FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

x[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31,June 30, 2009

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)

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) (I.R.S. Employer Identification No.)
   
1201 Dove Street, Suite 585  
1201 Dove Street, Suite 585
Newport Beach, California
 92660
(Address of principal executive offices) (Zip Code)

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



Indicate by check mark whether the registrantregistrant: (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 anysuch 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 is a large accelerated filed, an accelerated filer, a non-accelerated filer or a smaller public company.  See definitionthe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

As of May 6,August 11, 2009, 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


PART I — FINANCIAL INFORMATION
  
   
Item 1. Unaudited Consolidated Financial Statements
 
  Page
 
Balance Sheets as of  March 31,June 30, 2009 (Unaudited)
and December 31, 2008
3
   
 
Statements of Operations for the Three and Six Months Ended
March 31,June 30, 2009 and 2008 (Unaudited)
4
   
 
Statements of Cash Flows for the ThreeSix Months Ended
March 31,June 30, 2009 (Unaudited) and 2008 (Unaudited)
5
   
 
Notes to Financial Statements
6
  
Item 2.  Management’s Discussion and Analysis of Financial Condition
and Results of Operations
17
15
  
Item 4T.  Controls and Procedures
2524
  
PART II — OTHER INFORMATION
 
  
Item 6.  Exhibits
2625
  
2726















 
2

 

PART I.   FINANCIAL INFORMATION

Item 1. Financial Information
Pacific Health Care Organization, Inc.
Consolidated Balance Sheets

ASSETS ASSETS ASSETS 
 
June 30,
2009
  
December 31,
2008
 
 
March 31, 2009
(unaudited)
  
December 31,
2008
   (Unaudited)    
Current Assets              
Cash $539,196  $624,401  $518,661  $624,401 
Accounts receivable, net of allowance of $20,000  269,656   177,376   365,930   177,376 
Deferred tax asset  15,765   15,765   15,765   15,765 
Prepaid income tax  8,600   - 
Prepaid expenses  47,846   50,119   59,395   50,119 
Total current assets  872,463   867,661   968,351   867,661 
                
Property and equipment, net (note 4)                
Computer equipment  60,922   60,922   60,922   60,922 
Furniture & fixtures  28,839   28,839   28,839   28,839 
Total property & equipment  89,761   89,761   89,761   89,761 
                
Less: accumulated depreciation  (85,881)  (85,736)  (86,027)  (85,736)
                
Net property & equipment  3,880   4,025   3,734   4,025 
                
Total assets $876,343  $871,686  $972,085  $871,686 
                
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES AND STOCKHOLDERS’ EQUITY 
Current Liabilities                
Accounts payable $3,570  $1,630  $4,644  $1,630 
Accrued expenses (Note 8)  212,500   178,836 
Tax payable  4,291   34,823 
Accrued expenses (note 8)  235,946   178,836 
Income tax payable  33,756   34,823 
Unearned revenue  25,027   30,494   25,437   30,494 
Total current liabilities  245,388   245,783   299,783   245,783 
Total liabilities  245,388   245,783   299,783   245,783 
                
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 
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   623,629   623,629 
Retained earnings  6,524   1,472   47,871   1,472 
Total stockholders' equity  630,955   625,903 
Total stockholders’ equity  672,302   625,903 
                
Total liabilities and stockholders' equity $876,343  $871,686 
Total liabilities and stockholders’ equity $972,085  $871,686 
 

 




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

Pacific Health Care Organization, Inc.
Consolidated Statements of Operations
(Unaudited)
 For three months ended  For six months ended 
 
For three months ended
March 31,
  June 30,  June 30, 
 2009  2008  2009  2008  2009  2008 
Revenues:                  
HCO fees $244,998  $278,551  $230,263  $295,467  $475,261  $574,018 
MPN fees  149,560   187,392   151,291   148,016   300,851   335,408 
Other  126,797   127,724   125,136   146,319   251,933   274,043 
Total revenues  521,355   593,667   506,690   589,802   1,028,045   1,183,469 
        
                        
Expenses:                        
Depreciation  146   831   145   -   291   831 
Consulting fees  62,586   65,030   57,497   59,810   120,083   124,840 
Salaries & wages  212,451   177,072   181,856   190,530   394,602   367,602 
Professional fees  56,595   82,381   35,657   76,144   92,252   158,525 
Insurance  28,671   30,728   28,115   26,339   56,786   57,067 
Employment enrollment  15,000   18,000   15,000   18,000   30,000   36,000 
Data maintenance  55,632   64,355   46,905   62,418   102,537   126,773 
General & administrative  84,501   77,746   71,360   71,747   155,861   149,493 
                        
Total expenses  515,582   516,143   436,535   504,988   952,117   1,021,131 
        
Income from operations  5,773   77,524   70,155   84,814   75,928   162,338 
                        
Other income:                        
Interest income  747   992   657   756   1,404   1,748 
Total other income  747   992   657   756   1,404   1,748 
                        
