ended September 30, 2012 resulting primarily from the addition of two new customers during the fourth quarter 2011.

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We commenced offering lien representation services in February 2012 and recorded revenues totaling $24,434 for the quarter ended September 30, 2012.

Expenses

Total expenses for the three months ended September 30, 2012 and 2011 were $1,012,901 and $735,805, respectively. The increase of $277,096 was the result of increases in all expense categories averaging an increase of 38%.

Consulting Fees,

During the three months ended September 30, 2012, consulting fees increased to $143,326 from $93,946 during the three months ended September 30, 2011. This increase of $49,380 was mainly due to higher fees incurred in connection with replacing our information technology firm in January 2012 and June 2012, together with the addition of three temporary administrative staff consultants.

Additionally, in the event we see an increased level of services requested from our customers, especially for nurse case management services which would require us to engage additional nurse case managers, we could experience higher consulting fees.

Salaries and Wages

Salaries and wages increased $77,684 or 21% to $440,890 during the three months ended September 30, 2012 compared with the three months ended September 30, 2011. The increase in salaries and wages was primarily due to MMC hiring one MBR administrator in January 2012 and Medex hiring a nurse case manager in October 2011, and administrative support personnel in November and December of 2011 and three temporary support personnel in June 2012. The Senior Vice President of Medex was promoted to COO effective September 1, 2012 and received an increase in annual salary in connection with this promotion. In addition, the CEO and CFO of PHCO received an increase in their annual salaries in September 2012 and the CEO was paid a bonus/vacation payment in July 2012.

Professional Fees

For the three months ended September 30, 2012, we incurred professional fees of $77,558, compared to $49,428 during the three months ended September 30, 2011. This 57% increase in fees was primarily attributable to an increase in requests for the assignment of professional field case management nurses. These contracted nurses attend medical appointments on behalf of MMM. These invoiced fees are marked up by MMM and billed to each customer. Increased accounting fees in connection with preparing our financial reports also contributed to this increase.

Insurance

During the three months ended September 30, 2012, we incurred insurance expenses of $54,854, a $14,088 increase over the prior year three-month period. The increase in 2012 was due to premium increases for our employee group health medical coverage resulting from the increase in our total number of employees and increased premiums for our workers’ compensation insurance. We are currently reviewing all of our company insurance policies and do not expect a material increase during the remainder of this fiscal year.

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Outsource Service Fees

Outsource service fees consist of costs incurred by MMC, Medex and MMM in outsourcing its MBR services and certain NCM and UR services. We do not, at this time, have enough volume to justify creating our own MBR and UR in-house staff. We utilize outside vendors to provide specific services for our clients, charging additional fees over and above those paid to vendors for administration and coordination of MBR, NCM and UR services directly to the clients. We incurred $114,550 and $57,199 in outsource service fees during the three month periods ended September 30, 2012 and 2011, respectively. This $57,351 increase was primarily the result of the increased demand for our MBR, UR and NCM services.

Data Maintenance

During the three months period ended September 30, 2012 we experienced a 62% increase in data maintenance fees. The increase in data maintenance fees was primarily attributable to increased data maintenance costs associated with the increase in MPN and HCO enrollees.

General and Administrative

During the three months ended September 30, 2012, we incurred general and administrative expenses of $143,285 a $35,298 increase over the prior year three-month period. The increase in 2012 was primarily the result of higher rent expenses incurred by leasing addition space during January 2012, vacation expense and internet expenses.

Net Income

During the three months ended September 30, 2012, total revenues of $1,326,801 were higher by $462,404 when compared to the same period in 2011. This increase in total revenues was partially offset by increases in total expenses of $277,096 resulting in income from operations of $313,900 compared to income from operations of $128,592 during three months ended September 30, 2011. Correspondingly, we realized net income of $186,573 for the three months ended September 30, 2012, compared to net income of $74,860, during the three months ended September 30, 2011. We believe revenue growth in the fourth quarter will level off and starting first quarter of 2013, we expect moderate revenues increases to be generated from new services offered by the Company to existing and new customers in the areas of MBR, clinical and non-clinical UR, and other services.

Comparison of the nine months ended September 30, 2012 and 2011

Revenue

The total number of employee enrollees increased 27% during nine months ended September 30, 2012 compared to September 30, 2011. Total revenues increased 73% to $3,516,169.

The net increase in HCO and MPN enrollees of approximately 21,000 and 73,000, respectively, was mainly the result of adding four major HCO customers and three major MPN customers. During the nine months ended September 30, 2012, we have also been able to increase our MBR and UR services revenues.

