10-Q/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Amendment No. 1 to 

FORM 10-Q

(Mark One)

[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2012; or
[_]	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 0-23511

INTEGRATED HEALTHCARE HOLDINGS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA	87-0573331
(STATE OR OTHER JURISDICTION OF	(I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

1301 NORTH TUSTIN AVENUE
SANTA ANA, CALIFORNIA	92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	(ZIP CODE)

(714) 953-3503 (Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 such 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 [_]

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes[X] No [_]

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 definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  [_]	Accelerated filer  [_]
Non-accelerated filer  [_]	Smaller reporting company  [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]

There were 255,307,262 shares outstanding of the registrant's common stock as of August 6, 2012.

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q is being filed solely to furnish the Interactive Data files as Exhibit 101, in accordance with Rule 405 of Regulation S-T. No other changes have been made to the Form 10-Q, as originally filed on August 10, 2012.

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Item 6. Exhibits

101.INS*	XBRL Instance Document
101.SCH*	XBRL Schema Document
101.CAL*	XBRL Calculation Linkbase Document
101.DEF*	XBRL Definition Linkbase Document
101.LAB*	XBRL Label Linkbase Document
101.PRE*	XBRL Presentation Linkbase Document

* Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

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

	INTEGRATED HEALTHCARE HOLDINGS, INC
Dated: August 31, 2012	By:	/s/ Steven R. Blake
		Steven R. Blake
		Chief Financial Officer (Principal Financial Officer)

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9. VARIABLE INTEREST ENTITY (Details) (PCHI [Member], USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Mar. 31, 2012
PCHI [Member]
Cash	$ 266	$ 68
Property, net	40,662	40,984
Other	283	207
Total assets	41,211	41,259
Debt (as guarantor)	45,000	45,000
Other	544	641
Total liabilities	45,544	45,641
Deficiency	(4,333)	(4,382)
Total liabilities and accumulated deficit	$ 41,211	$ 41,259

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9. VARIABLE INTEREST ENTITY (Details Narrative) (USD $)	3 Months Ended
	Jun. 30, 2012
Variable Interest Entity Details Narrative
VIE, arrangements	The Company received $5.0 million and PCHI guaranteed the Company's $45.0 million Loan. The Company remains primarily liable as the borrower under the $45.0 million Loan notwithstanding its guarantee by PCHI. The $45.0 million term loan is cross-collateralized by substantially all of the Company's assets and all of the real property of the Hospitals
VIE, ownership	PCHI was owned 51% by various physician investors and 49% by Ganesha Realty LLC (“Ganesha”), which is managed by Dr. Chaudhuri
VIE, Financial support	$ 45,000,000
Exposure amount, VIE	PCHI's total liabilities represent the Company's maximum exposure to loss.

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7. RETIREMENT PLAN (Details Narrative) (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Mar. 31, 2012
Retirement Plan Details Narrative
Retirement Plan Expenses Incurred	$ 804,000	$ 774,000
Accrued compensation and benefits	$ 1,700,000		$ 3,900,000

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012
Total1Member
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	$ 910
FairValueInputsLevel1Member
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability
FairValueInputsLevel2Member
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability
FairValueInputsLevel3Member
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	$ 910

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2. PROPERTY AND EQUIPMENT (Tables)

6 Months Ended

Jun. 30, 2012

Property And Equipment Tables

Property and Equipment

Property and equipment consists of the following:

	June 30,			March 31,
	2012			2012
Buildings	$	36,536		$	35,376
Land and improvements		13,523			13,523
Equipment		18,856			18,268
Construction in progress		–			1,160
Assets under capital leases		11,218			11,218
		80,133			79,545
Less accumulated depreciation		(24,962	)		(24,016	)
Property and equipment, net	$	55,171		$	55,529

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12. ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Mar. 31, 2012
Electronic Health Records Incentive Program Details Narrative
Total incentive program awards	The Company has been awarded a total amount of $13.6 million under the Medicaid EHR incentive program, which will be earned and received over a four year period.
Recognized other income under Medicaid EHR	$ 6,800

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3. DEBT (Details Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2012
TermLoanCreditAgreementMember
Line of Credit Facility [Line Items]
Outstanding Balance	$ 45,000
Fixed Interest Bearing Rate + 2.5% LIBOR floor	14.50%
Credit agreement maturity date	Apr. 13, 2013
RevolvingLoanAgreementMember
Line of Credit Facility [Line Items]
Outstanding Balance	$ 14,000
Fixed Interest Bearing Rate + 2.5% LIBOR floor	5.00%
Credit agreement maturity date	Aug. 30, 2013

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4. COMMON STOCK WARRANTS (Details) (WarrantMember)	3 Months Ended	12 Months Ended
	Jun. 30, 2012	Mar. 31, 2012
WarrantMember
Expected dividend yield	0.00%	0.00%
Risk-free interest rate	0.20%	0.20%
Expected volatility	65.10%	57.30%
Expected term (in years)	9 months 14 days	1 year 14 days

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8. INCOME (LOSS) PER SHARE (Details Narrative)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Income Loss Per Share Details Narrative
Shares excluded from the calculations of diluted loss per share	411,000,000	412,000,000

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3. DEBT

3 Months Ended

Jun. 30, 2012

Debt Disclosure [Abstract]

NOTE 3 - DEBT

As of June 30, 2012, the Company had the following credit facilities:

● $45.0 million term loan under the Credit Agreement, dated as of October 9, 2007, as amended (the “Term Loan Credit Agreement”), by and among the Company, Silver Point Finance, LLC and its affiliates SPCP Group IV, LLC and SPCP Group, LLC (together with Silver Point Finance, LLC, “Silver Point”), and PCHI and Ganesha, as Credit Parties, bearing a fixed interest rate of 14.5% per year ($45.0 million outstanding balance at June 30, 2012). If any event of default occurs and continues, the lender can increase the interest rate to 19.5% per year.  The stated maturity date for this Credit Agreement is April 13, 2013 and, accordingly, the term loan is reflected in the accompanying unaudited condensed consolidated balance sheet as current debt.

● $14.0 million revolving line of credit under the Credit and Security Agreement, dated as of August 30, 2010, as amended (the “Revolving Loan Agreement”), by and among the Company, MidCap Funding IV, LLC, as assigned to it from MidCap Financial, LLC, as administrative agent and a lender, and Silicon Valley Bank, as a lender (collectively, the “Lenders”), bearing an interest rate of 5.0% plus LIBOR, with a 2.5% floor, per year (7.5% at June 30, 2012) and an unused commitment fee of 0.625% per year ($14.0 million outstanding balance at June 30, 2012).  For purposes of calculating interest, all payments the Company makes on the revolving line of credit are subject to a six business day clearance period.  The stated maturity date for this Revolving Loan Agreement is August 30, 2013.

The Company’s credit facilities contain various affirmative and negative covenants and customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, events of bankruptcy and insolvency, judgment defaults, the invalidity of liens on collateral, and the occurrence of events which have a material adverse effect on the Company. As of June 30, 2012, the Company was in compliance with all financial covenants.

The Company's outstanding debt consists of the following:

	June 30,		March 31,
	2012		2012
Current:
Revolving line of credit	$	14,000	$	14,000
Term loan		45,000		–
	$	59,000	$	14,000
Noncurrent:
Term loan	$	–	$	45,000

On August 1, 2012, the Company amended its Revolving Loan Agreement and Term Loan Credit Agreement (Note 14).

