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EX-32.2 - EXHIBIT 32.2 - PACIFIC HEALTH CARE ORGANIZATION INCphco10q063010x32_2.htm
EX-32.1 - EXHIBIT 32.1 - PACIFIC HEALTH CARE ORGANIZATION INCphco10q063010x32_1.htm
EX-31.2 - EXHIBIT 31.2 - PACIFIC HEALTH CARE ORGANIZATION INCphco10q063010x31_2.htm
EX-31.1 - EXHIBIT 31.1 - PACIFIC HEALTH CARE ORGANIZATION INCphco10q063010x31_1.htm

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2010

 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 585
   
Newport Beach, California
 
92660
(Address of principal executive offices)
 
(Zip Code)

(949) 721-8272
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No o
   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)   Yes o   No o
 
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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 August 10, 2010, the registrant had 802,424 shares of common stock, par value $0.001, issued and outstanding.
 
 
 
 

 
 PACIFIC HEALTH CARE ORGANIZATION, INC.
FORM 10-Q
TABLE OF CONTENTS









 
2

 
 

Pacific Health Care Organization, Inc.
ASSETS
   
June 30, 2010
(Unaudited)
   
December 31,
2009
 
Current Assets
           
  Cash
  $ 419,450     $ 604,022  
  Accounts receivable, net of allowance of $20,000
    136,108       155,066  
  Deferred tax asset
    12,469       12,469  
  Income tax receivable
    48,023       11,523  
  Prepaid expenses
    52,959       66,400  
Total current assets
    669,009       849,480  
                 
Property and equipment, net
               
       Computer equipment
    60,922       60,922  
       Furniture & fixtures
    28,839       28,839  
       Office equipment under capital lease
    25,543       -  
               Total property & equipment
    115,304       89,761  
                Less: accumulated depreciation and amortization
    (99,380 )     (86,318 )
       Net property & equipment
    15,924       3,443  
                 
                Total assets
  $ 684,933     $ 852,923  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities
               
   Accounts payable
  $ 8,235     $ 6,672  
   Accrued expenses
    78,063       169,054  
   Income tax payable
    850       100  
   Current obligation under capital lease
    5,937       -  
   Unearned revenue
    9,620       19,534  
Total current liabilities
    102,705       195,360  
                 
Long term liabilities
               
       Noncurrent obligation under capital lease
    16,789       -  
                Total liabilities
    119,269       195,360  
                 
Commitments and Contingencies
    -       -  
                 
Shareholders’ Equity
               
       Preferred stock; 5,000,000 shares authorized at $0.001 par value; zero shares issued and outstanding
    -       -  
       Common stock; 50,000,000 shares authorized at $ 0.001 par value; 802,424 shares issued and outstanding
    802       802  
       Additional paid-in capital
    623,629       623,629  
       Retained Earnings (deficit)
    (58,992 )     33,132  
Total stockholders' equity
    565,439       657,563        
                Total liabilities and stockholders’ equity
  $ 684,933     $ 852,923  
 
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

 
 
Pacific Health Care Organization, Inc.
(Unaudited)

   
For three months ended
   
For six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues:
                       
  HCO fees
  $ 152,173     $ 230,263     $ 292,524     $ 475,261  
  MPN fees
    156,138       151,291       302,471       300,851  
  Other
    38,089       125,136       98,963       251,933  
     Total revenues
    346,400       506,690       693,958       1,028,045  
                                 
Expenses:
                               
  Depreciation and amortization
    6,531       145       13,062        291  
  Consulting fees
    74,205       57,497       135,436       120,083  
  Salaries & wages
    149,185       181,856       322,599       394,307  
  Professional fees
    44,545       35,657       82,595       92,252  
  Insurance
    20,400       28,115       52,109       56,786  
  Outsource service fees
    1,024       -       1,024       -  
  Employment enrollment
    -       15,000       -       30,000  
  Data maintenance
    38,050       46,905       56,671       102,537  
  General & administrative
    81,380       71,360       158,055       155,861  
     Total expenses
    415,320       436,535       821,551       952,117  
                                 
Income (loss) from operations     (68,920     70,155       (127,593     75,928  
                                 
Other income (expense):
                               
