PACIFIC HEALTH CARE ORGANIZATION INC - Quarter Report: 2013 March (Form 10-Q)

pacifichealthcare10q033113.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 March 31, 2013

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 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)

(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 May 14, 2013, 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

	Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012	3

	(Unaudited) Statements of Operations for the Three Months Ended March 31, 2013 and 2012	4

	(Unaudited) Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012	5

	Notes to Condensed Consolidated Financial Statements	6

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk		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

ASSETS
	March 31, 2013 (Unaudited)			December 31, 2012
Current Assets
Cash	$	447,198		$	479,674
Accounts receivable, net of allowance of $20,000		1,427,646			1,332,499
Prepaid income tax		90,422			-
Receivable other		-			7,344
Prepaid expenses		96,987			52,988
Total current assets		2,062,253			1,872,505
Property and equipment, net
Computer equipment		128,655			127,667
Furniture & fixtures		83,708			83,708
Office equipment		26,560			26,560
Office equipment under capital lease		63,923			63,923
Total property & equipment		302,846			301,858
Less: accumulated depreciation		(144,381	)		(133,573	)
Net property & equipment		158,465			168,285
Other assets		8,158			8,158
Total assets	$	2,228,876		$	2,048,948

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	85,277		$	120,787
Accrued expenses		191,793			98,074
Income tax payable		174,472			249,162
Current obligations under capital lease		17,803			19,294
Deferred rent expense		24,611			24,951
Deferred tax liability		5,659			5,659
Unearned revenue		-			2,443
Total current liabilities		499,615			520,370

Long term liabilities
Noncurrent obligations under capital lease		18,122			21,324
Total liabilities		517,737			541,694


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		1,086,708			882,823
Total stockholders' equity		1,711,139			1,507,254
Total liabilities and stockholders’ equity	$	2,228,876		$	2,048,948

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

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Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	For three months ended March 31,
	2013			2012
Revenues:
HCO fees	$	246,689		$	198,257
MPN fees		205,741			183,036
Other		931,680			684,164
Total revenues		1,384,110			1,065,457


Expenses:
Depreciation		10,808			5,793
Consulting fees		99,481			95,816
Salaries & wages		500,336			425,594
Professional fees		75,778			49,088
Insurance		58,180			45,737
Outsource service fees		139,257			64,051
Data maintenance		27,737			6,831
General & administrative		128,973			105,773

Total expenses		1,040,550			798,683

Income from operations		343,560			266,774

Other income (expense)
Interest income		459			190
Rental income		-			750
Interest (expense)		(723	)		(230	)
Total other income (expense)		(264	)		710

Income before taxes		343,296			267,484

Income tax provision		139,411			111,113

Net income	$	203,885		$	156,371

Basic and fully diluted earnings per share:
Earnings per share amount	$	.25		$	.19
Weighted average common shares outstanding		802,424			802,424

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

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Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	203,885		$	156,371
Adjustments to reconcile net income to net cash:
Depreciation		10,808			5,793
Changes in operating assets & liabilities
(Increase) in accounts receivable		(95,147	)		(271,847	)
Decrease in other receivables		7,344			-
(Increase) decrease in income tax receivable		(90,422	)		-
Decrease in commission draw		-			3,884
(Increase) in prepaid expenses		(43,999	)		(24,048	)
(Decrease) in accounts payable		(35,510	)		(68,928	)
(Decrease) increase in deferred rent expense		(340	)		465
Increase in accrued expenses		93,719			84,305
(Decrease) increase in income tax payable		(74,690	)		111,113
(Decrease) in unearned revenue		(2,443	)		(1,465	)
Net cash used in operating activities		(26,795	)		(4,357	)

Cash Flows from investing activities
Purchase of furniture and office equipment		(988	)		(33,262	)
Net cash used in investing activities		(988	)		(33,262	)

Cash Flows from financing activities
Payment of obligation under capital lease		(4,693	)		(1,605	)
Net cash used in financing activities		(4,693	)		(1,605	)
(Decrease) in cash		(32,476	)		(39,224	)

Cash at beginning of period		479,674			368,459
Cash at end of period	$	447,198		$	329,235

Supplemental cash flow information
Cash paid for:
Interest	$	1,439		$	230
Income taxes paid	$	390,422		$	-

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

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Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2013

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Pacific Health Care Organization, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “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 consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2012 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for year ending December 31, 2013.

