UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

FORM 10-Q
 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2012March 31, 2013

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

Commission File Number 000-50009

PACIFIC HEALTH CARE ORGANIZATION, INC.
(Exact name of registrant as specified in its charter)

Utah 87-0285238
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)Exact name of registrant as specified in its charter) Identification No.)
   
Utah87-0285238
(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 November 9, 2012,May 14, 2013, the registrant had 802,424 shares of common stock, par value $0.001, issued and outstanding.
 
 
 PACIFIC PACIFIC HEALTH CARE ORGANIZATION, INC.
FORM 10-Q
TABLE OF CONTENTS

 Page
PART I — FINANCIAL INFORMATION 
  
Item 1.  Condensed Consolidated Financial Statements
Balance Sheets as of  March 31, 2013 (Unaudited) and December 31, 2012
3
   
 
Balance Sheets as of  September 30, 2012 (Unaudited) and December 31, 2011
3
(Unaudited) Statements of Operations for the Three and Nine Months Ended September 30,March 31, 2013 and 2012 and 2011
4
   
 
(Unaudited) Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2013 and 2012 and 2011
5
   
 
Notes to Condensed Consolidated Financial Statements
6
  
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
7
  
Item 3.  Quantitative and Qualitative Disclosure about Market Risk
16
  
Item 4.  Controls and Procedures
16
  
PART II — OTHER INFORMATION 
  
Item 1A.  Risk Factors
17
  
Item 6.  Exhibits
17
  
Signatures
18



PART I.   FINANCIAL INFORMATION

ItItem em 1. Financial Information
PacificPacific Health Care Organization, Inc.
Condensed Consolidated Balance Sheets
 
  
September 30, 2012
(Unaudited)
  
December 31,
2011
 
ASSETS      
Current Assets      
    Cash
 
$
407,754
  
$
368,459
 
    Accounts receivable, net of allowance of $20,000
  
1,359,467
   
523,864
 
    Income tax receivable
  
3,998
   
3,998
 
    Prepaid income tax
  
61,511
   
-
 
    Commission draw
  
503
   
29,853
 
    Prepaid expenses
  
49,127
   
53,947
 
Total current assets
  
1,882,360
   
980,121
 
         
Property and equipment, net
        
    Computer equipment
  
106,732
   
80,963
 
    Furniture & fixtures
  
80,230
   
56,471
 
    Office equipment
  
26,560
   
12,537
 
    Office equipment under capital lease
  
25,543
   
25,543
 
   Total property & equipment
  
239,065
   
175,514
 
   Less: accumulated depreciation and amortization
  
(123,898
)
  
(104,294
)
    Net property & equipment
  
115,167
   
71,220
 
         
Other assets
  
8,158
   
8,158
 
   Total assets
 
$
2,005,685
  
$
1,059,499
 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Current Liabilities
        
    Accounts payable
 
$
32,769
  
$
86,482
 
    Accrued expenses
  
240,216
   
126,770
 
    Income tax payable
  
363,555
   
1,611
 
    Current obligation under capital lease
  
6,947
   
6,592
 
    Deferred rent expense
  
25,032
   
21,903
 
    Deferred tax liability
  
5,404
   
5,404
 
    Unearned revenue
  
4,757
   
7,803
 
Total current liabilities
  
678,680
   
256,565
 
         
Long term liabilities
        
   Noncurrent obligation under capital lease
  
1,814
   
7,069
 
    Total liabilities
  
680,494
   
263,634
 
         
Commitments and Contingencies
  
-
   
-
 
         
Shareholders’ Equity
        
    Preferred stock; 5,000,000 shares authorized at $0.001 par value; zero shares issued and outstanding
    -
 
  
-
 
    Common stock; 50,000,000 shares authorized at $0.001 par value; 802,424 shares issued and outstanding
  
802
   
802
 
    Additional paid-in capital
  
623,629
   
623,629
 
    Retained earnings (deficit)
  
700,760
   
171,434
 
Total stockholders' equity
  
1,325,191
   
795,865
 
Total liabilities and stockholders’ equity
 
$
2,005,685
  
$
1,059,499
 
ASSETS 
  
March 31, 2013
(Unaudited)
  
December 31,
2012
 
Current Assets      
Cash $447,198  $479,674 
Accounts receivable, net of allowance of $20,000  1,427,646   1,332,499 
Prepaid income tax  90,422   - 
Receivable other  -   7,344 
Prepaid expenses  96,987   52,988 
Total current assets  2,062,253   1,872,505 
Property and equipment, net        
       Computer equipment
  128,655   127,667 
       Furniture & fixtures  83,708   83,708 
       Office equipment  26,560   26,560 
       Office equipment under capital lease  63,923   63,923 
               Total property & equipment  302,846   301,858 
               Less: accumulated depreciation
  (144,381)  (133,573)
       Net property & equipment  158,465   168,285 
Other assets  8,158   8,158 
Total assets $2,228,876  $2,048,948 
         