HCO Fees

During the nine months ended September 30, 2012 and 2011 HCO fee revenues were $691,574 and $565,831 respectively. As noted above, while HCO enrollment increased 38% during the nine months ended September 30, 2012, we realized a 22% increase in revenue from HCO fees when compared to the same period last year. The percentage increase in enrollment outpaced the percentage increase in revenue by 16%. Although HCO enrollment increased 38%, HCO revenues increased by only 22% because of lower monthly HCO fees, unbundling of services, price competition and similar factors, partially offset by higher claims network fees and increased enrollment during the three months ended September 30, 2012.

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MPN Fees

MPN Fee revenues for the nine months ended September 30, 2012 were $569,584 compared to $455,761 for the nine months ended September 30, 2011. We had an increase in MPN enrollment of 25% during the nine months ended September 30, 2012, as noted above, which resulted in a 22% increase in MPN revenues compared to the same period 2011.

Other Fees

As mentioned above other fees consist of revenues derived from MBR, NCM, UR, lien representation services and network claims repricing services provided by Medex, MMC, MMM and MLS. Other fee revenues for the nine months ended September 30, 2012 and 2011 were $2,255,011 and $1,006,308, respectively.

During the nine months ended September 30, 2012, MBR and UR revenues increased by $454,936 and $344,961, respectively, when compared to the same period of fiscal 2011. MBR and UR service revenues grew largely as a result of increased marketing efforts by MMC in these areas of our business.

During the nine months ended September 30, 2012 and 2011, NCM revenue was $517,777 and $259,388, respectively. This increase of $258,389 was primarily the result of increased customer employee enrollment.

We commenced offering lien representation services in February 2012 and have recorded revenues totaling $46,720 for the nine month period ended September 30, 2012. We did not offer such services during the nine months ended September 30, 2011.

During the nine months period ended September 30, 2012 and 2011, network claims repricing fees were $198,849 and $55,152, respectively.

Expenses

Total expenses for the nine months ended September 30, 2012 and 2011 were $2,626,596 and $1,793,833, respectively. The increase of $832,763 was the primarily the result of increases in consulting fees, depreciation, outsource service fees, salaries and wages, professional fees, insurance, data maintenance and general and administrative expense.

Consulting Fees

During the nine months ended September 30, 2012, consulting fees increased to $354,019 from $279,173 during the nine months ended September 30, 2011. This increase in consulting fees of $74,846 was due mainly to the addition of a temporary administrative consultant during January 2012 and the incurring of increased consulting fees in connection with replacing our information technology firm in January 2012 and June 2012, together with the addition of three temporary administrative staff consultants in the third quarter of 2012.

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Salaries and Wages

Salaries and wages increased $444,246 or 56% to $1,236,088 during the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011. The increase in salaries and wages was primarily due to MMC hiring one MBR administrator in January 2012 and Medex hiring a nurse case manager in October 2011, an administrative support personnel in July, November and December of 2011 and three temporary support personnel in June 2012. The Senior Vice President of Medex was promoted to COO effective September 1, 2012 and received an increase in annual salary in connection with this promotion. In addition, the CEO and CFO of PHCO received in September 2012, an increase in their annual salaries and the CEO was paid a bonus/vacation payment in July 2012.

Professional Fees

For the nine months ended September 30, 2012, we incurred professional fees of $195,833 compared to $146,380 during the nine months ended September 30, 2011. This 34% increase in professional fees was primarily attributable to an increase in requests for the assignment of professional field case management nurses. These contracted nurses attend medical appointments on behalf of MMM. These invoiced fees are marked up by MMM and billed to each customer. Increased accounting fees in connection with preparing our financial reports also contributed to this increase.

Insurance

During the nine months ended September 30, 2012, we incurred insurance expenses of $152,761 an increase of $44,814 over the same nine-month period of 2011. The increase in 2012 was primarily due to premium increases for our employee group health medical coverage resulting from the increase in our total number of employees and increased premiums for our workers’ compensation insurance. We are currently reviewing all of company insurance policies and do not expect a material increase during the remainder of this fiscal year.

Outsource Service Fees

As discussed above, outsource service fees consist of costs incurred by our subsidiaries in outsourcing its MBR services and certain NCM and UR services. We incurred $259,972 and $120,825 in outsource service fees during the nine month periods ended September 30, 2012 and 2011, respectively

Data Maintenance

During the nine months ended September 30, 2012, we incurred a 42% increase in data maintenance fees. The increase in data maintenance fees was primarily attributable to increased data maintenance costs associated with the increase in MPN and HCO enrollees.