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 Exchange 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 Medical Management, Inc. (“MMM”) and Medex Legal Support, Inc., (“MLS”).

Overview

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 of 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”)

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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.

Our subsidiary, 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.

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. HCO guidelines also impose certain reporting and information delivery requirements upon HCOs.

Medical Provider Networks

By virtue of our certification as an HCO, we are statutorily qualified as an approved MPN. 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.

Unlike HCOs, MPNs are not assessed annual fees and have fewer reporting and information delivery requirements. As a result, the administrative costs associated with administering an MPN program are lower, which allows MPNs to market their services at a lower cost than HCOs.

HCO + MPN

As a licensed HCO and MPN, in addition to offering HCO and MPN programs, we are 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.

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.

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Utilization Review

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.

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.

Nurse Case Management

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.

We provide UR, MBR and NCM services to self-insured employers, insurance companies and the public sector.

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.

We offer our HCO and MPN services through Medex. IRC participates in the Carve-Outs business. MMC oversees and manages our UR and MBR businesses and MMM oversees our NCM services.

Results of Operations

Comparison of the three months ended March 31, 2013 and 2012

Revenue

Total revenues increased 30% during the three-month period ended March 31, 2013 to $1,384,110 when compared to the same period a year earlier. When compared to the three months ending March 31, 2012, revenues for HCO, MPN and other revenues increased by 24%, 12% and 36%, respectively. During the three months ended March 31, 2013 the total number of employee enrollees increased 38%. As of March 31, 2013, we had approximately 537,000 total HCO and MPN enrollees compared to approximately 388,000 total HCO and MPN enrollees as of March 31, 2012. This increase was primarily the result of existing major HCO and MPN customer increasing their enrollments during 2012 and the quarter ended March 31, 2013. The primary reason for the growth in other revenues was the continuing growth in MBR, UR and NCM revenues.

Although we realized growth in our revenues during the three months ended March 31 2013 compared to the same period in 2012, there are no assurances that we will continue to experience growth during 2013 at a rate similar to the growth rate we experienced in 2012 and the first quarter of 2013.

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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.

HCO Fees

During the three months ended March 31, 2013 and 2012, HCO fee revenues were $246,689 and $198,257, respectively. While HCO enrollment increased 11% (from approximately 65,000 enrollees to approximately 72,000 enrollees) during the quarter ended March 31, 2013, we realized a 24% 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 13%. 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 the three months ended March 31, 2013 were $205,741 compared to $183,036 for the three months ended March 31, 2012. During the quarter ended March 31, 2013 we realized a 44% increase in MPN enrollment (from approximately 323,000 enrollees to approximately 465,000 enrollees.) Factors such as differing fee terms, unbundling of services, price competition and other similar factors as compared to three months ended March 31, 2012, resulted in only a 12% increase in MPN revenues compared to the three months ended March 31, 2012.

Other Fees

Other fees consist of revenues derived from UR, MBR, NCM and network claims repricing services. Other fee revenues for the three months ended March 31, 2013 and 2012 were $931,680 and $684,164, respectively.

UR and MBR Fees

Our MBR and UR revenues increased by $44,606 and $149,885, respectively, during the first fiscal quarter 2013 when compared to the same period of fiscal 2012. MBR and UR service revenues grew largely as a result of increased marketing efforts by MMC in these areas of our business.

NCM Fees

NCM revenues increased $72,724 to $215,116 during the quarter ended March 31, 2013 resulting primarily 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. Network claims repricing fees decreased from $68,146 to $44,715 during the three months ended March 31, 2013, as two customers reported lower levels of network claims repricing fees. This resulted in a decrease in fees of $23,431when compared to the three months ended March 31, 2012.