  Interest income
    452       657       1,072       1,404  
  Interest (expense)
    (414 )     -       (853 )     -  
     Total other income (expense)
    38       657       219       1,404  
                                 
Income (loss) before taxes
    (68,882 )     70,812       (127,374 )     77,332  
                                 
     Income tax provision (benefit)
    (35,875 )     29,465       (35,250 )     30,933  
                                 
     Net income (loss)
  $ (33,007 )   $ 41,347     $ (92,124 )   $ 46,399  
 
   
For three months ended
   
For six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Basic and fully diluted earnings per share:
                       
  Earnings per share amount
  $ (.04 )   $ .05     $ (.12 )   $ .06  
  Weighted average common shares outstanding
    804,424       804,424       804,424       804,424  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
4

 
 
Pacific Health Care Organization, Inc.
(Unaudited)
   
Six months ended June 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ (92,124 )   $ 46,399  
      Adjustments to reconcile net income to net cash:
               
Depreciation and amortization
    13,062       291  
Changes in operating assets & liabilities
               
Decrease (increase) in accounts receivable
    18,958       (188,554 )
(Increase) in prepaid income tax
    -       (8,600 )
(Increase) in income tax receivable
    (36,500 )     -  
Decrease (increase) in prepaid expenses
    13,441       (9,276 )
Increase in accounts payable
    1,563       3,014  
(Decrease) increase in accrued expenses
    (90,991 )     57,110  
Increase (decrease) in income tax payable
    750       (1,067 )
(Decrease) in unearned revenue
    (9,914 )     (5,057 )
Net cash provided by (used in) operating activities
    (181,755 )     (105,740 )
                 
Cash Flows from Investing Activities
               
Purchase of office equipment under capital lease
    (25,543 )     -  
Net cash used by investing activities
    (25,543 )     -  
                 
Cash Flows from Financing Activities
               
      Increase in obligation under capital lease
    25,543       -  
      Payment of obligation under capital lease
    (2,817 )     -  
Net cash used by financing activities
    22,726       -  
                 
(Decrease) in cash
    (184,572 )     (105,740 )
                 
Cash at beginning of period
    604,022       624,401  
Cash at end of period
  $ 419,450     $ 518,661  
                 
Supplemental Cash Flow Information
               
Cash paid for:
               
Interest
  $ 718     $ -  
Taxes
  $ 500     $ 40,600  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

 
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2010
 

 
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations.  The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2009.  Operating results for the six-months ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

A.   Basis of Accounting
 
The Company uses the accrual method of accounting.

B.   Revenue Recognition

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

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

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

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

C.   Cash Equivalents

The Company considers all short term, highly liquid investments that are readily convertible, within three months, to known amounts as cash equivalents. The Company currently has no cash equivalents.
 
 
 
 
6

 
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2010
 
 
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 (Loss) Per Share of Common Stock (unaudited)

The computation of earnings (loss) per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements.  There were no dilutive instruments outstanding at June 30, 2010 or 2009.
 
    For the three months ended     For the six months ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
                         
 Basic and fully diluted earnings per share:                        
     Income (loss) (numerator)   $ (33,007 )   $ 41,347     $ (92,124 )   $ 46,399  
     Shares (denominator)     802,424       802,424       802,424       802,424  
     Per share amount   $ (.04 )   $ .05     $ (.12 )   $ .06  
 

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

G.   Use of Estimates

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



 
7

 
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2010
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. The carrying value of convertible notes payable approximates fair value because negotiated terms and conditions are consistent with current market rates as of June 30, 2010 and 2009.

J.   General and Administrative Costs

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

K.   Income Taxes

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

L.   Capital Structure

The Company has two classes of stock.  Preferred stock, 5,000,000 shares authorized, zero issued.  Voting rights and liquidation preferences have not been determined. The Company also has voting common stock, of 50,000,000 shares authorized, with 802,424 shares issued and outstanding.  No dividends were paid in the six months ended June 30, 2010 and 2009, nor in any prior period.


