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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, 2012

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From ________ to _________

Commission File Number 000-50009

 
PACIFIC HEALTH CARE ORGANIZATION, INC.
 
 
(Exact name of registrant as specified in its charter)
 
         
 
Utah
 
87-0285238
 
 
(State or other jurisdiction of 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 15, 2012, the registrant had 802,424 shares of common stock, par value $0.001, issued and outstanding.
 
 
 PACIFIC HEALTH CARE ORGANIZATION, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
PART I — FINANCIAL INFORMATION
 
   
3
     
 
3
     
 
4
     
 
5
     
 
6
   
7
   
14
   
14
   
PART II — OTHER INFORMATION
 
   
15
   
15
   
16

 
PART I.   FINANCIAL INFORMATION
 
Item 1.   Financial Information
 
Pacific Health Care Organization, Inc.
Condensed Consolidated Balance Sheets
 
ASSETS
 
   
March 31,
2012
   
December 31,
2011
 
   
(Unaudited)
       
Current Assets
           
Cash
  $ 329,235     $ 368,459  
Accounts receivable, net of allowance of $20,000
    795,711       523,864  
Income tax receivable
    3,998       3,998  
Commission draw
    25,969       29,853  
Prepaid expenses
    77,991       53,947  
Total current assets
    1,232,904       980,121  
Property and equipment, net
               
Computer equipment
    89,213       80,963  
Furniture & fixtures
    79,820       56,471  
Office equipment
    14,200       12,537  
Office equipment under capital lease
    25,543       25,543  
Total property & equipment
    208,776       175,514  
Less: accumulated depreciation
    (110,083 )     (104,294 )
Net property & equipment
    98,693       71,220  
 
               
Other assets
    8,158       8,158  
Total assets
  $ 1,339,755     $ 1,059,499  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
Current Liabilities
               
Accounts payable
  $ 17,554     $ 86,482  
Accrued expenses
    211,075       126,770  
Income tax payable
    112,724       1,611  
Current obligations under capital lease
    6,708       6,592  
Deferred rent expense
    22,368       21,903  
Deferred tax liability
    5,404       5,404  
Unearned revenue
    6,338       7,803  
Total current liabilities
    382,171       256,565  
                 
                 
Long term liabilities
               
Noncurrent obligations under capital lease
    5,348       7,069  
Total liabilities
    387,519       263,634  
                 
                 
Commitments and Contingencies
    -       -  
                 
Shareholders’ Equity
               
Preferred stock; 5,000,000 shares authorized at $0.001 par value; zero shares issued and outstanding
    -       -  
Common stock; 50,000,000 shares authorized at$0.001 par value; 802,424 shares issued and outstanding
    802       802  
 Additional paid-in capital
    623,629       623,629  
 Retained earnings (deficit)
    327,805       171,434  
Total stockholders' equity
    952,236       795,865  
Total liabilities and stockholders’ equity
  $ 1,339,755     $ 1,059,499  
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
Pacific Health Care Organization, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
   
For three months ended
March 31,
 
   
2012
   
2011
 
Revenues:
           
HCO fees
  $ 198,257     $ 173,256  
MPN fees
    183,036       137,307  
Other
    684,164       239,263  
     Total revenues
    1,065,457       549,826  
                 
                 
Expenses:
               
  Depreciation
    5,793       2,106  
  Consulting fees
    95,816       79,345  
  Salaries & wages
    425,594       208,662  
  Professional fees
    49,088       46,182  
  Insurance
    45,737       28,969  
  Outsource service fees
    64,051       32,661  
  Data maintenance
    6,831       7,844  
  General & administrative
    105,773       106,302  
                 
     Total expenses
    798,683       512,071  
                 
Income from operations
    266,774       37,755  
                 
Other income (expense)
               
  Interest income
    190       284  
  Rental income
    750       -  
  Interest (expense)
    (230 )     (338 )
  Loss on disposal of assets
    -       (1,564 )
    Total other income (expense)
    710       (1,618 )
                 
Income before taxes
    267,484       36,137  
                 
     Income tax provision
    111,113       9,228  
                 
     Net income
  $ 156,371     $ 26,909  
                 
Basic and fully diluted earnings per share:
               
       Earnings per share amount
  $ .19     $ .03  
       Weighted average common shares outstanding
    802,424       802,424  
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
Pacific Health Care Organization, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
  $ 156,371     $ 26,909  
Adjustments to reconcile net income  to net cash:
               