Income before taxes  6,520   78,516   70,812   85,570   77,332   164,086 
                        
Income tax provision  1,468   33,108   29,465   36,472   30,933   69,580 
                        
Net income $5,052  $45,408  $41,347  $49,098  $46,399  $94,506 
        
Basic and fully diluted earnings per share:        
Earnings per share amount $.01  $.06 
Weighted average common shares outstanding  802,424   802,424 
  For three months ended  For six months ended 
  June 30,  June 30, 
  2009  2008  2009  2008 
Basic and fully diluted earnings per share:            
Earnings per share amount $.05  $.06  $.06  $.12 
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.
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended March 31,  Six Months Ended June 30, 
 2009  2008  2009  2008 
Cash flows from operating activities:            
Net income $5,052  $45,408  $46,399  $94,506 
Adjustments to reconcile net income to net cash:                
Depreciation  145   831   291   831 
Changes in operating assets & liabilities                
(Increase) decrease in accounts receivable  (92,280)  19,546 
(Increase) in accounts receivable  (188,554)  (3,959)
(Increase) in deferred tax asset  -   (964)  -   (2,087)
(Increase) in prepaid state income tax  -   (600)
Decrease in prepaid expenses  2,273   8,684 
Increase in accounts payable  1,940   11,836 
( Increase) in prepaid income tax  (8,600)  (20,620)
(Increase) in prepaid expenses  (9,276)  (295)
Increase (decrease) in accounts payable  3,014   (14,019)
Increase in accrued expenses  33,664   35,481   57,110   49,659 
Increase (decrease) in tax payable  (30,532)  21,998 
(Decrease) in unearned revenue  (5,467)  (65,051)
Increase (decrease) in income tax payable  (1,067)  59,593 
Increase (decrease) in unearned revenue  (5,057)  (13,958)
Net cash provided by (used in) operating activities  (85,205)  77,169   (105,740)  149,651 
                
Cash Flows from Investing Activities                
Cash-out of fractional shares of common stock  -   (1,005)
Net cash used by investing activities  -   -       (1,005)
                
Cash Flows from Financing Activities                
Net cash used by financing activities  -   -   -   - 
                
Increase (decrease) in cash  (85,205)  77,169   (105,740)  148,646 
                
Cash at beginning of period  624,401   419,416   624,401   419,416 
Cash at end of period $539,196  $496,585  $518,661  $568,062 
                
Supplemental Cash Flow Information                
Cash paid for:                
Interest $-  $-  $-  $- 
Income taxes $32,000  $10,051 
Taxes $40,600  $32,594 

The accompanying notes are an integral part of these consolidated financial statements.
 
5

 
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the ThreeSix Months Ended March 31,June 30, 2009


NOTE 1 - CORPORATE HISTORYCorporate History

Pacific Health Care Organization, Inc. was incorporated under the laws of the State of Utah, on April 17, 1970 under the name Clear Air, Inc.  The Company changed its name to Pacific Health Care Organization, Inc., on January 31, 2001.  On February 26, 2001, we acquired Medex Healthcare, Inc., a California corporation organized March 4, 1994, in a share for share exchange.  Medex is a wholly-owned subsidiary of the Company.  Medex is in the business of managing and administering Health Care Organizations (“HCOs”) and Medical Provider Network (“MPNs”) in the state of California.  On August 14, 2001, we formed Workers Compensation Assistance, Inc. as a wholly-owned subsidiary of PHCO.  In January 2008, Workers Compensation Assistance, Inc. changed its name to Industrial Resolutions Coalition, Inc.  Industrial Resolutions Coalition, Inc. is actively working towards participation in the business of creating legal agreements for the implementation of Workers’ Compensation Carve-Outs for California employers with collective bargaining units.

Medex Healthcare, Inc.

HCOs are networks of medical providers established to serve the workers’ compensation industry.  In the original legislation establishing HCOs, the California legislature mandated that if an employer contracts services from an HCO, the injured workers must be given a choice between at least two HCOs. To be competitive, our wholly owned subsidiary, Medex, recognized early on that it was necessary to have two HCO certifications. Instead of aligning with a competitor, Medex elected to go through the lengthy applications process with the California Department of Industrial Relations (“DIR”) twice to obtain licensure for and to operate two separate HCOs.  While there is no longer a statutory requirement to offer two HCOs to employers, Medex continues to retain its two certifications. As such, employer clients have the option of offering one or two HCOs to their employees.  Medex believes its ability to offer two HCOs gives potential clients greater choice, which is favored by a number of employers, especially those with certified bargaining units.

Through the two licensed HCOs Medex offers injured workers a choice. One is to enroll in an HCO with a network managed by primary care providers requiring a referral to specialists. Or theThe second choice is to enroll in an HCO where injured workers do not need any prior authorization to be seen and treated by specialists.

The two HCO certifications that Medex currently holds cover the entire state of California, where medical and indemnity costs associated with Workers’ Compensation in the state California are in the billions of dollars annually.  Our two HCOs utilize a network of over 3,200 contracted providers and clinics, as well as, hospitals, pharmacies, rehabilitation centers and other ancillary services making our HCOs capable of providing comprehensive medical services throughout this region.  We are continually developing the network based upon the nominations of new clients and the approvals of their claims’ administrators.  Provider credentialing is performed by Medex.

Medex, by virtue of its continued certification as an HCO, is statutorily deemed to be qualified as an approved MPN.  A significant number of employer clients have availed themselves of the MPN.  Others utilize the provisions of the HCO program, while others will use both in conjunction with each other.



6

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Three Months Ended March 31, 2009

NOTE 1 - CORPORATE HISTORY – (Continued)

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


6

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2009
NOTE 1 - Corporate History (continued)

Because the Company contracts with medical providers who own their own medical equipment, such as x-ray machines, the Company does not typically incur large capital expenditures.  The Company does, however, incur fixed costs such as liability insurance and other usual costs of running a business.

Industrial Resolutions Coalition, Inc.

In 2001 we incorporated Workers Compensation Assistance, Inc., (now known as Industrial Resolutions Coalition, Inc., as a wholly-owned subsidiary, with the intent of pursuing other opportunities in the workers’ compensation field.  Toward the end of 2007 we identified a business opportunity within the workers’ compensation field that we have begun to pursue.  Through IRC, we will be in the business of creating legal agreements for the implementation of Workers’ Compensation Carve-Outs for California employers with collective bargaining units, and the administration of such programs within the statutory and regulatory requirements.