 
8

 
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2010

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

The Company, in the normal course of business, extends credit to its customers on a short-term basis. Although the credit risk associated with these customers is minimal, the Company routinely reviews its accounts receivable balances and makes provisions for doubtful accounts. The Company ages its receivables by date of invoice. Management reviews bad debt reserves quarterly and reserves specific accounts as warranted or sets up a general reserve based on amounts over 90 days past due. When an account is deemed uncollectible, the Company charges off the receivable against the bad debt reserve.  At the six months ended June 30, 2010, the Company’s bad debt reserve of $20,000 is a general reserve for balances over 90 days past due and for accounts that are potentially uncollectible.

The percentages of the major customers to total accounts receivable for the six months ended June 30, 2010 are as follows:
 
 Customer A  22%
 Customer B  21%
 Customer C    15%
 Customer D  10%
 
 
O.   Subsequent Events
 
In accordance with ASC 855-10 Company management reviewed all material events through the date of this report and there are no material subsequent events to report.

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities in and out of Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.

 
9

 
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2010
 
NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

       This update is effective for companies with interim and annual reporting periods after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for interim and annual reporting periods beginning after December 15, 2010. We are currently evaluating the potential impact of this new guidance on our consolidated financial statements.

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

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

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




 
10

 
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2010

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

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

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

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

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


 
11

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

Overview

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

Under the traditional model of workers’ compensation insurance coverage, the employer controls the selection of the medical provider for the first 30 days after the injury is reported.  Thereafter the employee chooses the treating physician and the employer has no further control over the treatment of the patient.
 
 
 
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        In 1993 the California legislature passed a bill that established Health Care Organizations.  An HCO is a network of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training.  The benefit of the HCO to an employer is two-fold.  First, the employer is able to control the medical treatment of the injured employee for 90 to 180 days rather than just during the first 30 days.  Second, the HCO provides the employer a network of trained providers to which it can refer its injured employees who specialize in treating work place injuries.

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

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

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

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

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

In June 2010, PHCO made an equity investment of $1,000 to acquire 1,000,000 shares of Arissa common stock from Arissa, which represents all of the issued and outstanding common stock of Arissa.  Tom Kubota, a PHCO officer and director was the incorporator and is a director of Arissa.  Fred Odaka, a PHCO officer is the secretary and treasurer of Arissa.  Neither Mr. Kubota nor Mr. Odaka were shareholders of Arissa and neither received any funds from the PHCO equity investment into Arissa.  We anticipate Arissa will provide marketing services to Medex and IRC.
 
 
 
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Liquidity and Capital Resources

           As of June 30, 2010 we had cash on hand of $419,450 compared to $604,022 at December 31, 2009.  The $184,572 decrease in cash on hand is the result of decreases in revenue from operations,
unearned revenue, and accrued expenses, partially offset by decreases in accounts receivables and prepaid expenses and an increase in accumulated depreciation.  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 the need to find other sources of capital at this time.

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

Results of Operations

Comparison of the three months ended June 30, 2010 and 2009

Revenue

The total number of employee enrollees increased 13% during three months ended June 30, 2010 compared to June 30, 2009.  Even though we realized an increase in employee enrollees, total revenues decreased 32% to $346,400.  As of June 30, 2010, we had approximately 245,000 total enrollees.  Enrollment consisted of approximately 35,000 HCO enrollees and 210,000 MPN enrollees.  By comparison as of June 30, 2009 we had approximately 216,000 enrollees, including approximately 57,000 HCO enrollees and approximately 159,000 MPN enrollees.

The net increase in MPN enrollees of approximately 51,000 was mainly the result of adding one customer with approximately 73,000 enrollees offset against an approximate reduction of 22,000 enrollees from other customers.  The new customer with 73,000 enrollees generates revenues for the Company based upon a percentage of savings it realizes from its enrollment into Medex’s program by its employees.  During the three months ended June 30, 2010 revenues generated from this new customer on a percentage of savings basis were significantly lower per enrollee when compared to those revenues generated on a monthly or annual service fee per number of enrollees basis. The decrease in HCO enrollment of approximately 22,000 enrollees was primarily the result of a non-renewal by one of our major customers in August 2009. The economic slowdown has, and we expect will continue to impact us, as employers seek to address the effects of the current economic environment on their individual businesses.  As a result of the economic slowdown, employers are reducing their workforce.  However, this may lead to an increase in workers’ compensation claims.
 