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4. COMMON STOCK WARRANTS (Details Narrative) (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
OmnibusWarrantsMember
Class of Warrant or Right [Line Items]
Fair value of the Warrants	$ 528
OmnibusWarrantsMember | KPCResolutionCompanyMember
Class of Warrant or Right [Line Items]
Warrants Issued	139,000
Exercise Price	0.07
OmnibusWarrantsMember | TermLoanLenderMember
Class of Warrant or Right [Line Items]
Warrants Issued	96,000
Exercise Price	0.07
ReleaseWarrantMember
Class of Warrant or Right [Line Items]
Fair value of the Warrants	382
Acquisition of Shares	170.0
AprilWarrantsMember
Class of Warrant or Right [Line Items]
Net gain (loss) related to warrants	$ 731	$ (3,300,000)

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9. VARIABLE INTEREST ENTITY (Tables)

6 Months Ended

Jun. 30, 2012

Variable Interest Entity Tables

Variable Interest Entity

June 30,  2012			March 31,  2012
Cash	$	266		$	68
Property, net		40,662			40,984
Other		283			207
Total assets	$	41,211		$	41,259

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6. STOCK INCENTIVE PLAN (Tables)

6 Months Ended

Jun. 30, 2012

Stock Incentive Plan Tables

STOCK INCENTIVE PLAN

	Shares			Weighted- average exercise price			Weighted- average grant date fair value			Weighted- average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, March 31, 2012		8,235			$	0.18
Granted		–			$	–		$	–
Exercised		–			$	–
Forfeited or expired		(100	)		$	0.26
Outstanding, June 30, 2012		8,135			$	0.18					2.4		$	–
Exercisable at June 30, 2012		8,135			$	0.18					2.4		$	–

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5. INCOME TAXES (Details Narrative) (USD $)	Mar. 31, 2012
Income Tax Disclosure [Abstract]
Unrecognized tax benefits	$ 18,900,000

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13. COMMITMENTS AND CONTINGENCIES (Tables)

6 Months Ended

Jun. 30, 2012

Commitments And Contingencies Tables

INSURANCE

	June 30,  2012		March 31,  2012
Prepaid insurance	$	1,995	$	366
Accrued insurance premiums	$	69	$	60
(Included in other current liabilities)

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	$ 91,592	$ 89,662
MedicareMember
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	14,762	15,451
MedicaidMember
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	8,784	11,720
ManagedCareMember
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	51,726	49,063
IndemnitySelfPayAndOtherMember
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	15,475	12,589
MiscellaneousMember
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	845	839
TotalMember
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	$ 91,592	$ 89,662

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2. PROPERTY AND EQUIPMENT

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	June 30,			March 31,
	2012			2012
Buildings	$	36,536		$	35,376
Land and improvements		13,523			13,523
Equipment		18,856			18,268
Construction in progress		–			1,160
Assets under capital leases		11,218			11,218
		80,133			79,545
Less accumulated depreciation		(24,962	)		(24,016	)
Property and equipment, net	$	55,171		$	55,529

Equipment at June 30 and March 31, 2012 includes $5.1 million and $4.6 million, respectively, relating to the Company’s ongoing development of its new electronic health record technology, which has not been placed into service (Note 12).

The Hospitals are located in an area near active and substantial earthquake faults. The Hospitals carry earthquake insurance with a policy limit of $50.0 million. A significant earthquake could result in material damage and temporary or permanent cessation of operations at one or more of the Hospitals.

The State of California has imposed hospital seismic safety requirements. Under these requirements, the Hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

The State of California has a seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four Hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All Hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit. The Company does not have an estimate of the cost to remediate the seismic requirements for the administrative building as of June 30, 2012.

There are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on the Company's cash flow.  In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Mar. 31, 2012
Accounts receivable:
Patient accounts receivable	$ 69,713	$ 71,800
Allowance for doubtful accounts	(17,106)	(18,201)
Accounts receivable, net	52,607	53,599
Settlement receivables		190
DSH	2,097	4,993
Total Amount due from Government	$ 2,097	$ 5,183

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13. COMMITMENTS AND CONTINGENCIES (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Mar. 31, 2012
Notes to Financial Statements
Prepaid insurance	$ 1,995	$ 366
Accrued insurance premiums(Included in other current liabilities)	$ 69	$ 60

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Mar. 31, 2012
Current assets:
Cash and cash equivalents	$ 8,913	$ 11,829
Restricted cash	27	10
Accounts receivable, net of allowance for doubtful accounts of $17,106 and $18,201, respectively	52,607	53,599
Inventories of supplies, at cost	6,971	6,855
Due from governmental payers	2,097	5,183
Prepaid insurance	1,995	366
Prepaid income taxes	227	892
Hospital quality assurance fees receivable		2,436
Other prepaid expenses and current assets	9,314	8,339
Total current assets	82,151	89,509
Property and equipment, net	55,171	55,529
Debt issuance costs, net	26	64
Total assets	137,348	145,102
Current liabilities:
Revolving line of credit	14,000	14,000
Debt, current	45,000
Accounts payable	50,289	52,700
Accrued compensation and benefits	18,138	19,847
Accrued insurance retentions	14,193	14,377
Warrant liability, current	910
Due to governmental payers	72
Other current liabilities	4,034	3,242
Total current liabilities	146,636	104,166
Debt, noncurrent		45,000
Warrant liability, noncurrent		1,641
Capital lease obligations, net of current portion of $762 and $891, respectively	5,786	5,944
Total liabilities	152,422	156,751
Integrated Healthcare Holdings, Inc. stockholders' deficiency:
Common stock, $0.001 par value; 800,000 shares authorized; 255,307 shares issued and outstanding	255	255
Additional paid in capital	62,911	62,911
Accumulated deficit	(75,302)	(71,828)
Total Integrated Healthcare Holdings, Inc. stockholders' deficiency	(12,136)	(8,662)
Noncontrolling interests	(2,938)	(2,987)
Total stockholders' deficiency	(15,074)	(11,649)
Total liabilities and stockholders' deficiency	$ 137,348	$ 145,102

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6. STOCK INCENTIVE PLAN (Details Narrative)	3 Months Ended
	Jun. 30, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted or vested
StockIncentive2006PlanMember
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum aggregate number of shares under the plan	23,500,000
Plan description	In accordance with the Plan, incentive stock options, nonqualified stock options, and performance based compensation awards may not be granted at less than 100 percent of the estimated fair market value of the common stock on the date of grant. Incentive stock options granted to a person owning more than 10 percent of the voting power of all classes of stock of the Company may not be issued at less than 110 percent of the fair market value of the stock on the date of grant.
Vesting rights description	Option awards generally vest based on 3 years of continuous service (1/3 of the shares vest on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary). Certain option awards provide for accelerated vesting if there is a change of control, as defined. The option awards have 7-year contractual terms.
Options granted or vested	0

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (USD $)	Common Stock	Additional Paid-In Capital	Retained Earnings / Accumulated Deficit	Noncontrolling Interest	Total
Beginning balance, Amount at Mar. 31, 2012	$ 255,000	$ 62,911,000	$ (71,828,000)	$ (2,987,000)	$ (11,649,000)
Beginning balance, Shares at Mar. 31, 2012	255,307,000
Net loss			(3,474,000)	349,000	(3,125,000)
Noncontrolling interests distributions				(300,000)	(300,000)
Ending balance, Amount at Jun. 30, 2012	$ 255,000	$ 62,911,000	$ (75,302,000)	$ (2,938,000)	$ (15,074,000)
Ending balance, Shares at Jun. 30, 2012	255,307,000

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2. PROPERTY AND EQUIPMENT (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Mar. 31, 2012
Property, Plant and Equipment [Abstract]
Buildings	$ 36,536	$ 35,376
Land and improvements	13,523	13,523
Equipment	18,856	18,268
Construction in progress		1,160
Assets under capital leases	11,218	11,218
Property and equipment, gross	80,133	79,545
Less accumulated depreciation	(24,962)	(24,016)
Property and equipment, net	$ 55,171	$ 55,529