LIABILITIES AND STOCKHOLDERS' EQUITY 
         
Current Liabilities        
Accounts payable $85,277  $120,787 
Accrued expenses  191,793   98,074 
Income tax payable  174,472   249,162 
Current obligations under capital lease  17,803   19,294 
Deferred rent expense  24,611   24,951 
Deferred tax liability  5,659   5,659 
Unearned revenue  -   2,443 
Total current liabilities  499,615   520,370 
         
Long term liabilities        
  Noncurrent obligations under capital lease  18,122    21,324 
Total liabilities  517,737   541,694 
         
         
Commitments and Contingencies  -   - 
         
Shareholders’ Equity        
Preferred stock; 5,000,000 shares
 authorized at $0.001 par value;
 zero shares issued and outstanding
  -   - 
Common stock; 50,000,000 shares
 authorized at $0.001 par value;
 802,424 shares issued and outstanding
  802   802 
Additional paid-in capital  623,629   623,629 
Retained earnings  1,086,708   882,823 
Total stockholders' equity  1,711,139   1,507,254 
Total liabilities and stockholders’ equity $2,228,876  $2,048,948 
 
The accompanying notes are an integral part of these consolidatedcondensed consolidated financial statements.statements
 
 
PacificPacific Health Care Organization, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
For three months ended
September 30,
  
For nine months ended
September 30,
 
 2012  2011  2012  2011  
For three months ended
March 31,
 
          2013  2012 
Revenues:               
HCO fees
 
$
301,077
 
$
205,362
 
$
691,574
 
$
565,831
  $246,689  $198,257 
MPN fees
 
205,238
 
171,092
 
569,584
 
455,761
   205,741   183,036 
Other
  
820,486
  
487,943
  
2,255,011
  
1,006,308
   931,680   684,164 
Total revenues
  
1,326,801
  
864,397
  
3,516,169
  
2,027,900
   1,384,110   1,065,457 
                 
        
Expenses:
                 
Depreciation & amortization
 
7,153
 
3,903
 
19,605
 
9,691
 
Depreciation  10,808   5,793 
Consulting fees
 
143,326
 
93,946
 
354,019
 
279,173
   99,481   95,816 
Salaries & wages
 
440,890
 
363,206
 
1,236,088
 
791,842
   500,336   425,594 
Professional fees
 
77,558
 
49,428
 
195,833
 
146,380
   75,778   49,088 
Insurance
 
54,854
 
40,766
 
152,761
 
107,947
   58,180   45,737 
Outsource service fees
 
114,550
 
57,199
 
259,972
 
120,825
   139,257   64,051 
Data maintenance
 
31,285
 
19,370
 
51,969
 
36,463
   27,737   6,831 
General & administrative
  
143,285
  
107,987
  
356,349
  
301,512
   128,973   105,773 
        
Total expenses
  
1,012,901
  
735,805
  
2,626,596
  
1,793,833
   1,040,550   798,683 
                 
Income from operations
 
313,900
 
128,592
 
889,573
 
234,067
   343,560   266,774 
                 
Other income (expense):
         
Loss on disposal of assets
 
-
 
-
 
-
 
(1,564
) 
Other income (expense)        
Interest income
 
170
 
                224
 
551
 
760
   459   190 
Rental income
 
250
 
-
 
1,750
 
 
   -   750 
Interest (expense)
  
(173
)  
(285
)
  
(604
)   
(934
)   (723)  (230)
Total other income (expense)
  
247
  
(61
)   
1,697
  
(1,738
)   (264)  710 
                 
Income before taxes
 
314,147
 
            128,531
 
891,270
 
232,329
   343,296   267,484 
                 
Income tax provision
  
127,574
  
53,671
  
361,944
  
85,182
   139,411   111,113 
                 
Net income
 
$
186,573
 
$
74,860
 
$
529,326
 
$
147,147
  $203,885  $156,371 
                 
Basic and fully diluted earnings per share:
                 
Earnings per share amount
 
$
.23
 
$
                 .09
 
$
.66
 
$
.18
  $.25  $.19 
Weighted average common shares outstanding
 
802,424
 
802,424
 
802,424
 
802,424
   802,424   802,424 

The accompanying notes are an integral part of these condensed consolidated financial statements.statements
 
 
Pacific Pacific Health Care Organization, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
  
Nine months ended
September 30,
 
  2012  2011 
Cash flows from operating activities:      
       Net income
 
$
529,326
  
$
147,147
 
Adjustments to reconcile net income to net cash:
        