In the current economic environment, we anticipate businesses will continue to seek ways to reduce their workers’ compensation program costs.   As a result, we expect to experience client turnover, in the form of existing employer clients seeking to terminate or renegotiate the scope and terms of existing services.  We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house.  As a result, the market is currently subject to restructuring in the type and pricing of services provided in our industry. In January 2010 we received notice from a significant customer that it would not be renewing its contract with Medex when it terminated at the end of March 2010.  This customer accounted for 11% of Medex’s revenues in 2009 and 1% during the three months ended June 30, 2010.  We believe this non-renewal is the result of the company seeking to reduce expenses wherever possible and is representative of what is happening throughout the industry.  We expect these factors may continue to erode HCO Fees, MPN Fees and Other Revenue until economic conditions improve.
 
 
 
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HCO Fees

During the three months ended June 30, 2010 and 2009, HCO fee revenues were $152,173 and $230,263 respectively.  A 39% decrease in HCO enrollment during the three months ended June 30, 2010, resulted in this 34% decrease in revenue from HCO fees.  This was attributable to decreased employee enrollment, primarily due to non-renewal by one of our major customers in August 2009.

MPN Fees

MPN fee revenue for the three months ended June 30, 2010 was $156,138 compared to $151,291 for the three months ended June 30, 2010.  During the second fiscal quarter we realized a 32% increase in MPN enrollment when compared the same period 2009.  Although MPN enrollment increased 32%, because of differing fee terms, unbundling of services, price competition and similar factors, we realized only a 3% increase in MPN revenue during the three months ended June 30, 2010.

Other Revenue

During the three months ended June 30, 2010 other revenue decreased 70% to $38,089 from $125,136 in the same period a year earlier.  The primary component of other revenue is nurse case management.  We retain nurses on our staff who, at the request of our customers, will review the medical portion of a claim on behalf of our employer clients, claims managers and injured workers.  We offer nurse case management services to our customers on an optional basis.  We charge an additional fee for nurse case management services.  The decrease in other revenue of $87,047 was mainly the result of lower nurse case management service fees resulting from a non-renewal by a major customer in August 2009 coupled with other clients being less willing to utilize nurse case management services in an effort to cut costs.

Expenses

Total expenses for the three months ended June 30, 2010 and 2009 were $415,320 and $436,535 respectively.  The decrease of $21,215 was the result of decreases in salaries and wages, insurance, employment enrollment expense and data maintenance, offset by increases in depreciation, consulting fees, professional fees, outsource service fees and general and administration expense.

Consulting Fees

During the three months ended June 30, 2010 consulting fees increased to $74,205 from $57,497 during the three months ended June 30, 2009.  This increase in consulting fees of $16,708 was primarily the result of hiring a manager of bill review and electronic data interchange (“EDI”) operations and the addition of a corporate development consultant in March 2010.  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.

 
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Salaries and Wages

Salaries and wages decreased $32,671 or 18% to $149,185 from $181,856 during the three months ended June 30, 2010 compared with the three months ended June 30, 2009.  The decrease in salaries and wages was primarily due to the termination of Medex’s former president on August 3, 2009 and a 10% reduction in wages for all salaried employees that went into effect in May 2009.  Medex also hired a new President in December 2009 who is also Medex’s medical director.  He is compensated as a professional consultant and his monthly fees are recorded as professional fees rather than salaries and wages.

Professional Fees

For the three months ended June 30, 2010 we incurred professional fees of $44,545 compared to $35,657 during the three months ended June 30, 2009.  This 25% increase in professional fees was  primarily the result of an increase, effective April 1, 2010 in the monthly retainer fee paid to Medex’s president who is compensated as Medex’s medical director and president and an increased legal fees partially offset by lower accounting fees.

Insurance

During the three months ended June 30, 2010 we incurred insurance expenses of $20,400 a $7,715 decrease over the prior year three months of 2009.  The decrease in insurance expense realized during the three months ended June 30, 2010 was the result of lower workers’ compensation insurance premiums together with an adjustment transferring previously expensed insurance premiums in the first quarter of 2010 to prepaid insurance.  We do not expect insurance expense to increase materially in 2009.