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Jun. 30, 2012

Description Of Business And Summary Of Significant Accounting Policies Tables

PATIENT SERVICE REVENUES

The following is a summary of sources of patient service revenues (net of contractual allowances and discounts) before provision for doubtful accounts:

	Three months ended June 30,
	2012		2011
Medicare	$	14,762	$	15,451
Medicaid		8,784		11,720
Managed care		51,726		49,063
Indemnity, self-pay and other		15,475		12,589
Miscellaneous		845		839
	$	91,592	$	89,662

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3. DEBT (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Mar. 31, 2012
Current:
Revolving line of credit	$ 14,000	$ 14,000
Term loan	45,000
Total debt	59,000	14,000
Noncurrent:
Term loan		$ 45,000

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables 2)

6 Months Ended

Jun. 30, 2012

Description Of Business And Summary Of Significant Accounting Policies Tables 2

Warrant liability

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30, 2012:

	Total		Level 1		Level 2		Level 3
Warrant liability	$	910		–		–	$	910

Warrant liability - fair value measurements using significant unobservable inputs

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2012	$	1,641
Change in fair value of warrant liability included in earnings		(731	)
Balance at June 30, 2012	$	910

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated financial statements of Integrated Healthcare Holdings, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, the accompanying unaudited condensed consolidated statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments that are of a normal and recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The results of operations for the three months ended June 30, 2012 are not necessarily indicative of the results for the entire 2013 fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2012 filed with the SEC on June 22, 2012.

The Company has determined that Pacific Coast Holdings Investment, LLC ("PCHI") (Note 9), is a variable interest entity as defined by GAAP and the Company is the primary beneficiary and, accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all amounts included in these notes to the condensed consolidated financial statements are expressed in thousands (except per share amounts, percentages and stock option prices and values). 

LIQUIDITY - As of June 30, 2012, the Company had a total stockholders’ deficiency of $15.1 million and a working capital deficit of $64.5 million.  For the three months ended June 30, 2012, the Company had a net loss of $3.5 million. At June 30, 2012, the Company had no additional availability under its revolving credit facility (Notes 3 and 14).

DESCRIPTION OF BUSINESS - Effective March 8, 2005, the Company acquired four hospitals (the "Hospitals") from subsidiaries of Tenet Healthcare Corporation (the "Acquisition"). The Company owns and operates the four community-based hospitals located in southern California, which are:

● 282-bed Western Medical Center in Santa Ana

● 188-bed Western Medical Center in Anaheim

● 178-bed Coastal Communities Hospital in Santa Ana

● 114-bed Chapman Medical Center in Orange

RECLASSIFICATION FOR PRESENTATION - Certain amounts previously reported have been reclassified to conform to the current period's presentation with no impact on the reported net loss of the Company.

CONCENTRATION OF RISK - The Hospitals are subject to licensure by the State of California and accreditation by the Joint Commission. Loss of either licensure or accreditation would impact the ability to participate in various governmental and managed care programs, which provide the majority of the Company's revenues.

Substantially all patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans), which combined accounted for 57% and 55% of the patient service revenues for the three months ended June 30, 2012 and 2011, respectively. No other payers represent a significant concentration of the Company's patient service revenues.

The Company receives all of its inpatient service revenues from operations in Orange County, California. The economic conditions of this market could affect the ability of patients and third-party payers to reimburse the Company for services, through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs.

USE OF ESTIMATES - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Principal areas requiring the use of estimates include third-party cost report settlements, income taxes, accrued insurance retentions, self-insurance reserves, and net patient receivables. Management regularly evaluates the accounting policies and estimates that are used. In general, management bases the estimates on historical experience and on assumptions that it believes to be reasonable given the particular circumstances in which its Hospitals operate. Although management believes that all adjustments considered necessary for fair presentation have been included, actual results may materially vary from those estimates.

PATIENT SERVICE REVENUES – Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in the consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Since Medicare requires that a hospital's gross charges be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

The following is a summary of sources of patient service revenues (net of contractual allowances and discounts) before provision for doubtful accounts:

	Three months ended June 30,
	2012		2011
Medicare	$	14,762	$	15,451
Medicaid		8,784		11,720
Managed care		51,726		49,063
Indemnity, self-pay and other		15,475		12,589
Miscellaneous		845		839
	$	91,592	$	89,662

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost-based revenues under these programs are subject to audit and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. The Company has established settlement receivables (payables) of $(72) and $190 as of June 30 and March 31, 2012, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $4.7 million and $4.9 million during the three months ended June 30, 2012 and 2011, respectively. The related revenue recorded for the three months ended June 30, 2012 and 2011, was $1.8 million and $3.4 million, respectively. As of June 30 and March 31, 2012, estimated DSH receivables were $2.1 million and $5.0 million, respectively, which are included as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $23.6 million and $19.8 million for the three months ended June 30, 2012 and 2011, respectively), are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. The Hospitals estimate the discounts for contractual allowances utilizing billing data on an individual patient basis. Management believes the estimation and review process allows for timely identification of instances where such estimates need to be revised. The Company does not believe there were any adjustments to estimates of individual patient bills that were material to patient service revenues.

The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance are offered assistance in applying for Medicaid and other programs they may be eligible for, such as state disability, Victims of Crime, or county indigent programs. Patient advocates from the Hospitals' Medical Eligibility Program ("MEP") screen patients in the hospital and determine potential linkage to financial assistance programs. They also expedite the process of applying for these government programs. The estimated costs of charity care (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended June 30, 2012 and 2011 were approximately $2.5 million and $1.3 million, respectively.

The Company is not aware of any material claims, disputes, or unsettled matters with any payers that would affect revenues that have not been adequately provided for in the accompanying unaudited condensed consolidated financial statements.

.

PROVISION FOR DOUBTFUL ACCOUNTS - The Company provides for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.

The Company's policy is to attempt to collect amounts due from patients, including copayments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, until the legally required medical screening examination is complete and stabilization of the patient has begun, services are performed prior to the verification of the patient's insurance, if any. In nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

The provision for doubtful accounts for the three months ended June 30, 2012 was $9.9 million compared to $9.7 million for the three months ended June 30, 2011, representing a 2.1% increase.  

Effective March 31, 2012, the Company adopted Accounting Standards Update (“ASU”) 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” which requires health care entities to present the provision for doubtful accounts relating to patient service revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. All periods presented have been reclassified in accordance with the provisions of ASU 2011-07.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the non-interest bearing cash balances were fully insured at June 30, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250 per depositor at each financial institution, and the Company’s non-interest bearing cash balances may again exceed federally insured limits.

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – The following is a summary of the principal components of accounts receivable and due from government payers as of June 30 and March 31, 2012:

	June 30, 2012			March 31, 2012
Accounts receivable:
Patient accounts receivable	$	69,713		$	71,800
Allowance for doubtful accounts		(17,106	)		(18,201	)
Accounts receivable, net	$	52,607		$	53,599
Due from government payers:
Settlement receivables	$	–		$	190
DSH		2,097			4,993
	$	2,097		$	5,183

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 5.0% and 11.3% as of June 30 and March 31, 2012, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of June 30 and March 31, 2012, the allowance for doubtful accounts for self-pay uninsured was 96.1% and 90.3%, respectively, of self-pay uninsured patient accounts receivable. As of June 30 and March 31, 2012, the allowance for doubtful accounts for self-pay balance after insurance was 76.8% and 77.4%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of June 30 and March 31, 2012, the allowance for doubtful accounts for managed care was 16.1% and 16.1%, respectively, of managed care patient accounts receivable.

Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending under the MEP, with appropriate contractual allowances recorded. If the patient does not qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for doubtful accounts. Reclassifications of pending Medicaid accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for doubtful accounts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of June 30 and March 31, 2012 based on historical collections experience.

INVENTORIES OF SUPPLIES - Inventories of supplies are valued at the lower of weighted average cost or market.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and any impairment write-downs related to assets held and used. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Capital leases are recorded at the beginning of the lease term as property and equipment and a corresponding lease liability is recognized. The value of the property and equipment under capital lease is recorded at the lower of either the present value of the minimum lease payments or the fair value of the asset. Such assets, including improvements, are amortized over the shorter of the lease term or their estimated useful life, where applicable.

The Company uses the straight-line method of depreciation for buildings and improvements, and equipment over their estimated useful lives of 25 years, and 3 to 15 years, respectively.

LONG-LIVED ASSETS - The Company evaluates its long-lived assets for possible impairment whenever circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows. Fair value estimates are derived from established market values of comparable assets or internal calculations of estimated undiscounted future net cash flows. The estimates of future net cash flows are based on assumptions and projections believed by the Company to be reasonable and supportable. These assumptions take into account patient volumes, changes in payer mix, revenue, and expense growth rates and changes in legislation and other payer payment patterns.

DEBT ISSUANCE COSTS - Debt issuance costs are amortized over the related credit facility’s life using the straight-line method. Debt issuance costs of $38 and $410 were amortized during the three months ended June 30, 2012 and 2011, respectively.  At June 30 and March 31, 2012, prepaid expenses and other current assets in the accompanying unaudited condensed consolidated balance sheets included $153 and $153, respectively, as the current portion of debt issuance costs.

FAIR VALUE MEASUREMENTS - The Company's financial assets and liabilities recorded in the unaudited condensed consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, debt, accounts payable, and other liabilities, all of which are recorded at book value which approximates fair value.

GAAP has established a hierarchy for ranking the quality and reliability of the information used to determine fair values and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:	Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:	Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:	Unobservable inputs for the asset or liability.

The Company utilizes the best available information in measuring fair value.  Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company currently has no financial or nonfinancial assets or liabilities subject to fair value measurement on a recurring basis except for warrants issued in April 2010 (Note 4).

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30, 2012:

	Total		Level 1		Level 2		Level 3
Warrant liability	$	910		–		–	$	910

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2012	$	1,641
Change in fair value of warrant liability included in earnings		(731	)
Balance at June 30, 2012	$	910

WARRANTS - The Company has entered into complex transactions that contain warrants (Notes 3 and 4). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). The Company has concluded that the warrants should be classified as liabilities as the settlement of the warrants are not deemed to be in the control of the Company.

INCOME (LOSS) PER COMMON SHARE – Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds (Note 8).

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. The Company assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. The Company has recorded a 100% valuation allowance on its deferred tax assets.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Any penalties or interest arising from federal or state taxes are recorded as a component of the Company’s income tax provision.

SEGMENT REPORTING - The Company operates in one line of business, the provision of healthcare services through the operation of general hospitals and related healthcare facilities. The Company's Hospitals generate substantially all of its net patient service revenues.

The Company's four Hospitals and related healthcare facilities operate in one geographic region in Orange County, California. There are similarities in the region's economic characteristics and the nature of the Hospitals' operations, the regulatory environment in which they operate and the manner in which they are managed. This region is an operating segment, as defined by GAAP. In addition, the Company's Hospitals and related healthcare facilities share certain resources and benefit from many common clinical and management practices. Accordingly, the Company aggregates the facilities into a single reportable operating segment.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Mar. 31, 2012
Statement of Financial Position [Abstract]
Allowance for doubtful accounts (in Dollars)	$ 17,106	$ 18,201
Current portion of Capial Lease Obligation (in Dollars)	$ 762	$ 891
Common stock par value (in Dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	800,000	800,000
Common stock, shares issued	255,307	255,307
Common stock, shares outstanding	255,307	255,307

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11. HOSPITAL QUALITY ASSURANCE FEES (QAF)

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 11 - HOSPITAL QUALITY ASSURANCE FEES ("QAF")

In October 2009, the Governor of California signed legislation supported by the hospital industry to impose a provider fee on general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental Medi-Cal payments to hospitals. The state submitted the plan to the Centers for Medicare and Medicaid Services (“CMS”) for a required review and approval process, and certain changes in the plan were required by CMS. Legislation amending the fee program to reflect the required changes was passed by the legislature and signed by the Governor on September 8, 2010. Among other changes, the legislation leaves distribution of “pass-through” payments received by Medi-Cal managed care plans that will be paid to hospitals under the program to the discretion of the plans.  

The hospital quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to 21 months retroactive to April 2009 and expiring on December 31, 2010 (“2010 QAF”). In February 2011, CMS gave final approval for the 2010 QAF. In December 2011, CMS gave final approval for the extension of the QAF for the six month period from January 1 through June 30, 2011 (“2011 QAF”).

During fiscal year 2012, the Company recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 QAF.  During fiscal year 2011, the Company recognized $87.2 million in revenue and recorded expenses of $47.8 million relating to the 2010 QAF.

In June 2012, CMS conditionally approved the extension of the QAF for the thirty month period from July 1, 2011 through December 31, 2013 (“2013 QAF”). Based on the most recent modeling prepared by the California Hospital Association, the Company anticipates making payments for provider fees and other expenses relating to the 2013 QAF of approximately $105.8 million and receiving approximately $235.5 million in revenues from the state ($79.4 million from the fee-for-service portion and $156.1 million from the managed care portion). No amounts have been recognized relating to the 2013 QAF pending resolution of CMS conditions of approval.

The Company cannot provide any assurances or estimates in connection with CMS’s final approval of the 2013 QAF or a possible continuation of the QAF program beyond December 31, 2013.

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Document and Entity Information	3 Months Ended
	Jun. 30, 2012	Aug. 06, 2012
Document And Entity Information
Entity Registrant Name	Integrated Healthcare Holdings Inc
Entity Central Index Key	0001051488
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--03-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		255,307,262
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2013

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12. ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 12 - ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM

Provisions of the American Recovery and Reinvestment Act of 2009 provide incentive payments for the adoption and meaningful use of certified electronic health record (EHR) technology. The Medicare EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) that are meaningful users of certified EHRs. The Medicaid EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) for efforts to adopt, implement, upgrade, or meaningfully use of certified EHR technology.