   Depreciation and amortization
  
19,604
   
9,691
 
   Loss on disposition of assets
  
-
   
1,564
 
Changes in operating assets & liabilities
        
   (Increase) in accounts receivable
  
(835,603
)  
(274,120
) 
   Decrease in deferred tax asset
  
-
   
5,400
 
   (Increase) in prepaid income tax
  
(61,511
)   
(108,800
)
   Decrease in income tax receivable
  
-
   
35,100
 
   Decrease (increase) in commission draw
  
29,350
   
   (5,760
) 
   Decrease in prepaid expenses
  
4,820
   
26,203
 
   (Decrease) increase in accounts payable
  
(53,713
)  
30,714
 
   Increase in accrued expenses
  
113,446
   
91,969
 
   Increase in income tax payable
  
361,944
   
84,854
 
   Increase in deferred rent expense
  
3,129
   
18,414
 
   (Decrease) in unearned revenue
  
(3,046
)   
(4,720
)
           Net cash provided by operating activities
  
107,746
   
57,656
 
         
Cash flows from investing activities
        
   Purchases of furniture & equipment
  
(63,551
)   
(50,443
) 
       Net cash used by investing activities
  
(63,551
)   
(50,443
) 
         
Cash flows from financing activities
        
        Payment of obligation under capital lease
  
(4,900
)   
(4,570
) 
           Net cash provided by (used in) financing activities
  
(4,900
)  
   (4,570
) 
             Increase in cash
  
39,295
   
2,643
 
             Cash at beginning of period
  
368,459
   
349,552
 
             Cash at end of period
 
$
407,754
  
$
352,195
 
Supplemental Cash Flow Information
        
   Cash paid (refunded) for:
        
             Interest
 
$
604
  
$
649
 
             Taxes refunded
 
$
  -
 
 
$
(38,718
) 
             Taxes paid
 
$
61,511
  
$
107,346
 
  
Three Months Ended
March 31,
 
  2013  2012 
Cash flows from operating activities:      
Net income $203,885  $156,371 
Adjustments to reconcile net income  to net cash:        
Depreciation  10,808   5,793 
Changes in operating assets & liabilities        
 (Increase) in accounts receivable  (95,147)  (271,847)
 Decrease in other receivables  7,344   - 
 (Increase) decrease in income tax receivable  (90,422)  - 
 Decrease in commission draw  -   3,884 
 (Increase) in prepaid expenses  (43,999)  (24,048)
 (Decrease) in accounts payable  (35,510)  (68,928)
 (Decrease) increase in deferred rent expense  (340)  465 
 Increase in accrued expenses  93,719   84,305 
 (Decrease) increase in income tax payable  (74,690)  111,113 
 (Decrease) in unearned revenue  (2,443)  (1,465)
Net cash used in operating activities  (26,795)  (4,357)
         
Cash Flows from investing activities        
        Purchase of furniture and office equipment  (988)  (33,262)
Net cash used in investing activities  (988)  (33,262)
         
Cash Flows from financing activities        
        Payment of obligation under capital lease  (4,693)  (1,605)
Net cash used in financing activities  (4,693)  (1,605)
(Decrease)  in cash  (32,476)  (39,224)
         
Cash at beginning of period  479,674   368,459 
Cash at end of period $447,198  $329,235 
         
Supplemental cash flow information        
Cash paid for:        
Interest $1,439  $230 
Income taxes paid $390,422  $- 

The accompanying notes are an integral part of these condensed consolidated financial statements.statements
 
 
Pacific Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
For the NineThree Months Ended September 30, 2012March 31, 2013
 
NOTE 1 –- BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the CompanyPacific Health Care Organization, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”(the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations.  The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2012 Annual Report on Form 10-K for the year ended December 31, 2011.10-K.  Operating results for the nine-monthsthree months ended September 30, 2012March 31, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.2013.

NOTE 2 –- SUBSEQUENT EVENTS

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


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

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management.  For this purpose any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including statements about our revenue, spending, cash flow, products, actions, intentions, plans, strategies and objectives.  Without limiting the foregoing, words such as “may,“may,” “hope,“hope,” “will,“will,” “expect,“expect,” “believe,“believe,” “anticipate,“anticipate,” “estimate” “projected” “estimate” “projected” or “continue”“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 lookingforward-looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Securities Exchange Act of 1934) to reflect subsequent events or circumstances.