Employment Enrollment

As an HCO, we were required to pay a fee to the DWC for each person enrolled at the end of the calendar year in our HCO program.  Because employee enrollment expenses are not determined until year end, we had been accruing expenses during the year based on our estimation of what enrollment will be at year end.  Effective January 1, 2010 the annual HCO assessment moved to a flat fee basis.  Effective in 2010 the annual assessments became $250 for HCOs with enrollments of 0-1,000, $350 for enrollments of 1,001-5,000, and $500 for enrollments above 5,000.  The revisions to the HCO regulations became effective on January 1, 2010 and the change to the HCO enrollment fees was retroactively applied to 2009 assessments.  As a result of this change, employee enrollment decreased by $15,000 during the three months ended June 30, 2010 when compared to the previous year’s period. The changes in the HCO enrollment fee structure represents a significant decrease compared to the employee enrollment expenses we have historically paid.

Data Maintenance

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

Data maintenance costs are impacted by several factors, including the overall mix of enrollees in our HCO and MPN programs and the number of new enrollees during the year.  HCOs are required to deliver enrollment notices annually to each HCO enrollee.  By comparison, MPNs are required to deliver an enrollment notice only at the time of initial enrollment and at the time an enrollee is injured.  As a result, after the first year, data maintenance fees for MPN enrollees are consistently about 50% lower than data maintenance fees for HCO enrollees.  Therefore, depending on the mix of HCO and MPN enrollees and the number of new MPN enrollees versus ongoing MPN enrollees, our data maintenance costs may vary significantly from year to year even in years when our overall enrollment does not change materially.
 
 
 
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Data maintenance fees may also vary significantly from employment enrollment fees in any given year.  Employment enrollment fees are determined based on the number of HCO enrollees at the end of the calendar year.  Employment enrollment fees do not take into account fluctuations in HCO enrollment during the year.  By comparison, data maintenance fees are billed as services are provided.  Therefore, we may have years when HCO enrollment is higher during the year than it is at the end of the calendar year, resulting in variances in data maintenance fees and employment enrollment fees in a given year.

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

During the three months ended June 30, 2010 we experienced a 39% decrease in HCO enrollees and a 32% increase in MPN enrollees when compared the same period a year earlier, resulting in an overall enrollment increase of 13%.  Data maintenance fees decreased 19% from $46,905 to $38,050 during the three months ended June 30, 2010 when compared to the same period in 2009.  The decrease in data maintenance fees is primarily attributable to changing our primary service provider in August 2009.  Under an agreement with our new primary service provider, we agreed to pay a flat fee of $5,000 per month for the use of their associate development system until a cumulative amount of approximately $53,000 is paid, at which time the monthly $5,000 fee will cease and under the terms of the agreement we will own the system without further payments. Any additional software improvements or updates costs, if any, will be negotiated with the provider.

General and Administrative
 
General and administrative expenses increased 14% to $81,380 during the three months ended March 31, 2010.  The increase in general and administrative expense of $10,020 was primarily attributable to increases in advertising expenses, internet expense, vacation expense and miscellaneous general and administrative expenses,  partially offset a decrease in printing and reproduction costs. We expect current levels of general and administrative expenses to remain constant unless we realize a significant increase in new revenues.

Net Income

During the three months ended June 30, 2010 total revenues of $346,400, were lower by $160,290 when compared to the same period in 2009.   This decrease in total revenues was partially offset by $21,215 decrease in total expenses resulting in a loss from operations of $68,920 compared to an income from operations of $70,155 during three months ended June 30, 2009.  Correspondingly, we realized a net loss of $33,007 for the three months ended June 30, 2010 compared to a net income of $41,347, during the three months ended June 30, 2009.  While the current recession has had an adverse impact on our gross revenues during the three month period ending June 30, 2010 we expect modest increases in revenues beginning in the third quarter of 2010, (compared to the second quarter of 2010), to be generated from new services offered by the Company to existing and new customers in the areas of managed bill review and clinical and non-clinical utilization reviews.  There are no assurances that the new services will materialize to a level that will allow us to become profitable.