Expenses

Total expenses for the three months ended March 31, 2013 and 2012 were $1,040,550 and $798,683, respectively. The increase of $241,867 was the result of increases in depreciation, consulting fees, salaries and wages, professional fees, insurance, outsource service fees, data maintenance and general and administrative expense.

Consulting Fees

During the three months ended March 31, 2013 consulting fees increased to $99,481 from $95,816 during the three months ended March 31, 2012. This increase of $3,665 was primarily the result of increased IT consultant fees offset by the termination of the lien consultant as of January 31, 2013.

In the event we see increased levels of services requested from our customers, especially for nurse case management services, we may be required to engage additional nurse case managers and could experience higher consulting fees.

Salaries and Wages

Salaries and wages increased $74,742 or 18% to $500,336 during the three months ended March 31, 2013 compared to $425,594 during the three months ended March 31, 2012. The increase in salaries and wages was primarily due to hiring new employees as follows:

Medex added four MPN Program Administrators, one in June 2012, one in July 2012 and two in September 2012 and hired one 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 one 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.

Also contributing to the increase in salaries and wages during three months ended March 31, 2013 when compared to the three months ended March 31, 2012, were the salary increases given to the CEO and CFO of PHCO, and the COO of Medex in December 2012.

Professional Fees

For the three months ended March 31, 2013 we incurred professional fees of $75,778, compared to $49,088 during the three months ended March 31, 2012. This 54% increase in fees was primarily the result of increased professional fees paid for field case management services partially offset by lower legal and medical consultant fees.

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Insurance

During the three months ended March 31, 2013 we incurred insurance expenses of $58,180, a $12,443 increase over the prior year three-month period. The increase in 2013 was primarily due to premium increases for our employee group health medical coverage resulting from the increase in our total number of employees. We are currently reviewing our entire company insurance policies and do not expect a material increase during the remainder of this fiscal year.

Outsource Service Fees

Outsource service fees consist of costs incurred in outsourcing 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. Instead, we utilize outside vendors to provide specific services for our clients, charging additional fees over and above those paid to said vendors for administration and coordination of MBR, NCM and UR services directly to the clients. We incurred $139,257 and $64,061 in outsource service fees during the three-months periods ended March 31, 2013 and 2012, respectively. This $75,206 increase was primarily the result of the increased demand for our MBR and UR services.

Data Maintenance

During the three months ended March 31, 2013 and March 31, 2012 data maintenance fees were $27,737 and $6,831, respectively. The increase of $20,906 in data maintenance fees was primarily attributable to higher data maintenance costs associated with the renewal of MPN enrollees and enrollment of new customers during the period ended March 31, 2013 when compared to the period ended March 31, 2012.

General and Administrative

General and administrative expenses increased 22% to $128,973 during the three-month period ended March 31, 2013. This increase of $23,200 was primarily attributable to increases in advertising, employment agency fees, equipment and repairs, rent expense, travel and entertainment and vacation expense partially offset by decreases in dues and subscriptions, licenses and permits, postage and delivery and miscellaneous general administrative expenses. We expect current levels of general and administrative expenses to increase starting with the second quarter of 2013.

Income Before Taxes

In the first fiscal quarters of 2013 and 2012, total revenues exceeded total expenses. As a result, we recognized income before taxes during the three months ended March 31, 2013 and 2012 of $343,296 and $267,484, respectively.

Income Tax Provision

As a result of realizing income before taxes, we made provision for our income tax obligations in the first fiscal quarters of 2013 and 2012. Our income tax provision for the three-months ended March 31, 2013 was 25% greater than during the comparable period 2012 to reflect the 28% increase in income before taxes realized during the first fiscal quarter 2013 compared to the first fiscal quarter 2012.