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

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

Overview

Through our subsidiary Medex, we engage in the businessWe are a specialty workers’ compensation managed care company providing a range of managingservices for California employers and administering Health Care Organizations (“HCOs”)claims administrators.  Workers’ compensation costs continue to increase due to rising medical costs, inflation, fraud and other factors.  Medical Provider Networks (“MPNs”)and indemnity costs associated with workers’ compensation in the state of California. For many years,California are billions of dollars annually.  Our focus goes beyond the medical cost of claims.  Our goal is to reduce the entire cost of the claim, including medical, legal and administrative costs.  Through our wholly-owned subsidiaries we provide a range of effective workers’ compensation costs in California have been high. Under the traditional modelcost containment services, including but not limited to:

·  Health Care Organizations (“HCOs”)
·  Medical Provider Networks (“MPNs”)
·  HCO + MPN
·  Workers’ Compensation Carve-Outs
·  Utilization Review (“UR”)
·  Medical Bill Review (“MBR”)
·  Nurse Case Management (“NCM”)

Health Care Organizations

In 1993 the California legislature passed a bill that established Health Care Organizations.  An HCO is a networkHCOs are networks of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training.  The benefit ofHCOs were created to appeal to employees, while providing substantial savings to the employer clients.  In most cases, the HCO to an employer is two-fold.  First,program gives the employer client 180 days of medical control in a provider network within which the employer client has the ability to direct the claim.  The injured worker may change physicians once, but may not leave the network.  The increased length in control is abledesigned to decrease the incidence of fraudulent claims and disability awards and is also based upon the notion that if there is more control theover medical treatment there will be more control over getting injured workers back on the job and therefore, more control over the cost of claims and workers’ compensation premiums.

Our subsidiary, Medex holds two HCO licenses.  Through these licenses we cover the entire state of California.  We offer injured employee for 90 to 180 days rather than during just the first 30 days.  Second, theworkers a choice of enrolling in an HCO provides the employerwith a network of trainedmanaged by primary care providers requiring a referral to which it can refer itsspecialists or a second HCO where injured employees who specialize in treating work place injuries.workers do not need any prior authorization to be seen and treated by specialists.

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

In 2004 the California legislature enacted laws that created MPNs.Medical Provider Networks
By virtue of our certification as an HCO, we are statutorily qualified as an approved MPN.  Like an HCO, an MPN is a network of health care professionals, but MPN networks aredo not required to haverequire the same level of medical expertise in treating employee work place injuries.  Under an MPN program, the employer client dictates which physician the injured employee will see for the initial visit.  Thereafter, the employee can choose to treat with any physician within the MPN network.  Under the MPN program, however, for as long as the employee seeks treatment for his injury, he can only seek treatment from physicians within the MPN network.

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

HCO we were statutorily deemed to be qualified as an approved MPN.  + MPN

As a licensed HCO and MPN, in addition to offering HCO and MPN programs, we are able to offer our clients an HCO program, an MPN program and a combination of the HCO and MPN programs.  Under this combinationplan model an employer can enroll its employees in the HCO program, and then prior to the expiration of the 90 or 180 day treatment period under the HCO program, the employer can enroll the employee into the MPN program.  This allows employers to take advantage of both programs.  To our knowledge,We believe that we are currently the only entity that offers both programs together.together in a combination program.

Workers’ Compensation Carve-outs

Through IRC we seek to create legal agreements for the implementation of Workers’ Compensation Carve-Outs for California employers with collective bargaining units, and the administration of such programs within the statutory and regulatory requirements.  The California legislature permits employers and employees to engage in collective bargaining over alternative systems to resolve disputes in the workers’ compensation context.   These systems are called carve-outs because the employers and employees covered by such collective bargaining agreements are carved out from the state workers’ compensation system.

Utilization Review

Utilization review includes utilization review or utilization management functions that prospectively, retrospectively, or concurrently review and approve, modify, delay, or deny, based in whole or in part on medical necessity to cure and relieve, treatment recommendations by physicians, prior to, retrospectively, or concurrent with the provision of such medical treatment services pursuant to California Workers’ Compensation law, or other jurisdictional statutes.

Medical Bill Review

Medical bill review refers to professional analysis of medical provider, services, or equipment billing to ascertain the proper reimbursement.  Such services include, but are not limited to, coding review and rebundling, reasonable and customary review, fee schedule analysis, out-of-network bill review, pharmacy review, PPO management, and repricing.

Nurse Case Management

Nurse case management is a collaborative process that assesses, plans, implements, coordinates, monitors, and evaluates the options and services required to meet an injured worker’s health needs.  Our nurse case managers use communication and available resources to promote quality, cost-effective outcomes with the goal of returning the injured worker to gainful employment and maximum medical improvement as soon as medically appropriate.

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

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

Our wholly-owned subsidiaryWe offer our HCO and MPN services through Medex.  IRC participates in the Carve-Outs business.  MMC oversees and manages our utilization review (“UR”)UR and medical bill review (“MBR”).   Through our wholly-owned subsidiaries MLSMBR businesses and MMM we offer lien representation services and nurse case management (“NCM”) services, respectively.oversees our NCM services.