Because we already have established health care networks, we considered pursuing this market directly through Medex.  Workers’ unions, however, have historically been opposed to HCO programs, including Medex.  Medex has been largely unable to place its services into employers with union participation in both the private and public sectors.  The reason for this has been the requirement in the HCO statute (LC 4600.3) that the unions authorize the use of the HCO program.  Unions have been opposed to authorizing the use of HCO programs because the HCO program is selected by the employer with no input whatsoever from labor participants.  The major unions, especially those involved in schools and governmental entities (municipalities, etc.), have historically refused to allow employers to implement the HCO.  All the unions in the California Labor Federation have also refused to participate in HCO programs. The same objections have been raised regarding the use of the MPN, i.e., no input from labor representatives.


7

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Three Months Ended March 31, 2009


NOTE 2 - Significant Accounting Policies

A.    Basis of Accounting

The Company uses the accrual method of accounting.

B.    Revenue Recognition

The Company applies the provisions of SEC Staff Accounting Bulletin No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (“SAB 104”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 104 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 monthly contracted amounts for services provided 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) collectibilitycollectability 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.

7

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2009
NOTE 2 - Significant Accounting Policies (continued)
The Company’s subscribers pay for their services by check or electronic check payment, and revenue is then recognized ratably over the period in which the related services are provided.  Advance billings to subscribers are recorded on the balance sheet as unearned revenue.  In circumstances where payment is not received in advance, revenue is only recognized when earned. 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.

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.


8

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Three Months Ended March 31, 2009


NOTE 2 - Significant Accounting Policies (continued)

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, 2009 or 2008.

  For the Three Months Ended  For the Six Months Ended 
  June 30,  June 30, 
  2009  2008  2009  2008 
Basic and Fully Diluted Earnings per share:            
Income (loss) (numerator) $41,347  $49,098  $46,399  $94,506 
Shares (denominator)  802,424   802,424   802,424   802,424 
Per share amount $.05  $.06  $.06  $.12 
 

  For the Three Months Ended March 31, 
  2009  2008 
Basic Earnings per share:      
Income (numerator) $5,052  $45,408 
Shares (denominator)  802,424   802,424 
Per share amount $0.01  $0.06 
         
Fully Diluted Earnings per share:        
Income (numerator) $5,052  $45,408 
Shares (denominator)  802,424   802,424 
Per share amount $0.01  $0.06 

F.    Depreciation

The cost of property and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements is depreciated over the lesser of the length of the lease of the related assets for the estimated lives of the assets.  Depreciation is computed on the straight line method.

G.    Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles, in the United States of America, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
8

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2009
NOTE 2 - Significant Accounting Policies (continued)

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.

I.   Fair Value of Financial Instruments
On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements. SFAS No. 157 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 fair value of the Company's cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate carrying value based on their effective interest rates compared to current market prices.
 

9

Pacific Health Care Organization, Inc.
Notes to Financial Statements
ForThe Company’s financial instruments consist of cash, receivables, payables, and notes payable.  The carrying amount of cash, receivables and payables approximates fair value because of the Three Months Ended March 31, 2009


NOTE 2 - Significant Accounting Policies (continued)short-term nature of these items.  The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at market interest rates.

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.

9

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2009
NOTE 2 - Significant Accounting Policies (continued)

L.    Capital Structure

The Company has two classes of stock.  Preferred stock, par value $.001, 5,000,000 shares authorized, zero issued.  Voting rights and liquidation preferences have not been determined. The Company also has voting common stock, par value $.001, of 50,000,000 shares authorized, with 802,424 shares issued and outstanding.  No dividends were paid in the threesix months ended March 31,June 30, 2009 and 2008, nor in any prior period.

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 No. 123 (Revised 2004), “Accounting for Stock-Based Compensation” (SFS123[R]). 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 threesix months ended MarchJune 30, 2009 and at the year ended December 31, 2009,2008, a $20,000 general reserve for balances over 90 days past due has been established. There have not been any recognized bad debts during 2009.

The percentages of the major customers to total accounts receivable for the threesix months ended March 31,June 30, 2009 (unaudited) are as follows:
 

Customer A 22%
Customer B 20%16%
Customer C 14%
 Customer D 13%

10

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Three Months Ended March 31, 2009



NOTE 3 - New Technical Pronouncements

The FASB has issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts.  SFAS No. 163 clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, and addresses the recognition and measurement of premium revenue and claim liabilities.  It requires expanded disclosures about contracts, and recognition of claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation.  It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations, and (b) the insurance enterprise’s surveillance or watch list.  TheSFAS 163 is not currently applicable to the Company is currently evaluatingsince the impact of SFAS No. 163.Company does not have any financial guarantee insurance contracts.

10

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2009
NOTE 3 - New Technical Pronouncements (continued)

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities.  With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature.  The Company is currently assessing the impact of SGAS No. 162 on its financial position and results of operations.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009.  SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their
effects on an entity’s financial position, financial performance, and cash flows.  Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant.  SFAS 161 is not currently applicable to the Company since the Company does not have derivative instruments or hedging activity.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141 (R) did not have an impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 did not have an impact on the Company’s financial statements.

11

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Three Months Ended March 31, 2009



NOTE 3 – New Technical Pronouncements (continued)

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which permits entities to choose to measure at fair value eligible financial instruments and certain other items that are not currently required to be measured at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have an impact on the Company’s financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.

NOTE 4 - Fixed Assets

The Company capitalizes the purchase of equipment and fixtures for major purchases in excess of $1,000 per item. Capitalized amounts are depreciated over the useful life of the assets using the straight line method of depreciation which is three and seven years for office equipment, and furniture and fixtures, respectively. Scheduled below are the assets, costs and accumulated depreciation at March 31,June 30, 2009 (unaudited) and December 31, 2008.