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Net Income

During the three months ended March 31, 2013, total revenues of $1,384,110 were higher by $318,653 when compared to the same period in 2012. This increase in total revenues was partially offset by increases in total expenses of $241,867 resulting in income from operations of $343,560 compared to income from operations of $266,774 during three months ended March 31, 2012. Correspondingly, we realized net income of $203,885 for the three months ended March 31, 2013, compared to net income of $156,371, during the three months ended March 31, 2012. We expect moderate increases in revenues to continue in the second quarter of 2013, when compared to the the second quarter of 2012, to be generated from new services offered by the Company to existing and new customers.

Liquidity and Capital Resources

As of March 31, 2013, we had cash on hand of $447,198 compared to $479,674 at December 31, 2012. The $32,476 decrease in cash on hand is primarily the result of increases in our accounts receivables, prepaid expenses, and decreases in accounts payable, other receivables and income tax payable, partially offset by increases in our net profit, depreciation, accrued expenses and income tax payable. The payment period on our accounts receivables for our MBR and UR services is longer than for our other services, as these clients generally are slower payers. We are currently seeking loan arrangements to supplement our working capital needs to address the extended collection times on these accounts receivables. Notwithstanding this issue, barring a significant economic downturn, we believe that cash on hand and anticipated revenues from operation will be sufficient to cover our operating costs for the balance of the current fiscal year.

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 debt and/or equity financing. We do not currently possess an institutional source of financing. Given current credit market conditions, there is no assurance that we could be successful in obtaining additional debt financing on favorable terms, or at all. Similarly, given current market and economic conditions there is no guarantee that we could negotiate appropriate equity financing.

Cash Flow

During the three months ended March 31, 2013 cash was primarily used to fund operations. We had a net decrease in cash of $32,476 during the three months ended March 31, 2013. See below for additional discussion and analysis of cash flow.

	For the three months ended March 31,
	2013 (unaudited)			2012 (unaudited)

Net cash used in operating activities	$	(26,795	)	$	(4,357	)
Net cash used in investing activities		(988	)		(33,262	)
Net cash used in financing activities		(4,693	)		(1,605	)

Net (decrease) in cash	$	(32,476	)	$	(39,224	)

During the three months ended March 31, 2013, net cash used in operating activities was $26,795 compared to net cash provided by operating activities of $4,357 during the three months ended March 31, 2012. As discussed herein we realized net income of $203,885 during the three months ended March 31, 2013, compared to net income of $156,371 during the three months ended March 31, 2012.

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Summary of Material Contractual Commitments

The following is a summary of our material contractual commitments as of March 31, 2013:

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

Equipment Leases(1)	$	61,157	$	28,393	$	32,764	$	-	$	-
Office Leases(2)		422,975		105,768		317,207		-		-
Total	$	484,132	$	134,161	$	349,971		-	$	-

(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)

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

Rent Period	Annual Rent Payments
Apr. 1 to Dec. 31, 2013	$	105,768
Jan. 1 to Dec. 31, 2014	$	144,508
Jan. 1 to Dec. 31, 2015	$	147,949
Jan. 1 to Dec. 31, 2016	$	24,750
Total	$	422,975

Off-Balance Sheet Financing Arrangements

As of March 31, 2013 we had no off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

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

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

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

Revenue Recognition — The Company applies the revenue recognition provisions pursuant to Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition (“ASC 605”) (formerly SAB Topic 13A), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The guidance outlines the basic criteria that must be met to recognize the revenue and provides guidance for disclosure related to revenue recognition policies.

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

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

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

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

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

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

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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 March 31, 2013 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

As a smaller reporting company as defined in Rule 12b-2 of 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 6. Exhibits

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

	Exhibit Number		Title of Document

	Exhibit 31.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)

	Exhibit 31.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)

	Exhibit 32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350

	Exhibit 32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350

	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 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:	May 15, 2013	/s/ Tom Kubota
		Tom Kubota Chief Executive Officer


Date:	May 15, 2013	/s/ Fred Odaka
		Fred Odaka Chief Financial Officer

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