Results of Operations

Comparison of the three months ended September 30,March 31, 2013 and 2012 and 2011

Revenue

TheRevenue

Total revenues increased 30% during the three-month period ended March 31, 2013 to $1,384,110 when compared to the same period a year earlier. When compared to the three months ending March 31, 2012, revenues for HCO, MPN and other revenues increased by 24%, 12% and 36%, respectively. During the three months ended March 31, 2013 the total number of employee enrollees increased 27% during three months ended September 30, 2012 compared to September 30, 2011.  Total revenues increased 53% to $1,326,801.38%. As of September 30, 2012,March 31, 2013, we had approximately 442,000537,000 total enrollees.  Enrollment consisted of approximately 76,000 HCO enrollees and 366,000 MPN enrollees.  By comparison as of September 30, 2011 we had approximately 348,000 total enrollees, including approximately 55,000 HCO enrollees and approximately 293,000 MPN enrollees.

The net increase in HCO and MPN enrollees compared to approximately 388,000 total HCO and MPN enrollees as of approximately 21,000 and 73,000, respectively from September 30, 2011 to September 30, 2012,March 31, 2012.  This increase was mainlyprimarily the result of increased enrollment realized by our existing customersmajor HCO and MPN customer increasing their enrollments during 2012 and the addition of four new HCO customersquarter ended March 31, 2013.  The primary reason for the growth in other revenues was the continuing growth in MBR, UR and NCM revenues.

Although we realized growth in our revenues during the three new MPN customers.  Even through HCO revenues increased approximately 47%,months ended March 31 2013 compared to the quarter ended September 30, 2011, HCO enrollment only increased by 38%.  By comparison, MPN revenues increased by 20% and enrollment increased by 25%.  While the economic slowdown impacted our revenue throughout fiscal 2011,same period in 2012, there are no assurances that we anticipate HCO and MPN revenues will continue to be slightly higherexperience growth during 2013 at a rate similar to the fourthgrowth rate we experienced in 2012 and the first quarter of fiscal 2012.2013.
 

Our business generally has a long sales cycle, typically in excess of one year. Once we have established a customer relationship, our revenue adjusts with the growth or retraction of our customers’ managed headcount volume. New customers are added throughout the year and other customers terminate from the program for a variety of reasons.

In the current economic environment, we anticipate businesses will continue to seek ways to further reduce their workers’ compensation program costs. Even though the HCO and MPN programs have been shown to create a favorable return on investment for employers, (as our services are a significant component of the employers’ loss prevention programs), it is always a challenge to justify our fees to our customers, especially in this economy. In order to convince employers that HCO and/or MPN fees are well-spent, we must continue to provide a framework for expeditiously returning employees back to work at the lowest cost. As a result, we expect tomay experience some client turnover in the form of existing employer clients seeking to terminate or renegotiate the scope and terms of existing services. We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house.  In response to the changing market, we have sought to expand our marketing efforts for some of the additional services we now offer our clients.  As a result, during the quarter ended September 30, 2012, we realized increases in our MBR and UR services fee revenues.

HCO Fees

During the three months ended September 30,March 31, 2013 and 2012, and 2011, HCO fee revenues were $301,077$246,689 and $205,362,$198,257, respectively.  While HCO enrollment increased 38%11% (from approximately 65,000 enrollees to approximately 72,000 enrollees) during the quarter ended September 30, 2012,March 31, 2013, we realized a 47%24% increase in revenue from HCO fees when compared to the same period last year.  The percentage increase in revenues outpaced the percentage increase in enrollment by 8%13%.  This was theRevenue growth outpaced enrollment growth principally as a result of an increase in the volume of claims network fees to a number of new clients which resulted in increased revenues.  We expect HCO revenues in the fourth quarter of 2012 to be slightly higher when compared to the quarter ended September 30, 2012 resulting mainly from increased network claims fees and network access fees.clients.  

MPN Fees

MPN Fees

MPN Feefee revenues for the three months ended September 30, 2012March 31, 2013 were $205,238$205,741 compared to $171,092$183,036 for the three months ended September 30, 2011.March 31, 2012. During the quarter ended September 30, 2012March 31, 2013 we realized a 25%44% increase in MPN enrollment when compared the same period 2011 and a corresponding 20% increase in revenues.  Although MPN enrollment increased 25%, MPN revenues increased by only 20% because of(from approximately 323,000 enrollees to approximately 465,000 enrollees.)  Factors such as differing fee terms, unbundling of services, price competition and other similar factors duringas compared to three months ended March 31, 2012, resulted in only a 12% increase in MPN revenues compared to the three months ended September 30,March 31, 2012. MPN fee revenue for the fourth quarter of fiscal 2012 is expected to increase over the 3rd quarter 2012 due to increases in MPN enrollment.

Other Fees

Other fees consist of revenues derived from UR, MBR, NCM UR, lien representation services and network claims repricing services provided by Medex, MMC, MMM and MLS.services. Other fee revenues for the three months ended September 30,March 31, 2013 and 2012 were $931,680 and 2011 were $820,486$684,164, respectively.