  Cost   Depreciation Expense  Accumulated Depreciation 
  
For the Six
Months Ended
  
For the
Year Ended
  
For the Six
Months Ended
  
For the
Year Ended
  For the Six Months Ended  
For the
Year Ended
 
  
June
30, 2009
  
December
31, 2008
  
June
30, 2009
  
December
31, 2008
  
June
30, 2009
  
December
31, 2008
 
Assets:                  
Computer Equipment $60,922  $60,922  $-  $-  $60,922  $60,922 
Furniture & Fixtures  28,839   28,839   291   831   25,105   24,814 
     Totals $89,761  $89,761  $291  $831  $86,027  $85,736 
  
Cost
  
 Depreciation Expense
  
 Accumulated Depreciation
 
  For the Three Months Ended  
For the
Year Ended
  For the Three Months Ended  
For the
Year Ended
  For the Three Months Ended  
For the
Year Ended
 
  
March
31, 2009
  
December
31, 2008
  
March
31, 2009
  
December
31, 2008
  
March
31, 2009
  
December
31, 2008
 
Assets                  
Computer Equipment $60,922  $60,922  $-  $-  $60,922  $60,922 
Furniture & Fixtures  28,839   28,839   145   831   24,959   24,814 
                         
     Totals $89,761  $89,761  $145  $831  $85,881  $85,736 

NOTE 5 - Income Taxes

The Company accounts for corporate income taxes in accordance with Statement of Accounting Standards Number 109 (“SFAS No. 109”) “Accounting for Income Taxes.”  SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income tax purposes.

The tax provision (benefit) for the three months ended March 31, 2009 and the year ended December 31, 2008 consisted of the following:

 
1211

 
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the ThreeSix Months Ended March 31,June 30, 2009



NOTE 5 - Income Taxes (continued)

The tax provision (benefit) for the six months ended June 30, 2009 and the year ended December 31, 2008 consisted of the following:
 2009  2008  2009  2008 
 (unaudited)     (unaudited)    
Current:            
Federal $892  $81,703  $23,200  $81,703 
State  576   35,323   7,733   35,323 
Deferred:                
Federal  -   (996)  -   (996)
State  -   (259)  -   (259)
Total tax (benefit) $1,468  $115,771 
Total tax $30,933  $115,771 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The Company’s total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances at March 31,June 30, 2009 (unaudited) and December 31, 2008 are as follows:

  2009  2008 
       
Net operating loss $-  $- 
Depreciation        
Federal  (888)  (888)
State  (330)  (330)
Reserve for bad debts        
Federal  6,770   6,770 
State  1,030   1,030 
Vacation accrual        
Federal  7,734   7,734 
State  1,449   1,449 
Charitable contribution  -   - 
         
Deferred tax asset $15,767  $15,767 
 
  2009  2008 
Depreciation      
Federal $(889) $(888)
State  (232)  (330)
Reserve for bad debts        
Federal  6,770   6,770 
State  1,030   1,030 
Vacation accrual        
Federal  7,734   7,734 
State  1,449   1,449 
Deferred tax asset $15,862  $15,765 
The reconciliation of income tax computed at statutory rates of income tax benefits at March 31, 2009 (unaudited) and December 31, 2008 is as follows:
  2009  2008 
Expense at federal statutory rate $978  $70,085 
State tax effects  490   35,064 
Non deductible expenses  -   10,622 
Taxable temporary differences  -   2,764 
Deductible temporary differences  -   (1,768)
Deferred tax asset valuation increase  -   (996)
Income tax (benefit) $1,468  $115,771 


13

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Three Months Ended March 31, 2009
  2009  2008 
       
Expense at federal statutory rate $23,200  $70,085 
State tax effects  7,733   35,064 
Non deductible expenses  -   10,622 
Taxable temporary differences  -   2,764 
Deductible temporary differences  -   (1,768)
Deferred tax asset valuation increase  -   (996)
Income tax (benefit) $30,933  $115,771 


NOTE 5 - Income Taxes (continued)

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

12

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2009
NOTE 5 - Income Taxes (continued)
At the adoption date of January 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized.

The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations in the provision for income taxes. As of March 31,June 30, 2009 and December 31, 2008, the Company had no accrued interest or penalties.

NOTE 6 - Operating Leases (unaudited)

Our principal executive offices are located at 1201 Dove Street, Suite 585, in Newport Beach, California, where we currently lease approximately 950 square feet of office space.  We moved to this location in March 2009 under a one-year lease.  Our monthly rent for this space is approximately $2,000 per month.  The principal offices of our operating subsidiaries, Medex and IRC are located in Long Beach, California.  Medex leases approximately 3,504 square feet of office space in Long Beach, California.  The monthly lease payment during the quarter ended March 31,June 30, 2009 was approximately $7,400.$7,700.  The term of this lease is through February 2011.  Medex currently makes some office space available to IRC. Medex also has an equipment lease for an office copier with monthly payments of $436 expiring in May 2011. We anticipate the facilities we currently lease will be suitable and adequate for our needs.
 

Total Lease Commitments: Year 
Office
Lease
Amount
  
Equipment
Lease Amount
  
Total
Amount
 
  2009 $57,984  $2,616  $60,600 
  2010  98,208   5,232   103,440 
  Thereafter  15,776   2,180   17,956 
  Total $171,968  $10,028  $181,996 
Total Lease Commitments          Year 
Office
Lease
Amount
  
Equipment
Lease Amount
  
Total
Amount
 
 2009 $86,976  $3,924  $90,900 
 2010  98,208   5,232  $103,440 
 Thereafter  15,776   2,180  $17,956 
 Total $200,960  $11,336  $212,296 
 
Rent expense for the office space for the threesix months ended March 31,June 30, 2009 and March 31,June 30, 2008 was $26,674$55,666 and $25,575,$51,479, respectively.  Equipment rent expense for the threesix months ended March 31,June 30, 2009 was $1,308.$2,616.