Depreciation
    5,793       2,106  
Loss on disposition of assets
    -       1,564  
Changes in operating assets & liabilities
               
 (Increase) in accounts receivable
    (271,847 )     (25,364 )
 Decrease in deferred tax asset
    -       5,400  
 Decrease in  income tax receivable
    -       1,954  
 Decrease in commission draw
    3,884       4,659  
 (Increase) decrease in prepaid expenses
    (24,048 )     30,991  
  (Decrease) in accounts payable
    (68,928 )     (14,542 )
 Increase in deferred rent expense
    465       8,093  
 Increase (decrease) in accrued expenses
    84,305       (469 )
 Increase in tax payable
    111,113       7,046  
 (Decrease) in unearned revenue
    (1,465 )     (1,688 )
Net cash provided by (used in) operating activities
    (4,357 )     46,659  
                 
Cash Flows from investing activities
               
   Purchase of furniture and office equipment
    (33,262 )     (42,723 )
Net cash used in investing activities
    (33,262 )     (42,723 )
                 
Cash Flows from financing activities
               
   Payment of obligation under capital lease
    (1,605 )     (1,497 )
Net cash provided by (used in) financing activities
    (1,605 )     (1,497 )
                 
Increase (decrease)  in cash
    (39,224 )     2,439  
                 
Cash at beginning of period
    368,459       349,552  
Cash at end of period
  $ 329,235     $ 351,991  
                 
Supplemental cash flow information
               
 Cash paid for:
               
Interest
  $ 230     $ 347  
Income taxes paid (refunded)
  $ -     $ (5,172 )

The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2012
 
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, 2011 Annual Report on Form 10-K.  Operating results for the three-months ended March 31, 2012 are not necessarily indicative of the results to be expected for year ending December 31, 2012.

NOTE 2 - SUBSEQUENT EVENTS

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



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

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

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

Throughout this quarterly report on Form 10-Q, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”) and Industrial Resolutions Coalition, Inc. (“IRC”), Medex Managed Care, Inc. (“MMC”), Medex Legal Support, Inc., (“MLS”) and Medex Medical Management, Inc. (“MMM”).

Overview

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

In 1993 the California legislature passed a bill that established Health Care Organizations.  An HCO is a network of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training.  The benefit of the HCO to an employer is two-fold.  First, the employer is able to control the medical treatment of the injured employee for 90 to 180 days rather than during just the first 30 days.  Second, the HCO provides the employer a network of trained providers to which it can refer its injured employees who specialize in treating work place injuries.
 
Under the HCO guidelines, all HCOs are required to pay certain annual fees to the California Division of Workers’ Compensation (“DWC”).  This annual fee is based on the number of employees enrolled in the HCO.

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

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

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

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

Results of Operations

Comparison of the three months ended March 31, 2012 and 2011

Revenue

The total number of employee enrollees increased 76% during three months ended March 31, 2012 compared to March 31, 2011 Total revenues increased 94% to $1,065,457.  As of March 31, 2012, we had approximately 388,000 total enrollees.  Enrollment consisted of approximately 65,000 HCO enrollees and 323,000 MPN enrollees.  By comparison as of March 31, 2011 we had approximately 288,000 enrollees, including approximately 45,000 HCO enrollees and approximately 243,000 MPN enrollees.

The net increase in HCO and MPN enrollees of approximately 20,000 and 80,000, respectively, was mainly the result of increase enrollment realized by our existing customers and the addition of four new HCO customers and three new MPN customers. While the economic slowdown impacted our revenue throughout fiscal 2011, we anticipate revenue will continue to be moderately higher throughout fiscal 2012.
 

In the current economic environment, we anticipate businesses will continue to seek ways to reduce their workers’ compensation program costs.   As a result, we expect to experience client turnover, in the form of existing employer clients seeking to terminate or renegotiate the scope and terms of existing services.  We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house.  In response to the changing market, we have sought to expand our marketing efforts for some of the additional services we now offer our clients.  As a result, during the quarter ended March 31, 2012, we realized increases in our MBR and UR services fee revenues.

HCO Fees

During the three months ended March 31, 2012 and 2011, HCO fee revenues were $198,257 and $173,256, respectively.  While HCO enrollment increased 44% during the quarter ended March 31, 2012, we realized only a 14% increase in revenue from HCO fees when compared to the same period last year.  The percentage increase in enrollment outpaced the percentage increase in revenue by 30%.  This was the result of changes in our fee structure and our offering bundled services, including MBR, UR and NCM services to a number of new clients, which resulted in increased enrollment, without increasing HCO fees charged.