UR and $487,943, respectively.MBR Fees

Our MBR and UR revenues increased by $82,436$44,606 and $70,786$149,885, respectively, during the thirdfirst fiscal quarter 2012, respectively,2013 when compared to the same period of fiscal 2011.2012.  MBR and UR service revenues grew largely as a result of increased marketing efforts by MMC in these areas of our business.  We expect MBR and UR revenues for the fourth quarter of 2012 to remain constant when compared to the third quarter of 2012 resulting from lower levels of hospital PPO fees offset by higher employee enrollment when compared to the third quarter of 2012.

NCM Fees

NCM revenues increased $113,394$72,724 to $220,371$215,116 during the quarter ended March 31, 2013 resulting primarily as a result offrom increased customer employee enrollment. We retain nurses on our staff who, at the requestenrollment primarily by existing customers.

Network Repricing Fees

Our network claims repricing fees are generated from certain customers’customers who have access to our network and split with Medex their cost savings generated from their PPO. Network claims repricing fees increaseddecreased from $20,668$68,146 to $44,715 during the three months ended September 30, 2011March 31, 2013, as two customers reported lower levels of network claims repricing fees.  This resulted in a decrease in fees of $23,431when compared to $62,160 during the three months ended September 30, 2012 resulting primarily from the addition of two new customers during the fourth quarter 2011.

We commenced offering lien representation services in February 2012 and recorded revenues totaling $24,434 for the quarter ended September 30,March 31, 2012.

Expenses

Total expenses for the three months ended September 30,March 31, 2013 and 2012 were $1,040,550 and 2011 were $1,012,901 and $735,805,$798,683, respectively.  The increase of $277,096$241,867 was the result of increases in all expense categories averaging an increase of 38%.depreciation, consulting fees, salaries and wages, professional fees, insurance, outsource service fees, data maintenance and general and administrative expense.

Consulting Fees

During the three months ended September 30, 2012,March 31, 2013 consulting fees increased to $143,326$99,481 from $93,946$95,816 during the three months ended September 30, 2011.March 31, 2012.  This increase of $49,380$3,665 was mainly due to higherprimarily the result of increased IT consultant fees incurred in connection with replacing our information technology firm inoffset by the termination of the lien consultant as of January 2012 and June 2012, together with the addition of three temporary administrative staff consultants.31, 2013.

Additionally, inIn the event we see an increased levellevels of services requested from our customers, especially for nurse case management services,  which would require uswe may be required to engage additional nurse case managers weand could experience higher consulting fees.

Salaries and Wages

Salaries and wages increased $77,684$74,742 or 21%18% to $440,890$500,336 during the three months ended September 30, 2012March 31, 2013 compared withto $425,594 during the three months ended September 30, 2011.March 31, 2012. The increase in salaries and wages was primarily due to MMC hiring new employees as follows:

  Medex added four MPN Program Administrators, one MBRin June 2012, one in July 2012 and two in September 2012 and hired one provider relations administrator in JanuarySeptember 2012.  PHCO added an accounting manager in August 2012, an accounting clerk in September 2012 and Medex hiring a receptionist in October 2012.  MMM hired one nurse case manager in October 2011, and administrative support personnel in November and December of 2011 and three temporary support personnel in June 2012. The Senior Vice President of Medex was promoted to COO effective September 1,July 2012 and received anone in August 2012.  MMC hired a bill review analyst and a UR program coordinator in September 2012 and a bill review specialist in October 2012.

Also contributing to the increase in annualsalaries and wages during three months ended March 31, 2013 when compared to the three months ended March 31, 2012, were the salary in connection with this promotion.  In addition,increases given to  the CEO and CFO of PHCO, received an increase in their annual salaries in September 2012 and the CEO was paid a bonus/vacation paymentCOO of Medex in JulyDecember 2012.

Professional Fees

For the three months ended September 30, 2012,March 31, 2013 we incurred professional fees of $77,558,$75,778, compared to $49,428$49,088 during the three months ended September 30, 2011.March 31, 2012.  This 57%54% increase in fees was primarily attributable to an increase in requeststhe result of increased professional fees paid for the assignment of professional field case management nurses. These contracted nurses attendservices partially offset by lower legal and medical appointments on behalfconsultant fees.

Insurance

During the three months ended September 30, 2012,March 31, 2013 we incurred insurance expenses of $54,854,$58,180, a $14,088$12,443 increase over the prior year three-month period.  The increase in 20122013 was primarily due to premium increases for our employee group health medical coverage resulting from the increase in our total number of employees and increased premiums for our workers’ compensation insurance.employees. We are currently reviewing all of 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.  WeInstead, we utilize outside vendors to provide specific services for our clients, charging additional fees over and above those paid to said vendors for administration and coordination of MBR, NCM and UR services directly to the clients. We incurred $114,550$139,257 and $57,199$64,061 in outsource service fees during the three monththree-months periods ended September 30,March 31, 2013 and 2012, and 2011, respectively. This $57,351$75,206 increase was primarily the result of the increased demand for our MBR UR and NCMUR services.