NOTE 7 - Major Customers

The Company had four and three customers, respectively, who accounted for 10 percent or more of the Company’s total revenues during the six months ended June 30, 2009 and year ended December 31, 2008.  The percentages of total revenues for the six months ended June 30, 2009 and the year ended December 31, 2008 are as follows:

  
June 30,
2009
  
December 31,
2008
 
  (unaudited)    
Customer A  13%  18%
Customer B  16%  15%
Customer C  0%  12%
Customer D  21%  0%
Customer E  13%  0%

 
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Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the ThreeSix Months Ended March 31,June 30, 2009


NOTE 7 - Major Customers

The Company had four customers who, accounted for 10 percent, or more of the Company’s total revenues during the three months ended March 31, 2009 and three customers in the year ended December 31, 2008.  The percentages of total revenues for the three months ended March 31, 2009 and the year ended December 31, 2008 are as follows:
  
March 31,
2009
  
December 31,
2008
 
  (unaudited)    
Customer A  17%  18%
Customer B  17%  15%
Customer C  12%  12%
Customer D  11%  - 


NOTE 8 - Accrued and Other Liabilities

  
June 30,
2009
  
December 31,
2008
 
  (unaudited)    
Accrued liabilities consist of the following;      
Employment Enrollment Fees $104,250  $75,000 
Compensated Absences  22,888   22,735 
Legal Fees  94,000   79,000 
Accounting Fees  14,490   1,783 
Other  318   318 
Total $235,946  $178,836 
  March 31, 2009  December 31, 2008 
  (unaudited)    
Accrued liabilities consist of the following:      
Employment Enrollment Fees $90,000  $75,000 
Compensated Absences  24,662   22,735 
Legal Fees  88,000   80,783 
Other  318   318 
Total $212,500  $178,836 

NOTE 9 - Options for Purchase of Common Stock

In August 2002, the Company adopted a stock option plan.  The Company adopted a plan which provides for the grant of options to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant.   Options are exercisable six months after the grant date and expire five years from the grant date.  The exercise price of the options is $1.00.  The fair market value of the options at the date of grant was determined to be $.70 due to earlier issuances for cash of this stock.  The plan calls for a total of 50,000 shares to be held for grant.  No securities were issued under the plan during the first quartersix months period ending June 30, 2009 or during the 2008 fiscal year.

2005 Stock Option Plan

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


15

Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Three Months Ended March 31, 2009

NOTE 10 – Stockholders’ Equity

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

As permitted under Utah law and as approved by the Company’s stockholders at a Special Meeting of Stockholders, 12,568 pre-reverse split shares of common stock were reduced to fractional shares (less than one whole share) by the reverse split and such fractional shares were not reissued.  Rather, the fractional shares were cancelled and converted into the right to receive a cash payment for the value of the fractional share.  The Company believes that the transaction will result in significantly reduced shareholder record keeping and mailing expenses and provided holders of fewer than the 50 pre-reverse split shares with an efficient, cost-effective way to cash-out their investments.  As of March 31, 2009, the Company had paid an aggregate amount of $1,005 to cashed-out fractional share shareholders.

As a result of the reverse and forward splits, the Company has restated its outstanding shares on the balance sheets for March 31, 2009, December 31, 2008 and 2007 and in Note 2(e). Neither the authorized common stock of the Company, nor the par value of the common stock were affected by the splits. Prior to the splits, the Company had 15,427,759 shares of common stock outstanding.  Following the splits the outstanding common stock of the Company was 802,424 shares. For the year end December 31, 2008, $14,626 was reclassified from common stock to additional paid-in-capital.

NOTE 1110 - Unaudited Information

The financial statementsstatement for the threesix months ended March 31,June 30, 2009 and 2008 were taken from the books and records of the Company without audit.  However, such information reflects all adjustments, which are in the opinion of management, necessary to properly reflect the results of the threesix months ended March 31,June 30, 2009 and 2008, and are of a normal, recurring nature.  The information presented is not necessarily indicative of the results from operations expected for the full fiscal year.

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

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

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

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

Throughout this 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”) and Industrial Resolutions Coalition, Inc. (“IRC”).

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.

17

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.

15

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 collect from each enrolled employerpay certain annual fees which are passed on to the California Division of Workers’ Compensation (“DWC”).  These fees include an annual fee per employee enrolled in the HCO at the end of the calendar year.  The HCO guidelines also impose certain data reporting requirements on the HCO and annual enrollment notice delivery requirements.  These requirements increase the administrative costs of an 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.

Unlike HCOs, MPNs are not assessed the annual enrollee fee that must be paid to the DWC.  MPNs have far fewer data reporting obligations and no annual enrollment notice delivery requirements.  MPN’s are only required to provide an enrollment notice at the time the employee first joins the MPN and a second notice at the time the employee suffers a work place injury.  We experienced small increases in total enrollment during the nine months ended
September 30, 2008.

Liquidity and Capital Resources

           As of March 31,June 30, 2009, we had cash on hand of $539,196$518,661 compared to $624,401 at December 31, 2008.  The $85,205$105,740 decrease in cash on hand is the result of decreases in tax payable,revenue from operations and unearned revenues and increasesrevenue, increase in accounts receivable, partiallyreceivables and prepaid income taxes offset by increases in accrued expenses.expenses and accounts payables.  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 needingthe need to find other sources of capital at this time. However, if our revenues are less than anticipated we may need to find other sources of capital to continue operations.

18

We do not currently have planned forany significant capital expenditures during the next twelve months any significant capital expenditures 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.
16


Results of Operations

Comparison of the three months ended March 31,June 30, 2009 and 2008

Revenue

The total number of employee enrollees decreased 9%6% during three months ended March 31,June 30, 2009 compared to March 31,June 30, 2008.  Total revenues decreased 12%14% to $521,355.$506,690.  As of March 31,June 30, 2009, we had approximately 213,000216,000 total enrollees.  Enrollment consisted of approximately 59,00057,000 HCO enrollees and 154,000159,000 MPN enrollees.  By comparison as of March 31,June 30, 2008 we had approximately 234,000228,000 enrollees, including approximately 73,00075,000 HCO enrollees and approximately 161,000153,000 MPN enrollees.