CMS has established the final rule which requires eligible providers in their first year of participation in the Medicaid incentive payment program to demonstrate that they have adopted (acquired, purchased, or secured access to), or implemented, or upgraded to certified EHR technology in order to qualify for an incentive payment. During the second and subsequent years of the program, eligible providers are required to meet other criteria, including meaningful use, to receive additional funds. The Company has been awarded a total amount of $13.6 million under the Medicaid EHR incentive program, which will be earned and received over a four year period. The Company adopted certified EHR technology and it recognized other income of $6.8 million relative to the first year under the Medicaid EHR incentive program during fiscal year 2012.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Income Statement [Abstract]
Patient service revenues (net of contractual allowances and discounts)	$ 91,592	$ 89,662
Provision for bad debts	(9,927)	(9,697)
Net patient service revenues	81,665	79,965
Operating expenses:
Salaries and benefits	52,991	53,238
Supplies	14,051	12,983
Other operating expenses	15,043	14,476
Depreciation and amortization	959	1,090
Total OperatingExpenses	83,044	81,787
Operating loss	(1,379)	(1,822)
Other expense:
Interest expense, net	(2,433)	(2,843)
Gain (loss) on warrants	731	(3,270)
Total Other Expense	(1,702)	(6,113)
Loss before income tax provision (benefit)	(3,081)	(7,935)
Income tax provision (benefit)	44	(5,200)
Net loss	(3,125)	(2,735)
Net income attributable to noncontrolling interests (Note 9)	(349)	(135)
Net loss attributable to Integrated Healthcare Holdings, Inc.	$ (3,474)	$ (2,870)
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Basic	$ (0.01)	$ (0.01)
Diluted	$ (0.01)	$ (0.01)
Weighted average shares outstanding
Basic	255,307	255,307
Diluted	255,307	255,307

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6. STOCK INCENTIVE PLAN

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 6 - STOCK INCENTIVE PLAN

The Company's 2006 Stock Incentive Plan (the "Plan"), which is shareholder-approved, permits the grant of share options to its employees and board members for up to a maximum aggregate of 12.0 million shares of common stock. In addition, as of the first business day of each calendar year in the period 2007 through 2015, the maximum aggregate number of shares shall be increased by a number equal to one percent of the number of shares of common stock of the Company outstanding on December 31 of the immediately preceding calendar year. Accordingly, as of June 30, 2012, the maximum aggregate number of shares under the Plan was 23.5 million. The Company believes that such awards better align the interests of its employees with those of its shareholders. In accordance with the Plan, incentive stock options, nonqualified stock options, and performance based compensation awards may not be granted at less than 100 percent of the estimated fair market value of the common stock on the date of grant. Incentive stock options granted to a person owning more than 10 percent of the voting power of all classes of stock of the Company may not be issued at less than 110 percent of the fair market value of the stock on the date of grant. Option awards generally vest based on 3 years of continuous service (1/3 of the shares vest on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary). Certain option awards provide for accelerated vesting if there is a change of control, as defined. The option awards have 7-year contractual terms.

When the measurement date is certain, the fair value of each option grant is estimated on the date of grant using the Black-Scholes valuation model. Since there is limited historical data with respect to both pre-vesting forfeiture and post-vesting termination, the expected life of the options was determined utilizing the simplified method, whereby the expected term is calculated by taking the sum of the vesting term plus the original contractual term and dividing that quantity by two.

No options were granted or exercised during the three months ended June 30, 2012 and 2011. All outstanding options were fully vested as of June 30 and March 31, 2012.

A summary of stock option activity for the three months ended June 30, 2012 is presented as follows.

	Shares			Weighted- average exercise price		Weighted- average grant date fair value		Weighted- average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, March 31, 2012		8,235		$	0.18
Granted		–		$	–	$	–
Exercised		–		$	–
Forfeited or expired		(100	)	$	0.26
Outstanding, June 30, 2012		8,135		$	0.18				2.4	$	–
Exercisable at June 30, 2012		8,135		$	0.18				2.4	$	–

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5. INCOME TAXES

3 Months Ended

Jun. 30, 2012

Income Tax Disclosure [Abstract]

NOTE 5 - INCOME TAXES

The utilization of net operating loss (“NOL”) and credit carryforwards is limited under the provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. Section 382 of the IRC of 1986 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. In fiscal year 2009, the Company entered into the amended purchase agreement which resulted in a change in control. The Company conducted an analysis and determined that it is subject to significant IRC Section 382 limitations. For both Federal and State tax purposes, the Company's utilization of NOL and credit carryforwards is subject to significant IRC Section 382 limitations. The Company evaluates its ability to utilize the net operating losses each period with regard to the limitations imposed under IRC 382 and also considering the continuing expiration of statutes of limitation for prior years; and in the prior year determined that a portion of the federal and state net operating losses were no longer realizable, and removed from the schedule of deferreds those net operating losses in excess of the IRC 382 limitation and also considering prior years statutes now closed. 

The difference between the reported income tax provision (benefit) and the amount computed by multiplying income before income tax provision (benefit) in the accompanying unaudited condensed consolidated statements of operations for the three months ended June 30, 2012 and 2011 by the statutory federal income tax rate primarily relates to the impact of a full valuation allowance reserving the net deferred assets, permanently nondeductible expenses, state and local income taxes, and variable interest entity.

The application of FASB Interpretation Number 18 requires the Company to compute the interim period income tax provision (benefit) by applying the estimated annual effective tax rate to the loss from continuing operations for the three months ended June 30, 2012, which resulted in the recognition of a tax expense for the three months ended June 30, 2012.

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at June 30, 2012 could be realized and, based on this analysis, the Company concluded that there was not sufficient positive evidence to support the realization of the net deferred tax assets, and therefore will continue to maintain a full valuation allowance against its net deferred assets as of June 30, 2012.

The Company’s California Enterprise Zone credits were recently examined by the California taxing authority, which issued a Notice of Proposed Adjusted Carryover Amount.  The Company has filed a Protest requesting an oral hearing with the taxing authority. The Protest is currently pending review by the taxing authority. As a result of the examination, during the year ended March 31, 2011, the Company recorded a liability of approximately $18.9 million for unrecognized tax benefits.  The Company's utilization of these credits is also subject to significant IRC Section 383 limitations, and these limitations have been incorporated into the tax provision calculation.

PCHI tax status – PCHI is a limited liability company. PCHI's taxable income or loss will flow through to its owners and be their separate responsibility. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any amounts for the income tax expense or benefit, or liabilities related to PCHI's income or loss.

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables 1)

6 Months Ended

Jun. 30, 2012

Description Of Business And Summary Of Significant Accounting Policies Tables 1

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following is a summary of the principal components of accounts receivable and due from government payers as of June 30 and March 31, 2012:

	June 30, 2012			March 31, 2012
Accounts receivable:
Patient accounts receivable	$	69,713		$	71,800
Allowance for doubtful accounts		(17,106	)		(18,201	)
Accounts receivable, net	$	52,607		$	53,599
Due from government payers:
Settlement receivables	$	–		$	190
DSH		2,097			4,993
	$	2,097		$	5,183

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13. COMMITMENTS AND CONTINGENCIES

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 13 - COMMITMENTS AND CONTINGENCIES

INFORMATION TECHNOLOGY SYSTEMS – On July 1, 2011, the Company entered into software and services agreements with McKesson Technologies Inc. (“McKesson”) to upgrade the Company’s information technology systems.

Under the agreements, McKesson will provide the Company with a variety of services, including new software implementation and education/training services for the Company’s personnel, software maintenance services and professional services related to movement and migration of data from legacy systems.  McKesson will also furnish to the Company and maintain new hardware to accommodate the upgraded software and systems.  The new hardware will include computers and servers, among other things, and will include installation, testing, and ongoing maintenance.  The Company has entered into the arrangement to enhance its clinical information systems and upgrade its billing and revenue management information systems.

The agreements will initially run for a period of five years, and the recurring services may be renewed by the Company for successive periods.  The agreements do not provide that they may be terminated by the Company prior to the initial expiration date.  The agreements provide for one-time fees and recurring fees which aggregate a total of $22.0 million.  Approximately 60% of the fees are for one-time charges, while the balance is for recurring services.

GUARANTEE – At June 30, 2012, the Company continues to maintain an accrual for $1.8 million for a guarantee extended to UC Irvine Healthcare, a state supported teaching institution, to accept the transfer of an uninsured patient for a necessary higher level of care. The Company is contesting UC Irvine Healthcare’s position.

LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY – On April 13, 2010, the Company and PCHI entered into a Second Amendment to Amended and Restated Triple Net Hospital Building Lease (the “2010 Lease Amendment”).  Under the 2010 Lease Amendment, the annual base rent to be paid by the Company to PCHI was increased from $5.4 million to $7.3 million. The base rent is subject to an annual Consumer Price Index increase on January 1 of each year; such increase shall not be less than 2% or more than 6% per year. As a result, the annual base rent as of January 1, 2012 is $7.7 million. If PCHI refinances the $45.0 million term loan, the annual base rent will increase to $8.3 million. This lease commitment with PCHI is eliminated in consolidation.

CAPITAL LEASES - In connection with the Acquisition, the Company also assumed the leases for the Chapman facility, which include buildings and land with terms that were extended concurrently with the assignment of the leases to December 31, 2023. The Company leases equipment under capital leases expiring at various dates through December 2015. Assets under capital leases with a net book value of $6.0 million and $6.2 million are included in the accompanying unaudited condensed consolidated balance sheets as of June 30 March 31, 2012, respectively. Interest rates used in computing the net present value of the lease payments are based on the interest rates implicit in the leases.

INSURANCE – The Company accrues for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The Company has purchased as primary coverage a claims-made form insurance policy for general and professional liability risks. Estimated losses within general and professional liability retentions from claims incurred and reported, along with incurred but not reported (“IBNR”) claims, are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of June 30 and March 31, 2012, the Company had accrued $12.0 million and $11.5 million, respectively, which is comprised of $5.4 million and $4.5 million, respectively, in incurred and reported claims, along with $6.6 million and $7.0 million, respectively, in estimated IBNR. Estimated insurance recoveries of $3.6 million and $3.0 million are included in other prepaid expenses and current assets as of June 30 and March 31, 2012, respectively.

The Company has also purchased occurrence coverage insurance to fund its obligations under its workers compensation program. The Company has a "guaranteed cost" policy, under which the carrier pays all workers compensation claims, with no deductible or reimbursement required of the Company. The Company accrues for estimated workers compensation claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The ultimate costs related to this program include expenses for deductible amounts associated with claims incurred and reported in addition to an accrual for the estimated expenses incurred in connection with IBNR claims. Claims are accrued based upon projections and are discounted to their net present value using a weighted average risk-free discount rate of 5%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of June 30 and March 31, 2012, the Company had accrued $643 and $673, respectively, comprised of $318 and $338, respectively, in incurred and reported claims, along with $325 and $335, respectively, in estimated IBNR.

In addition, the Company has a self-insured health benefits plan for its employees. As a result, the Company has established and maintains an accrual for IBNR claims arising from self-insured health benefits provided to employees. The Company's IBNR accruals at June 30 and March 31, 2012 were based upon projections. The Company determines the adequacy of this accrual by evaluating its limited historical experience and trends related to both health insurance claims and payments, information provided by its insurance broker and third party administrator, and industry experience and trends. The accrual is an estimate and is subject to change. Such change could be material to the Company's unaudited condensed consolidated financial statements. As of June 30 and March 31, 2012, the Company had accrued $1.6 million and $2.2 million, respectively, in estimated IBNR.

The Company has also purchased umbrella liability policies with aggregate limits of $25 million. The umbrella policies provide coverage in excess of the primary layer and applicable retentions for insured liability risks such as general and professional liability, auto liability, and workers compensation (employers liability).

As of June 30, 2012, the Company finances various insurance policies at an interest rate of 4.39% per annum. The Company incurred finance charges relating to such policies of $17 and $12 for the three months ended June 30, 2012 and 2011, respectively. As of June 30 and March 31, 2012, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

	June 30, 2012		March 31, 2012
Prepaid insurance	$	1,995	$	366
Accrued insurance premiums	$	69	$	60
(Included in other current liabilities)

CLAIMS AND LAWSUITS – The Company and the Hospitals are subject to various legal proceedings, most of which relate to routine matters incidental to operations. The results of these claims cannot be predicted, and it is possible that the ultimate resolution of these matters, individually or in the aggregate, may have a material adverse effect on the Company's business (both in the near and long term), financial position, results of operations, or cash flows. Although the Company defends itself vigorously against claims and lawsuits and cooperates with investigations, these matters (1) could require payment of substantial damages or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under insurance policies where coverage applies and is available, (2) cause substantial expenses to be incurred, (3) require significant time and attention from the Company's management, and (4) could cause the Company to close or sell the Hospitals or otherwise modify the way its business is conducted. The Company accrues for claims and lawsuits when an unfavorable outcome is probable and the amount is reasonably estimable.

There have been no material developments in the matters identified in the Company’s Form 10-K filed with the SEC on June 22, 2012.

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9. VARIABLE INTEREST ENTITY

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 9 - VARIABLE INTEREST ENTITY

Concurrent with the close of the Acquisition, PCHI simultaneously acquired title to substantially all of the real property acquired by the Company in the Acquisition. The Company received $5.0 million and PCHI guaranteed the Company's $45.0 million Loan. The Company remains primarily liable as the borrower under the $45.0 million Loan notwithstanding its guarantee by PCHI. The $45.0 million term loan is cross-collateralized by substantially all of the Company's assets and all of the real property of the Hospitals. All of the Company's operating activities are directly affected by the real property that was sold to PCHI, which is a related party entity that is affiliated with the Company through common ownership and control. As of June 30, 2012, PCHI was owned 51% by various physician investors and 49% by Ganesha Realty LLC (“Ganesha”), which is managed by Dr. Chaudhuri.

The Company entered into a lease agreement dated March 7, 2005 (amended and restated as of April 13, 2010) under which it leased back from PCHI all of the real estate that it transferred to PCHI (Note 13). The amended lease terminates on the 25-year anniversary of the original lease (March 7, 2005), grants the Company the right to renew for one additional 25-year period, and requires combined annual base rental payments of $8.3 million for all the properties. However, until PCHI refinances the related $45.0 million term loan, the annual base rental payments are reduced to $7.3 million. In addition, the Company offsets, against its rental payments owed to PCHI, interest payments that it makes on the related $45.0 million term loan. Lease payments to PCHI and offsetting interest payments are eliminated in consolidation.

GAAP defines variable interest entities (“VIE”) as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as a VIE, the guidance sets forth a model to a primary beneficiary based on an assessment of which party to a VIE, if any, bears a majority of the exposure to expected losses, or stands to gain from a majority of its expected returns and has the power to direct activities of the VIE that impacts economic performance. The primary beneficiary of a VIE should consolidate the VIE.

The Company determined that it provides the majority of financial support to PCHI through various sources including lease payments, remaining primarily liable under the $45.0 million term loan, and cross-collateralization of the Company's non-real estate assets to secure the $45.0 million term loan. The Company concluded that PCHI is a VIE and it is the primary beneficiary. Accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

PCHI's assets, liabilities, and deficiency are set forth below.

	June 30, 2012			March 31, 2012
Cash	$	266		$	68
Property, net		40,662			40,984
Other		283			207
Total assets	$	41,211		$	41,259
Debt (as guarantor)	$	45,000		$	45,000
Other		544			641
Total liabilities		45,544			45,641
Deficiency		(4,333	)		(4,382	)
Total liabilities and accumulated deficit	$	41,211		$	41,259

As noted above, PCHI is a guarantor on the $45.0 million term loan should the Company not be able to perform.  PCHI's total liabilities represent the Company's maximum exposure to loss.

PCHI rental income and the Company’s related rental expense of $2.0 million and $1.9 million were eliminated upon consolidation for the three months ended June 30, 2012 and 2011, respectively.

The Company has a lease commitment to PCHI (Note 13). Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Note 2).