 
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Comparison of the six months ended June 30, 2010 and 2009

Revenue

The total number of employee enrollees increased 13% during six months ended June 30, 2010 compared to June 30, 2009.  Although we realized an increase in employee enrollees, total revenues decreased 33% to $693,958.  As of June 30, 2010 we had approximately 245,000 total enrollees.  Enrollment consisted of approximately 35,000 HCO enrollees and 210,000 MPN enrollees.  By comparison as of June 30, 2009 we had approximately 216,000 enrollees, including approximately 57,000 HCO enrollees and approximately 159,000 MPN enrollees.

HCO Fees

During the six months ended June 30, 2010 and 2009 HCO fee revenues were $292,524 and $475,261 respectively.  The 39% decrease in HCO enrollment during the six months ended June 30, 2010 resulted in a 38% decrease in revenue from HCO fees.  This was attributable to decreased employee enrollment and decreased re-notification of existing clients.

MPN Fees

MPN Fee revenues for the six months ended June 30, 2010 were $302,471 compared to $300,851 for the six months ended June 30, 2009.  As of June 30, 2010 we realized a 32% increase in MPN enrollment when compared the same period 2009.  Although we had an increase in MPN enrollment during the six months ended June 30, 2010, factors such as differing fee terms, unbundling of services, price competition and other similar factors as compared to 2009, resulted in only a 1% increase in MPN revenues compared to the same period 2009.

Other Revenue

During the six months ended June 30, 2010 other revenue decreased 61% to $98,963 from $251,933 in the same period a year earlier.  As noted above, the primary component of other revenue is nurse case management.  Other revenue decreased by $152,970 during the six months ended June 30, 2010 primarily resulting from a non-renewal by a major customer in August 2009 and an overall decline in demand for nurse case management services, which we believe is related to efforts by employers to reduce costs.

Expenses

Total expenses for the six months ended June 30, 2010 and 2009 were $821,551 and $952,117.  The decrease of $130,566 was primarily the result in decreases in salary and wages, professional fees, insurance, employment enrollment fees, and data maintenance expense partially offset by increases in depreciation, consulting fees, outsource service fees and general and administrative expenses.

Consulting Fees

During the six months ended June 30, 2010, consulting fees increased to $135,436 from $120,083 during the six months ended June 30, 2009.  This increase in consulting fees of $15,353 was primarily the result of hiring a manager of bill review and EDI operations and the addition of a corporate development consultant in March 2010.  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.


 
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Salaries and Wages

Salaries and wages decreased $71,708 or 18% to $322,599 from $394,307 during the six months ended June 30, 2010 compared with the six months ended June 30, 2009.  The decrease in salaries and wages was primarily due to the termination of Medex’s former president in August 2009 and a 10% reduction in wages for all salaried employees that went into effect in May 2009.  Medex also hired a new president in December 2009 who is also Medex’s medical director.  He is compensated as a professional consultant and his monthly fees are recorded as professional fees rather than salaries and wages.
 
Professional Fees

For the six months ended June 30, 2010, we incurred professional fees of $82,595 compared to $92,252 during the six months ended June 30, 2009.  This 11% decrease in professional fees was primarily the result of decrease in accounting fees and NCM fees, partially offset by increases in legal fees, and the medical consulting fees paid to the president of Medex.

Insurance

During the six months ended June 30, 2010, we incurred insurance expenses of $52,109 a $4,677 decrease over the same six-month period of 2009.  The decrease in insurance expense realized during the six months ended June 30, 2010 was the result of lower workers’ compensation insurance premiums together with modest premium reductions in Medex’s other insurance policies.  We do not expect insurance expense to increase materially in 2010.

Employment Enrollment

As discussed earlier above, effective January 1, 2010 the annual HCO assessment moved to a flat fee basis.  Effective in 2010 the annual assessments became $250 for HCOs with enrollments of 0-1,000, $350 for enrollments of 1,001-5,000, and $500 for enrollments above 5,000.  The revisions to the HCO regulations became effective on January 1, 2010 and the change to the HCO enrollment fees was retroactively applied to 2009 assessments.  As a result of this change, employee enrollment decreased by $30,000 during the six months ended June 30, 2010 when compared to the previous year’s period. The changes in the HCO enrollment fee structure represents a significant decrease compared to the employee enrollment expenses we have historically paid.