We believe the decrease in employee enrollees and revenue is indicative of the current economy.  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.

Our business generally has a long sales cycle, typically in excess of one year. However, once we have established a customer relationship, our revenue adjusts with the growth or retraction of our customers’ managed headcount volume.  New customers are added throughout the year and other customers terminate from the program for a variety of reasons.  Our single largest customer will terminated its contract with us effective August 1, 2009.  We anticipate the impact on revenue of this termination will be significant on a go forward basis as this customer accounted for approximately $158,000 and $161,000, of  revenue for the quarters ending September 30, 2008 and December 31, 2008, respectively. The total 2008 revenue generated from this customer was approximately $681,000.

In the current economic environment, we anticipate businesses will seek ways to further reduce their workers’ compensation program costs.  Even though the HCO and MPN programs create a favorable return on investment for employers as our services are a significant part of the employers’ loss prevention programs to avoid significant workers’ compensation claims and provide a framework for expeditiously returning their employees back to work at the lowest cost, it is always a challenge to justify our fees to our customers.  As a result, we expect tomay experience some client turnover, in the form of existing employer clients short-sightedly 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, theThe market is currently subject to restructuring in the type and pricing of services provided in our industry.  We expect these factors may continue to erode HCO Fees, MPN Fees and Other Revenue until economic conditions improve.

Total revenues decreased 14% to $506,690, in the second quarter 2009 over the second quarter 2008. HCO revenues decreased 22% due to decreased HCO enrollees. MPN revenues increased 2% due to increases in MPN enrollees in the second quarter 2009. Other revenue decreased 14% as a result of providing decreased nurse case management services to our customers.

HCO Fees

During the three months ended March 31,June 30, 2009 and 2008, HCO fee revenues were $244,998$230,263 and $278,551$295,467 respectively.  The 19%A 24% decrease in HCO enrollment during the three months ended March 31,June 30, 2009, resulted in a 12%this 22% decrease in revenue from HCO fees.  This was attributable to decreased employee enrollment and re-notificationrenotification of existing clients.

19


MPN Fees

MPN Fee revenuesfee revenue for the three months ended March 31,June 30, 2009 were $149,560was $151,291 compared to $187,392$148,016 for the three months ended March 31,June 30, 2008.  As of March 31, 2009During the second fiscal quarter we realized a 4% decreaseincrease in MPN enrollment when compared the same period 2007.  Along with the decrease in2008.  Although MPN enrollment andincreased 4%, because of differing fee terms, unbundling of services, price competition and similar factors, as compared to 2008, we realized only a 20% decrease2% increase in MPN revenues.revenue during the three months ended June 30, 2009.

17


Other Revenue

During the three months ended March 31,June 30, 2009, other revenue decreased 1%14% to $126,797$125,136 from $127,724$146,319 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.

Expenses

Total expenses forduring the three months ended March 31,June 30, 2009 andcompared to 2008, were $515,582 and $516,143.  The decreasedecreased 14% to $436,535 primarily as a result of $561 was the result in decreases in consulting fees,decreased professional fees insurance, employment enrollmentcaused by higher legal fees incurred in the 2008 quarter related to the reverse and data maintenance, partially offset by increases inforward stock splits.  Additionally, during the three months ended June 30, 2009, salaries and wages and generaldata maintenance expense were lower by 5% and administrative expenses.25%, respectively, when compared to the same period a year earlier.

Consulting Fees

During the three months ended March 31,June 30, 2009, consulting fees decreased to $62,586$57,497 from $65,030$59,810 during the three months ended March 31,June 30, 2008.  This decrease of $2,444 in consulting fees of $2,313 was primarily due to reduced level oflower lobbyist consulting fees.   We do not anticipate that consulting fees will increase during fiscal 2009 unless 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.

Salaries and Wages

Salaries and wages increased $35,379decreased $8,674 or 20%5% during the three months ended March 31, 2009.June 30, 2009 from the same period a year earlier.  The increasedecrease in salaries & wages iswas due primarily due to the hiringtermination of an additional administrative staff member, a bonus paid to our CEOnurse case manager and merit increases to certain administrative staff members.  Based upon the current trenda 10% reduction in declining revenues, we are contemplating the reduction of our current salary and wage levels by implementing a companywide salary cut, including the elimination of annual bonuses paid at the end of the year.wages for salaried employees that went into effect in  May 2009.

Professional Fees

For the three months ended March 31,June 30, 2009, we incurred professional fees of $56,595$35,657 compared to $82,381$76,144 during the three months ended March 31, 2008.June 30, 2009.  This 31%53% decrease in professional fees iswas the primarily the result of decreased accounting and legal fees partially offset by increases in medical consulting fees and NCM fees. The decrease in accounting fee was the result of terminating the outside accounting consultant in December 2008.  The lower legal expenses during the firstthree months ended June 30, 2009 when compared to the previous year quarter 2009, resulted from the higher expense level in 2008which included legal fees associated with our the reverse and forward splits of our common stock.  Should potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses arise, legal expenses may be considerably higher in future quarters.

2018

Insurance

During the three months ended March 31,June 30, 2009, we incurred insurance expenses of $28,671,$28,115 a $2,057 decrease$1,776 increase over the prior year three months.  The decrease in 2009 was primarily due to minor adjustments made to the health insurance premiums.months of 2008.  We do not expect insurance expense to increase materially in 2009.