General and Administrative

General and administrative expenses increased 18% to $356,349 during the nine months ended September 30, 2012. The increase in general and administrative expense was primarily attributable to increases in internet expense, license and permits, office supplies, postage expense and rent expense partially offset with decreases in dues and subscriptions, employment agency fees, equipment repairs, moving expense and telephone expense. Provided we continue to add new customers at our current rate, we expect current levels of general and administrative expenses to increase during the remainder of this fiscal year.

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Net Income

We realized net income of $529,326 for the nine months ended September 30, 2012 compared to a net income of $147,147, during the nine months ended September 30, 2011. We expect moderate increases in revenues to continue in the nine-month period ending September 30, 2012, when compared to the corresponding nine-month period of 2011, to be generated primarily from new services offered by the Company to our existing and new customers in the areas of MBR and clinical and non-clinical UR and other services.

Liquidity and Capital Resources

As of September 30, 2012, we had cash on hand of $407,754 compared to $368,459 at December 31, 2011. The $39,295 increase in cash on hand is primarily the result of increases in our net profit, depreciation, accrued expense and income tax payable and decreases in commission draw and prepaid expenses, which were partially offset by increases in account receivables and prepaid taxes, a decrease in accounts payable and the purchase of furniture and equipment. We believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating costs over the next twelve months. We do not anticipate needing to find other sources of capital at this time. However, if our revenue is lower than anticipated we may need to find other sources of capital to fund operations.

We currently have budgeted approximately $55,000 for capital expenditures planned for the fourth quarter of this year and do not anticipate needing to seek outside sources of funding during the remainder of the current year. We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We have not identified any suitable opportunity at the current time. An expansion or acquisition of this sort may require greater capital resources than we possess. Should we need additional capital resources, we most likely would seek to obtain such through debt and/or equity financing. We do not currently possess an institutional source of financing. Given current credit conditions, there is no assurance that we could be successful in obtaining additional debt financing on favorable terms, or at all. Similarly, given current market and economic conditions there is no guarantee that we could negotiate appropriate equity financing.

Cash Flow

During the nine months ended September 30, 2012 cash was primarily used to fund operations. We had a net increase in cash of $39,295 during the nine months ended September 30, 2012. See below for additional discussion and analysis of cash flow.

	For the nine months ended September 30,
	2012 (unaudited)			2011 (unaudited)

Net cash provided by operating activities	$	107,746		$	57,656
Net cash used in investing activities		(63,551)			(50,443	)
Net cash used in financing activities		(4,900	)		(4,570	)

Net Change in Cash	$	39,295		$	2,643

During the nine months ended September 30, 2012 net cash provided by operating activities was $107,746, compared to net cash provided by operating activities of $57,656 during the nine months ended September 30, 2011. As discussed herein we realized net income of $529,326 during the nine months ended September 30, 2012, compared to net income of $147,147 during the nine months ended September 30, 2011.

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Summary of Material Contractual Commitments

The following is a summary of our material contractual commitments as of September 30, 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)	$	13,447	$	2,521	$	10,926	$	-	$	-
Office Leases(2)		491,784		34,234		432,800		24,750		-
Total	$	505,231	$	36,755	$	443,726	$	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%.

(2)

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

Rent Period	Annual Rent Payments
Oct. 1 to Dec. 31, 2012	$	34,234
Jan. 1 to Dec. 31, 2013	$	140,342
Jan. 1 to Dec. 31, 2014	$	144,508
Jan. 1 to Dec. 31, 2015	$	147,950
Jan. 1 to Feb. 29, 2016	$	24,750
Total	$	491,784

Off-Balance Sheet Financing Arrangements

As of September 30, 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 its long-lived assets and its provision for certain contingencies. We evaluate the reasonableness of these estimates and assumptions continually based on a combination of historical information and other information that comes to its attention that may vary its outlook for the future. Actual results may differ from these estimates under different assumptions.

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

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

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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk

As a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act), as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, information required to be disclosed by us in the reports that we file or submit under the Exchange Act within the time periods specified in the SEC’s rules and forms and (2) ensuring that information disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

Item 6. Exhibits

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

	Exhibit Number		Title of Document

	Exhibit 31.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

	Exhibit 31.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

	Exhibit 32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	Exhibit 32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	Exhibit 101.INS		XBRL Instance Document

	Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document

	Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

	Exhibit 101.DEF		XBRL Taxonomy Definition Linkbase Document

	Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase Document

	Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

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

		PACIFIC HEALTH CARE ORGANIZATION, INC.


Date:	November 14, 2012	/s/ Tom Kubota
		Tom Kubota Chief Executive Officer


Date:	November 14, 2012	/s/ Fred Odaka
		Fred Odaka Chief Financial Officer

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