Data Maintenance

During the three months period ended September 30,March 31, 2013 and March 31, 2012 we experienced a 62% increase in data maintenance fees.fees were $27,737 and $6,831, respectively.  The increase of $20,906 in data maintenance fees was primarily attributable to increasedhigher data maintenance costs associated with the increase inrenewal of MPN enrollees and HCO enrollees.enrollment of new customers during the period ended March 31, 2013 when compared to the period ended March 31, 2012.

General and Administrative
 
DuringGeneral and administrative expenses increased 22% to $128,973 during the three monthsthree-month period ended September 30, 2012, we incurredMarch 31, 2013.  This increase of $23,200 was primarily attributable to increases in advertising, employment agency fees, equipment and repairs, rent expense, travel and entertainment and vacation expense partially offset by decreases in dues and subscriptions, licenses and permits, postage and delivery and miscellaneous general administrative expenses.  We expect current levels of general and administrative expenses to increase starting with the second quarter of $143,285 a $35,298 increase over the prior year three-month period.  The increase in 2012 was primarily the result of higher rent expenses incurred by leasing addition space during January 2012, vacation expense and internet expenses.2013.
Income Before Taxes

Net Income

DuringIn the three months ended September 30,first fiscal quarters of 2013 and 2012, total revenues of $1,326,801 were higher by $462,404 when compared to the same period in 2011.  This increase inexceeded total revenues was partially offset by increases in total expenses of $277,096 resulting inexpenses.  As a result, we recognized income from operations of $313,900 compared to income from operations of $128,592 during three months ended September 30, 2011.  Correspondingly, we realized net income of $186,573 for the three months ended September 30, 2012, compared to net income of $74,860,before taxes during the three months ended September 30, 2011.  We believe revenue growth in the fourth quarter will level offMarch 31, 2013 and starting first quarter2012 of 2013, we expect moderate revenues increases to be generated from new services offered by the Company to existing$343,296 and new customers in the areas of MBR, clinical and non-clinical UR, and other services.$267,484, respectively.

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

Revenue

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

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

HCO Fees

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

MPN Fees

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

Other Fees

As mentioned above other fees consista result of revenues derived from MBR, NCM, UR, lien representation servicesrealizing income before taxes, we made provision for our income tax obligations in the first fiscal quarters of 2013 and network claims repricing services provided by Medex, MMC, MMM and MLS. Other fee revenues2012.  Our income tax provision for the nine monthsthree-months ended September 30,March 31, 2013 was 25% greater than during the comparable period 2012 and 2011 were $2,255,011 and $1,006,308, respectively.

Duringto reflect the nine months ended September 30, 2012, MBR and UR revenues increased by $454,936 and $344,961, respectively, when28% increase in income before taxes realized during the first fiscal quarter 2013 compared to the same period offirst fiscal 2011.  MBR and UR service revenues grew largely as a result of increased marketing efforts by MMC in these areas of our business.

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

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

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

Expenses

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

Consulting Fees

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

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

Professional Fees

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

Insurance

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

Outsource Service Fees

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

Data Maintenance

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

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

Net Income

WeDuring the three months ended March 31, 2013, total revenues of $1,384,110 were higher by $318,653 when compared to the same period in 2012.   This increase in total revenues was partially offset by increases in total expenses of $241,867 resulting in income from operations of $343,560 compared to income from operations of $266,774 during three months ended March 31, 2012.  Correspondingly, we realized net income of $529,326$203,885 for the ninethree months ended September 30, 2012March 31, 2013, compared to a net income of $147,147,$156,371, during the ninethree months ended September 30, 2011.March 31, 2012.  We expect moderate increases in revenues to continue in the nine-month period ending September 30, 2012,second quarter of 2013, when compared to the corresponding nine-month periodthe second quarter of 2011,2012, to be generated primarily from new services offered by the Company to our existing and new customers in the areas of MBR and clinical and non-clinical UR and other services.customers.

Liquidity and Capital Resources

As of September 30, 2012,March 31, 2013, we had cash on hand of $407,754$447,198 compared to $368,459$479,674 at December 31, 2011.2012.  The $39,295 increase$32,476 decrease in cash on hand is primarily the result of increases in our net profit, depreciation, accrued expenseaccounts receivables, prepaid expenses, and decreases in accounts payable, other receivables and income tax payable, and decreases in commission draw and prepaid expenses, which were partially offset by increases in accountour net profit, depreciation, accrued expenses and income tax payable.  The payment period on our accounts receivables for our MBR and prepaid taxes,UR services is longer than for our other services, as these clients generally are slower payers.  We are currently seeking loan arrangements to supplement our working capital needs to address the extended collection times on these accounts receivables.    Notwithstanding this issue, barring a decrease in accounts payable and the purchase of furniture and equipment.  Wesignificant economic downturn, we believe that cash on hand and anticipated revenues from operationsoperation will be sufficient to cover our operating costs overfor the next twelve months.  We do not anticipate needing to find other sourcesbalance 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.the current fiscal year.