Employment Enrollment

Employment enrollment expenses decreased $3,000 to $15,000 during the three months ended March 31,June 30, 2009, compared to the three months ended March 31,June 30, 2008.  As an HCO, we are required to pay a fee to the State of California – Division of Workers’ Compensation (DWC)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 accrue expenseexpenses during the year based on our estimation of what enrollment will be at year end. We anticipate that employee enrollment will be lower at December 31, 2009 than it was at December 31, 2008 due to lessfewer HCO enrolled employees.

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.

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 March 31, 2009 we experienced a 19% decrease in HCO enrollment and a 4% decrease in MPN enrollment, resulting in an overall enrollment decrease of 9%.  Data maintenance fees decreased 14% to $55,63225% during the three months ended March 31, 2008.June 30, 2009.  The decrease in data maintenance fees iswas primarily attributable to the decreased level of HCO enrollees, lower data maintenance costs associated with the renewal of MPN enrollees and lower prices negotiated with third party service providers.  We expect data maintenance fees will be lower throughout 2009 as compared to 2008.

General and Administrative

General and administrative expenses for the three months ended June 30, 2009 and 2008 were $71,360 and $71,747, respectively.  We expect current general and administrative expenses to be lower in the remaining months of 2009, as compared to the comparable period of 2008, as a result of cutting operating costs in proportion to the anticipated decline in revenues.
 

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Net Income

While we realized a 14% decrease in our total revenue during the quarter, this decrease was partially offset by a 13% decrease in total expenses during the three months ended June 30, 2009, which led to a $14,659 decrease in income from operations during three months ended June 30, 2009.

As a result of lower revenues and lower expenses, we realized a net income of $41,347 compared to $49,098 during three months ended June 30, 2009 and 2008, respectively.

Comparison of the six months ended June 30, 2009 and 2008

Revenue

The total number of employee enrollees decreased 6% during six months ended June 30, 2009 compared to June 30, 2008.  As a result, total revenues decreased 13% to $1,028,045.  As of June 30, 2009, we had approximately 216,000 total enrollees.  Enrollment consisted of approximately 57,000 HCO enrollees and 159,000 MPN enrollees.  By comparison as of June 30, 2008 we had approximately 228,000 enrollees, including approximately 75,000 HCO enrollees and approximately 153,000 MPN enrollees.

HCO Fees

During the six months ended June 30, 2009 and 2008, HCO fee revenues were $475,261 and $574,018 respectively.  The 24% decrease in HCO enrollment during the six months ended June 30, 2009, resulted in a 17% 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, 2009 were $300,851 compared to $335,408 for the six months ended June 30, 2008.  As of June 30, 2009 we realized a 4% increase in MPN enrollment when compared the same period 2008.  Although we had an increase in MPN enrollment during the six months ended June 30, 2009, factors such as differing fee terms, unbundling of services, price competition and other similar factors as compared to 2008, resulted in a 10% decrease in MPN revenues compared to the same period 2008.

Other Revenue

During the six months ended June 30, 2009, other revenue decreased 8% to $251,933 from $274,043 in the same period a year earlier.  As noted above, the primary component of other revenue is nurse case management.  Other revenue decreased during the six months ended June 30, 2009 because of the decline in demand for nurse case management services.

Expenses

Total expenses for the six months ended June 30, 2009 and 2008 were $952,117 and $1,021,131.  The decrease of $69,014 was the result in decreases in consulting fees, professional fees, insurance, employment enrollment and data maintenance, partially offset by increases in salaries and wages and general and administrative expenses.

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Consulting Fees

During the six months ended June 30, 2009, consulting fees decreased to $120,083 from $124,840 during the six months ended June 30, 2008.  This decrease of $4,757 in consulting fees was primarily due to reduced level of lobbyist fees.  We do not anticipate that consulting fees will increase during fiscal 2009 unless 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.

Salaries and Wages

Salaries and wages increased $26,705 or 7% during the six months ended June 30, 2009.  The increase in salaries & wages is primarily, due to the hiring of an additional administrative staff member, a bonus paid to our CEO and merit increases to certain administrative staff members, offset by a 10% wage reduction implemented in May 2009 for our salaried employees and the termination of a nurse case manager.

Professional Fees

For the six months ended June 30, 2009, we incurred professional fees of $92,252 compared to $158,525 during the six months ended June 30, 2008.  This 42% decrease in fees is the result of decreased accounting and legal fees, partially offset by increases in medical consulting fees and NCM fees. The decrease in accounting fee was the result of terminating the outside accounting consultant in December 2008.  The lower legal expenses during the six months ended June 30, 2009, resulted from the higher expense level in 2008 associated with the reverse and forward splits of our common stock.

Insurance

During the six months ended June 30, 2009, we incurred insurance expenses of $56,786, a $281 decrease over the prior year six months.  The decrease in 2009 was primarily due to minor adjustments made to the health insurance premiums.

Employment Enrollment

Employment enrollment expenses decreased $6,000 to $30,000 during the six months ended June 30, 2009, compared to the six months ended June 30, 2008.  As an HCO, we are 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 accrue expense during the year based on our estimation of what enrollment will be at year end.

Data Maintenance

During six months ended June 30, 2009 we experienced a 32% decrease in HCO enrollment and a 4% increase in MPN enrollment, resulting in an overall enrollment decrease of 6%.  Data maintenance fees decreased 19% to $102,537 during the six months ended June 30, 2009.  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.

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General and Administrative

General and administrative expenses increased 9%4% to $84,501$155,861 during the threesix months ended March 31,June 30, 2009.  This increase in general and administrative expense was attributable to increases in expenses associated with maintaining a provider network site, printing and reproduction and miscellaneous expense partially offset by decreases in advertising expense, equipment repairs, travel and entertainment expense and shareholders’ meeting expense. We expect current general and administrative expenses to be lower in the remaining months of 2009 as a result of cutting operating costs in proportion to the anticipated decline in revenues.