MPN Fees

MPN Fee revenues for the three months ended March 31, 2012 were $183,036 compared to $137,307 for the three months ended March 31, 2011. During the quarter ended March 31, 2012 we realized a 33% increase in MPN enrollment when compared the same period 2011 and a corresponding 33% increase in revenues.

Other Fees

Other fees consist of revenues derived from MBR, NCM, UR, lien representation service and network claims repricing services provided by Medex, MMC, MMM and MLS. Other fee revenues for the three months ended March 31, 2012 and 2011 were $684,164 and $239,263, respectively.

Our MBR and UR revenues increased by $192,417 and $121,895, respectively, when compared to the same period of fiscal 2011.  MBR and UR service revenues grew largely as a result of increased marketing efforts by MMC in these areas of our business.

NCM revenues increased $77,241 to $142,392 resulting primarily from increased customer employee enrollment. We retain nurses on our staff who, at the request of our customers, will review the medical portion of a claim on behalf of our employer clients, claims managers and injured workers.  We offer nurse case management services to our customers on an optional basis.  We charge an additional fee for nurse case management services.

Network claims re-pricing fees increased from $48,082 to $68,146 resulting primarily from the addition of two new customers.

We commenced offering lien representation services in February 2012 and recorded revenues totaling $4,266 for the quarter ended March 31, 2012.

Expenses

Total expenses for the three months ended March 31, 2012 and 2011 were $798,683 and $512,071, respectively.  The increase of $286,612 was the result of increases in depreciation, consulting fees, outsource service fees, salaries and wages, professional fees, insurance, offset by, decreases in data maintenance and general and administrative expense.
 

Consulting Fees

During the three months ended March 31, 2012, consulting fees increased to $95,816 from $79,345 during the three months ended March 31, 2011.  This increase of $16,471 was due mainly to the addition of a nurse case manager and the hiring of two temporary administrative consultants during the second quarter of 2011 and the incurring of increased consulting fees resulting from the replacement of our information technology firm in January 2012.

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

Salaries and Wages

Salaries and wages increased $216,932 or 104% to $425,594 from $208,662 during the three months ended March 31, 2012 compared with the three months ended March 31, 2011.  The increase in salaries and wages was primarily due to the MMC hiring a UR administrator in March 2011, two supervisors and three administrative support personnel in July 2011, one MBR administrator in January 2012 and Medex hiring a nurse case manager in October 2011 and administrative support personnel in July, November and December of 2011.  Also contributing to this increase were salary increases given to our CEO and CFO in March 2011.

Professional Fees

For the three months ended March 31, 2012, we incurred professional fees of $49,088, compared to $46,182 during the three months ended March 31, 2011.  This 6% increase in fees was primarily the result of increased accounting expenses incurred in connection with preparing our financial reports.

Insurance

During the three months ended March 31, 2012, we incurred insurance expenses of $45,737, a $16,768 increase over the prior year three month period.  The increase in 2012 was primarily due to premium increases for our employee group health medical coverage resulting from the increase in our total number of employees. 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 by MMC, Medex and MMM in outsourcing its MBR services and certain NCM and UR services.  We do not, at this time, have enough volume to justify creating our own MBR and UR in-house staff.  We utilize outside vendors to provide specific services for our clients, charging additional fees over and above those paid to said vendors for administration and coordination of MBR, NCM and UR services directly to the clients. We commenced outsourcing these services during the second half of 2010 and incurred $64,051 and $32,661 in outsource service fees during the three months period ended March 31, 2012 and 2011, respectively. This $31,390 increase was primarily the result of the increased demand for our MBR and UR services.


Data Maintenance

During the three months period ended March 31, 2012 we experienced a 13% decrease in data maintenance fees.  The decrease in data maintenance fees was primarily attributable to lower data maintenance costs associated with the renewal of MPN enrollees and lower prices negotiated with third party service providers.

General and Administrative
 
General and administrative expenses were nearly flat decreasing 1% during the three months ended March 31, 2012.  We expect current levels of general and administrative expenses to increase in future periods providing we continue to increase revenues.