Data Maintenance

During six months ended June 30, 2010 we experienced a 39% decrease in HCO enrollment and a 32% increase in MPN enrollment, resulting in an overall enrollment increase of 13%.  Despite the increase in overall employee enrollment, data maintenance fees decreased 45% to $102,537 during the six months ended June 30, 2010.  The decrease in data maintenance fees is primarily attributable to lower data maintenance costs associated with the renewal of MPN enrollees and lower prices negotiated with third party service providers.

General and Administrative
 
General and administrative was largely unchanged increasing 1% to $158,055 during the six months ended June 30, 2010.  This increase in general and administrative expense was attributable to
increases in advertising expense, expenses associated with maintaining a provider network site, vacation expense, rent expense and miscellaneous expenses, partially offset by decreases in printing and reproduction expenses, travel and entertainment expense and shareholders’ meeting expense. We expect current levels of general and administrative expenses to remain constant unless we realize a significant increase in new revenues.

 
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Net Income

During the six months ended June 30, 2010 total revenues of $693,958 were lower by $334,087 when compared to the same period in 2009.   This decrease in total revenues was only partially offset by the $130,566 decrease in total expenses resulting in a loss from operations of $127,593 compared to an income from operations of $75,928 during six months ended June 30, 2009.  Correspondingly, we realized a net loss of $92,124 for the six months June 30, 2010, compared to a net income of $46,399, during the six months ended June 30, 2009.  We expect modest increases in revenues beginning in the third quarter of 2010, (compared to the second quarter of 2010), to be generated from new services offered by the Company to existing and new customers in the areas of managed bill review and clinical and non-clinical utilization reviews.  There are no assurances that the new services will materialize to a level that will allow us to become profitable.

Cash Flow

During the six months ended June 30, 2010 cash was primarily used to fund operations. We had a net decrease in cash of $184,572 during the six months ended June 30, 2010 as compared a decrease in cash of $105,740 at June 30, 2009.  See below for additional discussion and analysis of cash flow.

   
For the six months ended June 30,
 
    2010      2009  
   
(unaudited)
   
(unaudited)
 
             
Net cash provided by (used in) operating activities
  $ (181,755 )   $ (105,740 )
Net cash used in investing activities
    (25,543 )     -  
Net cash provided by financing activities
    22,726       -  
                 
Net Change in Cash
  $ (184,572 )   $ (105,740 )

During the six months ended June 30, 2010, net cash used in operating activities was $181,755 compared to net cash used by operating activities of $105,740 during the six months ended June 30, 2009.  As discussed herein we realized net loss from operations of $127,593 during the six months ended June 30, 2010, compared to a net income from operations of $75,928 during the six months ended June 30, 2009.

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

 
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Summary of Material Contractual Commitments

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

   
Payments Due By Period
 
Contractual obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
Operating leases:
                         
 
 
     Office leases
  $ 76,856     $ 76,856     $ -     $ -     $ -  
Total operating leases
  $ 76,856     $ 76,856     $ -     $ -     $ -  
 
Capital lease:
                                       
     Office equipment
  $ 36,140     $ 10,086     $ 26,055     $ -     $ -  
Total capital lease
  $ 36,140     $ 10,086     $ 26,055     $ -     $ -  

Off-Balance Sheet Financing Arrangements

As of June 30, 2010 we had no off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

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

Basis of Accounting We use the accrual method of accounting.

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

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

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

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

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

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

Item 4.   Controls and Procedures

         Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of June 30, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2010, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) ensuring that information disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting

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

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

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

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on this assessment, our management concluded that as of June 30, 2010, our internal control over financial reporting is effective based on those criteria.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the six months ended June 30, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Item 1.  Risk Factors

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

Item 6.   Exhibits

 Exhibits.  The following exhibits are included as part of this Quarterly Report:
 
 
Exhibit Number
 
Title of Document
       
   
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
       
   
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
   
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
   
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

 
 
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In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf, thereunto duly authorized.
 
 
 
 
PACIFIC HEALTH CARE ORGANIZATION, INC.
 
       
Date: August 13, 2010
By:
/s/ Tom Kubota  
    Tom Kubota  
    Chief Executive Officer  
       
 
       
Date: August 13, 2010
By:
/s/ Fred Odaka  
    Fred Odaka  
    Chief Financial Officer  
       

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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