Net Income

During the threesix months ended March 31, 2008,June 30, 2009, total revenues of $521,355$1,028,045 were lower by $73,312$155,424 when compared to the same period in 2008.   This decrease in total revenues was slightly offset by the $521$69,014 decrease in total expenses resulting in an income from operations of $5,773$75,928 compared to an income from operations of $77,524$162,338 during threesix months ended March 31,June 30, 2008.  Correspondingly, we only realized a net profit of $5,052$46,399 for the threesix months ended March 31,June 30, 2009, compared to a net income of $45,408,$94,506, during the threesix months ended March 31,June 30, 2008.  As the current recession has had an adverse impact on our gross revenues and net income during the three and six month periodperiods ending March 31,June 30, 2009, we expect this trend will continue throughout 2009.

Cash Flow

During the threesix months ended March 31,June 30, 2009 cash was primarily used to fund operations. We had a net decrease in cash of $85,205$105,740 during the threesix months ended March 31, 2009.June 30, 2009 as compared an increase in cash of $148,646 at June 30, 2008.  See below for additional discussion and analysis of cash flow.

  For the six months ended June 30, 
  2009  2008 
   (unaudited)   (unaudited) 
       
Net cash provided by (used in) operating activities $(105,740) $149,651 
Net cash used in investing activities  -   (1,005)
Net cash provided by financing activities  -   - 
         
Net Change in Cash $(105,740) $148,646 
  For the three months ended March 31, 
  
2009
(unaudited)
  
2008
(unaudited)
 
Net cash provided by (used in) operating activities $(85,205) $77,169 
Net cash used in investing activities  -   - 
Net cash provided by financing activities  -   - 
         
Net Change in Cash $(85,205) $77,169 

During the threesix months ended March 31,June 30, 2009, net cash used in operating activities was $85,205,$105,740 compared to net cash provided by operating activities of $77,169$149,651 during the threesix months ended March 31,June 30, 2008.  As discussed herein we realized net income from operations of $5,052$46,399 during the threesix months ended March 31,June 30, 2009, compared to a net income of $45,408$94,506 during the threesix months ended March 31,June 30, 2008.

We did not engage in investing or financing activities during the threesix months ended March 31,June 30, 2009 and used only $1,005 in investing activities during the six months ended June 30, 2008 for the cash-out of fractional shares of common stock resulting from the reverse split of our common stock in May 2008.  We did not engage in any financing activities in six months ended June 30, 2009 or 2008.

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Summary of Material Contractual Commitments

The following is a summary of our material contractual commitments as of March 31, 2009:

 Payments Due By Period  Payments Due By Period 
Contractual obligations 
Total
  Less than 1 year  
1-3 years
  
3-5 years
  
More than
5 years
  Total  Less than 1 year  1-3 years  3-5 years  
More than
5 years
 
Operating Leases:                              
Equipment Leases $11,336  $5,232  $6,104  $-  $-  $10,028  $5,232  $4,796  $-  $- 
Office Leases  200,960   114,192   86,768   -   -   171,968   108,864   63,104   -   - 
                    
Total $212,296  $119,424  $92,872  $-  $-  $181,996  $114,096  $67,900  $-  $- 

Off-Balance Sheet Financing Arrangements

As of March 31,June 30, 2009 we had no off-balance sheet financing arrangements.

Recent Accounting Pronouncements

The FASB has issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts.  SFAS No. 163 clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, and addresses the recognition and measurement of premium revenue and claim liabilities.  It requires expanded disclosures about contracts, and recognition of claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation.  It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations, and (b) the insurance enterprise’s surveillance or watch list.  We are currently evaluating the impact of SFAS No. 163.

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities.  With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature.  We are currently assessing the impact of SGAS No. 162 on our financial position and results of operations.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009.  SFAS 161 requires enhanced
disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows.  Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant.  SFAS 161 is not currently applicable to the Company since we do not have derivative instruments or engage in hedging activity.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141 (R) did not have an impact on the Company’s financial statements.

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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160. is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 did not have an impact on the Company’s financial statements.

        In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which permits entities to choose to measure at fair value eligible financial instruments and certain other items that are not currently required to be measured at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have an impact on the Company’s financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.

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

Basis of Accounting We use the accrual method of accounting.

Revenue Recognition — We apply the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (“SAB 104”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC.  SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies.  In general, we recognize revenue related to monthly contracted amounts for services provided 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) collectibility 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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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 4T.4T.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures.  Because of inherent limitations, our disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met.

As of the end of the period covered by this Report we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b).  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31,June 30, 2009.

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Changes in Internal Control

There was no change in our internal control over financial reporting during the threesix months ended March 31,June 30, 2009, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 Exhibits.  The following exhibits are included as part of this Quarterly Report:
 Exhibit Number Title of Document
 Exhibit 31.1  
Certification of Principal Executive Officer Pursuant to
Section 302 of the SarbanesSarbannes Oxley Act of 20022002.
 Exhibit 31.2  
Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-OxleySarbannes Oxley Act of 20022002.
 Exhibit 32.1  
Certification Pursuant to Section 906 of the Sarbanes-
OxleySarbannes-Oxley Act of 2002.
 Exhibit 32.2  
Certification Pursuant to Section 906 of the Sarbanes-
OxleySarbannes-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,ORGNIZATION, INC. 
    
Date: May 15,August 14, 2009By:/s/ Tom Kubota 
  Tom Kubota, Chief Executive Officer 
  
 Date: August 14, 2009 By:/S/ Fred Odaka 
 Fred Odaka, Chief ExecutiveFinancial Officer
 
    
 
 
Date: May 15, 2009By:/s/ Fred Odaka
Fred Odaka
Chief Financial Officer

 

 

 
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