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

Cash Flow

During the ninethree months ended September 30, 2012March 31, 2013 cash was primarily used to fund operations. We had a net increasedecrease in cash of $39,295$32,476 during the ninethree months ended September 30, 2012.March 31, 2013.  See below for additional discussion and analysis of cash flow.

 
For the nine months ended
September 30,
  For the three months ended March 31, 
 
2012
(unaudited)
 
2011
(unaudited)
  
2013
(unaudited)
  
2012
(unaudited)
 
           
Net cash provided by operating activities
 
$
107,746
 
$
57,656
 
Net cash used in operating activities $(26,795) $(4,357)
Net cash used in investing activities
 
(63,551)
 
 (50,443
)
  (988)  (33,262)
Net cash used in financing activities
  
(4,900
)   
(4,570
)   (4,693)  (1,605)
             
Net Change in Cash
 
$
39,295
 
$
          2,643
 
Net (decrease) in cash $(32,476) $(39,224)

During the ninethree months ended September 30, 2012March 31, 2013, net cash provided byused in operating activities was $107,746,$26,795 compared to net cash provided by operating activities of $57,656$4,357 during the ninethree months ended September 30, 2011.March 31, 2012.  As discussed herein we realized net income of $529,326$203,885 during the ninethree months ended September 30, 2012,March 31, 2013, compared to net income of $147,147$156,371 during the ninethree months ended September 30, 2011.March 31, 2012.
 

Summary of Material Contractual Commitments
 
The following is a summary of our material contractual commitments as of September 30, 2012:March 31, 2013:
 
 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
 
                           
Equipment Leases(1)
 
$
13,447
 
$
2,521
 
$
10,926
 
$
-
 
$
-
  $61,157  $28,393  $32,764  $-  $- 
Office Leases(2)
  
491,784
  
34,234
  
432,800
  
24,750
  
-
   422,975   105,768   317,207   -   - 
Total
 
$
505,231
 
$
36,755
 
$
443,726
 
$
24,750
 
$
-
  $484,132  $134,161  $349,971   -  $- 

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

 
(2)
On March 1, 2011 we commenced a new office lease agreement that runs to February 29, 2016.  Unlike our previous arrangements, the new office space is sufficient for PHCO and each of our subsidiaries. Following is our annual base rent for the newour office space throughout the remaining term of the lease:

Rent Period Annual Rent Payments  Annual Rent Payments 
Oct. 1 to Dec. 31, 2012
 
$
34,234
 
Jan. 1 to Dec. 31, 2013
 
$
140,342
 
Apr. 1 to Dec. 31, 2013 $105,768 
Jan. 1 to Dec. 31, 2014
 
$
144,508
  $144,508 
Jan. 1 to Dec. 31, 2015
 
$
147,950
  $147,949 
Jan. 1 to Feb. 29, 2016
 
$
24,750
 
Jan. 1 to Dec. 31, 2016 $24,750 
Total
 
$
491,784
  $422,975 

Off-Balance Sheet Financing Arrangements

As of September 30, 2012March 31, 2013 we had no off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition —  The Company applies the revenue recognition provisions pursuant to Accounting Standards Codification (“ASC”) 605.10,605-10, Revenue Recognition (“ASC 605”) (formerly SAB Topic 13A), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC.  The guidance outlines the basic criteria that must be met to recognize the revenue and provides guidance for disclosure related to revenue recognition policies.

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

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

Certain HCO and MPNThe 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 generally 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.

ItItem em 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.

ItItem em 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2012March 31, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

PART II.   OTHER INFORMATION

IteItem m 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.

IteItem m 6.   Exhibits

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

 Exhibit Number Title of Document
    
 Exhibit 31.1 
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
    
 Exhibit 31.2 
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
    
 Exhibit 32.1 
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
 Exhibit 32.2 
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
 Exhibit 101.INS XBRL Instance Document
    
 Exhibit 101.SCH XBRL Taxonomy Extension Schema Document
    
 Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
    
 Exhibit 101.DEF XBRL Taxonomy Definition Linkbase Document
    
 Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document
    
 Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
 

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

  PACIFIC HEALTH CARE ORGANIZATION, INC.
    
    
Date:November 14, 2012May 15, 2013/s/ Tom Kubota 
  
Tom Kubota
Chief Executive Officer

    
Date:November 14, 2012May 15, 2013/s/ Fred Odaka 
  
Fred Odaka
Chief Financial Officer