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7. RETIREMENT PLAN

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 7 - RETIREMENT PLAN

The Company has a 401(k) plan for its employees. All employees with 90 days of service are eligible to participate, unless they are covered by a collective bargaining agreement which precludes coverage. The Company matches employee contributions up to 3% of the employee's compensation, subject to IRS limits. During the three months ended June 30, 2012 and 2011, the Company incurred expenses of $804 and $774, respectively. These costs are included in salaries and benefits in the accompanying unaudited condensed consolidated statements of operations.  At June 30 and March 31, 2012, accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets included $1.7 million and $3.9 million, respectively, in accrued employer contributions.

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8. INCOME (LOSS) PER SHARE

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 8 - INCOME (LOSS) PER SHARE

Income (loss) per share is calculated under two different methods, basic and diluted. Basic income per share is calculated by dividing the net income by the weighted average shares of common stock outstanding during the period. Diluted income per share is calculated by dividing the net income by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds.

Since the Company incurred losses for the three months ended June 30, 2012 and 2011, the potential shares of common stock, consisting of approximately 411 million and 412 million shares, respectively, issuable under warrants and stock options, have been excluded from the calculations of diluted loss per share for those periods.

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10. RELATED PARTY TRANSACTIONS

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company leases substantially all of the real property of the acquired Hospitals from PCHI which is owned by various physician investors and Ganesha, which is managed by Dr. Chaudhuri. As of June 30 and March 31, 2012, Dr. Chaudhuri and Mr. William E. Thomas are the beneficial holders of an aggregate of 447.5 million shares of the outstanding stock of the Company. As described in Note 9, PCHI is a variable interest entity and the Company is the primary beneficiary, accordingly, the Company has consolidated the financial statements of PCHI in the accompanying unaudited condensed consolidated financial statements.

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 3) (WarrantMember, USD $) In Thousands, unless otherwise specified	Jun. 30, 2012
WarrantMember
Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2012	$ 1,641
Change in fair value of warrant liability included in earnings	(731)
Balance at June 30, 2012	$ 1,641

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13. COMMITMENTS AND CONTINGENCIES (Details Narrative) (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Mar. 31, 2012
Aggregate One time and recurring fee	$ 22,000,000
One-time charges	60.00%
Accrual required for uninsured patients	1,800,000
Lease amendment	The annual base rent to be paid by the Company to PCHI was increased from $5.4 million to $7.3 million
Net book value of assets under capital	6,000,000		6,200,000
Insurance Policy Interest rates	4.39%
Self-insurance health benefit accruals	1,600,000		2,200,000
Finance charges related to policies	17,000	12,000
Lease Amendment 2010 [Member]
Annual Base rent			8,300,000
General Professional Liability [Member]
Accrued liability	12,000,000		11,500,000
Reported Claim Liability	5,400,000		4,500,000
Incurred but not reported claims	6,600,000		7,000,000
Estimated insurance recoveries	3,600,000		3,000,000
Workers Compensation [Member]
Accrued liability	643,000		673,000
Reported Claim Liability	318,000		338,000
Incurred but not reported claims	$ 325,000		$ 335,000

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Integrated Healthcare Holdings, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, the accompanying unaudited condensed consolidated statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments that are of a normal and recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The results of operations for the three months ended June 30, 2012 are not necessarily indicative of the results for the entire 2013 fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2012 filed with the SEC on June 22, 2012.

The Company has determined that Pacific Coast Holdings Investment, LLC ("PCHI") (Note 9), is a variable interest entity as defined by GAAP and the Company is the primary beneficiary and, accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all amounts included in these notes to the condensed consolidated financial statements are expressed in thousands (except per share amounts, percentages and stock option prices and values).

LIQUIDITY

As of June 30, 2012, the Company had a total stockholders’ deficiency of $15.1 million and a working capital deficit of $64.5 million.  For the three months ended June 30, 2012, the Company had a net loss of $3.5 million. At June 30, 2012, the Company had no additional availability under its revolving credit facility (Notes 3 and 14).

DESCRIPTION OF BUSINESS

Effective March 8, 2005, the Company acquired four hospitals (the "Hospitals") from subsidiaries of Tenet Healthcare Corporation (the "Acquisition"). The Company owns and operates the four community-based hospitals located in southern California, which are:

● 282-bed Western Medical Center in Santa Ana

● 188-bed Western Medical Center in Anaheim

● 178-bed Coastal Communities Hospital in Santa Ana

● 114-bed Chapman Medical Center in Orange

RECLASSIFICATION FOR PRESENTATION

Certain amounts previously reported have been reclassified to conform to the current period's presentation with no impact on the reported net loss of the Company.

CONCENTRATION OF RISK

The Hospitals are subject to licensure by the State of California and accreditation by the Joint Commission. Loss of either licensure or accreditation would impact the ability to participate in various governmental and managed care programs, which provide the majority of the Company's revenues.

Substantially all patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans), which combined accounted for 57% and 55% of the patient service revenues for the three months ended June 30, 2012 and 2011, respectively. No other payers represent a significant concentration of the Company's patient service revenues.

The Company receives all of its inpatient service revenues from operations in Orange County, California. The economic conditions of this market could affect the ability of patients and third-party payers to reimburse the Company for services, through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs.

USE OF ESTIMATES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Principal areas requiring the use of estimates include third-party cost report settlements, income taxes, accrued insurance retentions, self-insurance reserves, and net patient receivables. Management regularly evaluates the accounting policies and estimates that are used. In general, management bases the estimates on historical experience and on assumptions that it believes to be reasonable given the particular circumstances in which its Hospitals operate. Although management believes that all adjustments considered necessary for fair presentation have been included, actual results may materially vary from those estimates.

PATIENT SERVICE REVENUES

Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in the consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Since Medicare requires that a hospital's gross charges be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

PROVISION FOR DOUBTFUL ACCOUNTS

The Company provides for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.

The Company's policy is to attempt to collect amounts due from patients, including copayments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, until the legally required medical screening examination is complete and stabilization of the patient has begun, services are performed prior to the verification of the patient's insurance, if any. In nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the non-interest bearing cash balances were fully insured at June 30, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250 per depositor at each financial institution, and the Company’s non-interest bearing cash balances may again exceed federally insured limits.

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending under the MEP, with appropriate contractual allowances recorded. If the patient does not qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for doubtful accounts. Reclassifications of pending Medicaid accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for doubtful accounts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of June 30 and March 31, 2012 based on historical collections experience.

INVENTORIES OF SUPPLIES

Inventories of supplies are valued at the lower of weighted average cost or market.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation and any impairment write-downs related to assets held and used. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Capital leases are recorded at the beginning of the lease term as property and equipment and a corresponding lease liability is recognized. The value of the property and equipment under capital lease is recorded at the lower of either the present value of the minimum lease payments or the fair value of the asset. Such assets, including improvements, are amortized over the shorter of the lease term or their estimated useful life, where applicable.

The Company uses the straight-line method of depreciation for buildings and improvements, and equipment over their estimated useful lives of 25 years, and 3 to 15 years, respectively.

LONG-LIVED ASSETS

The Company evaluates its long-lived assets for possible impairment whenever circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows. Fair value estimates are derived from established market values of comparable assets or internal calculations of estimated undiscounted future net cash flows. The estimates of future net cash flows are based on assumptions and projections believed by the Company to be reasonable and supportable. These assumptions take into account patient volumes, changes in payer mix, revenue, and expense growth rates and changes in legislation and other payer payment patterns.