Net Income

During the three months ended March 31, 2012, total revenues of $1,065,457 were higher by $515,631 when compared to the same period in 2011.   This increase in total revenues was partially offset by increases in total expenses of $286,612 resulting in income from operations of $266,774 compared to income from operations of $37,755 during three months ended March 31, 2011.  Correspondingly, we realized net income of $156,371 for the three months ended March 31, 2012, compared to net income of $26,909, during the three months ended March 31, 2011.  We expect moderate increases in revenues to continue in the second quarter of 2012, when compared to the the second quarter of 2011, to be generated from new services offered by the Company to existing and new customers in the areas of MBR and clinical, non-clinical UR and other services.

Liquidity and Capital Resources

As of March 31, 2012, we had cash on hand of $329,235 compared to $368,459 at December 31, 2011.  The $39,224 decrease in cash on hand is primarily the result of increases in our accounts receivables, prepaid expenses, and decreases in accounts payable, partially offset by increases in our net profit, depreciation, accrued expenses, income tax payable and decrease in commission draw.  We believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating costs over the next twelve months.  We do not anticipate needing to find other sources of capital at this time. However, if our revenue is lower than anticipated we may need to find other sources of capital to fund operations.

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

Cash Flow

During the three months ended March 31, 2012 cash was primarily used to fund operations. We had a net decrease in cash of $39,224 during the three months ended March 31, 2012.  See below for additional discussion and analysis of cash flow.

   
For the three months ended March 31,
 
   
2012
(unaudited)
   
2011
(unaudited)
 
             
Net cash provided by (used in) operating activities
  $ (4,357 )   $ 46,659  
Net cash used in investing activities
    (33,262 )     (42,723 )
Net cash provided by (used in) financing activities
    (1,605 )     (1,497 )
                 
Net increase (decrease) in cash
  $ (39,224 )   $ 2,439  
 

During the three months ended March 31, 2012, net cash used in operating activities was $4,357, compared to net cash provided by operating activities of $46,659 during the three months ended March 31, 2011.  As discussed herein we realized net income of $156,371 during the three months ended March 31, 2012, compared to net income of $26,909 during the three months ended March 31, 2011.

Summary of Material Contractual Commitments
 
The following is a summary of our material contractual commitments as of March 31, 2012:
 
   
Payments Due By Period
 
Contractual obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
                           
 
 
Equipment Leases(1)
  $ 18,490     $ 7,564     $ 10,926     $ -     $ -  
Office Leases(2)
    560,251       102,701       432,800       24,750       -  
Total
  $ 578,741     $ 110,265     $ 443,726     $ 24,750     $ -  

 
(1)
In January 2010 we entered into a capital lease arrangement whereby we leased an office copy machine for $25,543. The asset was recorded on our balance sheet under office equipment under capital lease and our liability incurred under the lease was recorded as current and noncurrent obligations under capital lease.    The lease arrangement is for a term of 48 months at level operating rents with capital interest rate at 7%.

 
(2)
In March 2011 we commenced a new office lease agreement that runs to February 29, 2016.  In October 2011 we amended our office lease agreement to include an additional 1,640 square feet for our subsidiary MMC.  Following is our annual amended base rent for the new office space throughout the term of the lease:
 
Rent Period
 
Annual Rent Payments
 
Mar. 1 to Dec. 31, 2012
  $ 102,701  
Jan. 1 to Dec. 31, 2013
  $ 140,342  
Jan. 1 to Dec. 31, 2014
  $ 144,508  
Jan. 1 to Dec. 31, 2015
  $ 147,950  
Jan. 1 to Dec. 31, 2016
  $ 24,750  
    Total
  $ 560,251  

Off-Balance Sheet Financing Arrangements

As of March 31, 2012 we had no off-balance sheet financing arrangements.
 

Critical Accounting Policies and Estimates

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

Basis of Accounting We use the accrual method of accounting.

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

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

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

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

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

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

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

Item 3.   Quantitative and Qualitative Disclosure about Market Risk

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, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

PART II.   OTHER INFORMATION

Item 1A.  Risk Factors

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 6.   Exhibits

 Exhibits.  The following exhibits are included as part of this quarterly report on Form 10-Q:
 
 
Exhibit Number
 
Title of Document
       
 
Exhibit 31.1
 
       
 
Exhibit 31.2
 
       
 
Exhibit 32.1
 
       
 
Exhibit 32.2
 
       
 
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
 
 
 
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 21, 2012 /s/ Tom Kubota  
   
Tom Kubota
Chief Executive Officer
(Principal Executive Officer)

       
 Date:  May 21, 2012  /s/ Fred Odaka  
   
Fred Odaka
Chief Financial Officer
(Principal Financial Officer)