DEBT ISSUANCE COSTS

Debt issuance costs are amortized over the related credit facility’s life using the straight-line method. Debt issuance costs of $38 and $410 were amortized during the three months ended June 30, 2012 and 2011, respectively.  At June 30 and March 31, 2012, prepaid expenses and other current assets in the accompanying unaudited condensed consolidated balance sheets included $153 and $153, respectively, as the current portion of debt issuance costs.

FAIR VALUE MEASUREMENTS

 The Company's financial assets and liabilities recorded in the unaudited condensed consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, debt, accounts payable, and other liabilities, all of which are recorded at book value which approximates fair value.

GAAP has established a hierarchy for ranking the quality and reliability of the information used to determine fair values and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:	Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:	Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:	Unobservable inputs for the asset or liability.

The Company utilizes the best available information in measuring fair value.  Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company currently has no financial or nonfinancial assets or liabilities subject to fair value measurement on a recurring basis except for warrants issued in April 2010 (Note 4).

WARRANTS

 The Company has entered into complex transactions that contain warrants (Notes 3 and 4). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). The Company has concluded that the warrants should be classified as liabilities as the settlement of the warrants are not deemed to be in the control of the Company.

INCOME (LOSS) PER COMMON SHARE

 Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds (Note 8).

INCOME TAXES

Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. The Company assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. The Company has recorded a 100% valuation allowance on its deferred tax assets.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Any penalties or interest arising from federal or state taxes are recorded as a component of the Company’s income tax provision.

SEGMENT REPORTING

The Company operates in one line of business, the provision of healthcare services through the operation of general hospitals and related healthcare facilities. The Company's Hospitals generate substantially all of its net patient service revenues.

The Company's four Hospitals and related healthcare facilities operate in one geographic region in Orange County, California. There are similarities in the region's economic characteristics and the nature of the Hospitals' operations, the regulatory environment in which they operate and the manner in which they are managed. This region is an operating segment, as defined by GAAP. In addition, the Company's Hospitals and related healthcare facilities share certain resources and benefit from many common clinical and management practices. Accordingly, the Company aggregates the facilities into a single reportable operating segment.

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3. DEBT (Tables)

6 Months Ended

Jun. 30, 2012

Debt Tables

Outstanding Debt

The Company's outstanding debt consists of the following:

	June 30,		March 31,
	2012		2012
Current:
Revolving line of credit	$	14,000	$	14,000
Term loan		45,000		–
	$	59,000	$	14,000
Noncurrent:
Term loan	$	–	$	45,000

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10. RELATED PARTY TRANSACTIONS (Details Narrative)	Jun. 30, 2012
Related Party Transactions Details Narrative
Common Stock Outstanding by beneficial owners	447,500,000

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2. PROPERTY AND EQUIPMENT (Details Narrative) (USD $)	Jun. 30, 2012	Mar. 31, 2012
Earthquake insurance with a policy limit	$ 50,000,000
Ongoing development of electronic health record technology	$ 5,100,000	$ 4,600,000

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Statement of Cash Flows [Abstract]
Net income (loss)	$ (3,125)	$ (2,735)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization of property and equipment	959	1,090
Provision for doubtful accounts	9,927	9,697
Amortization of debt issuance costs	38	410
(Gain) loss on warrants	(731)	3,270
Changes in operating assets and liabilities:
Accounts receivable	(8,935)	(3,471)
Inventories of supplies	(116)	(150)
Due from governmental payers	3,086	932
Prepaid income taxes	665	(5,200)
Prepaid expenses - hospital quality assurance fees		(15,100)
Hospital quality assurance fees receivable	2,436	1,815
Prepaid insurance, other prepaid expenses and current assets, and other assets	(2,604)	(1,835)
Accounts payable	(2,411)	(3,799)
Accrued compensation and benefits	(1,709)	(1,696)
Due to governmental payers	72
Unearned revenue - hospital quality assurance fees		17,245
Income taxes payable		(6,306)
Accrued insurance retentions and other current liabilities	608	418
Net cash used in operating activities	(1,840)	(5,415)
Cash flows from investing activities:
Decrease in restricted cash	(17)	12
Additions to property and equipment	(601)	(419)
Net cash used in investing activities	(618)	(407)
Cash flows from financing activities:
Proceeds from revolving line of credit, net		919
Noncontrolling interests distributions	(300)	(500)
Payments on capital lease obligations	(158)	(289)
Net cash provided by (used in) financing activities	(458)	130
Net decrease in cash and cash equivalents	(2,916)	(5,692)
Cash and cash equivalents, beginning of period	11,829	20,539
Cash and cash equivalents, end of period	8,913	14,847
Supplemental information:
Cash paid for interest	2,282	2,191
Cash paid for income taxes		$ 6,300

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4. COMMON STOCK WARRANTS

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 4 - COMMON STOCK WARRANTS

On April 13, 2010, the Company issued warrants (the “Omnibus Warrants”) to purchase its common stock for a period of three years at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC Resolution Company (a company owned and controlled by Kali P. Chaudhuri, M.D., the Company’s majority shareholder) or its designees and 96.0 million shares to the $45.0 million term loan lender or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights. As of April 13, 2010, the Company recorded warrant expense and the related warrant liability of $2.9 million, representing fair value.  As of June 30, 2012, the fair value of the Omnibus Warrants was $528.

In addition, on April 13, 2010, the Company issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of its common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling the Company to recover amounts due from the Company’s prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company. As a result, the Company recorded the fair value of the Release Warrant ($2.1 million) as an offsetting cost of the recovery of amounts due from the Company’s prior lender. The Release Warrant also provides the holder with certain pre-emptive, information and registration rights. As of June 30, 2012, the fair value of the Release Warrant was $382.

The Omnibus Warrants and the Release Warrant are collectively referred to as the “April Warrants.” The net gain (loss) recorded related to the April Warrants for the three months ended June 30, 2012 and 2011 was $731 and $(3.3) million, respectively.

The fair value of warrants issued by the Company is estimated using the Black-Scholes valuation model, which the Company believes is the appropriate valuation method under the circumstances. Since the Company’s stock is thinly traded, the expected volatility is based on an analysis of the Company's stock and the stock of eight other publicly traded companies that own hospitals.

The risk-free interest rate is based on the average yield on U.S. Treasury notes with maturity commensurate with the terms of the warrants. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.  The assumptions used in the Black-Scholes valuation model are as follows.

	June 30, 2012		March 31, 2012
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.2%		0.2%
Expected volatility		65.1%		57.3%
Expected term (in years)		0.79		1.04

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4. COMMON STOCK WARRANTS (Tables)

6 Months Ended

Jun. 30, 2012

Common Stock Warrants Tables

Common Stock Warrants

	June 30, 2012		March 31, 2012
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.2%		0.2%
Expected volatility		65.1%		57.3%
Expected term (in years)		0.79		1.04

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6. STOCK INCENTIVE PLAN (Details) (USD $)	3 Months Ended
	Jun. 30, 2012
Stock Incentive Plan Tables
Outstanding, March 31, 2012, Shares	8,235
Granted, Shares
Exercised, Shares
Forfeited or expired, Shares	(100)
Outstanding, June 30, 2012, Shares	8,135
Exercisable at June 30, 2012, Shares	8,135
Weighted- Average Exercise Price
Outstanding, March 31, 2012, exercise price	$ 0.18
Granted, exercise price
Exercised, exercise price
Forfeited or expired, exercise price	$ 0.26
Outstanding, June 30, 2012, exercise price	$ 0.18
Exercisable at June 30, 2012, exercise price	$ 0.18
Weighted- Average remaining contractual term (years)
Outstanding, June 30, 2012, contractual term (years)	2 years 4 months 24 days
Exercisable at June 30, 2012, contractual term (years)	2 years 4 months 24 days
Aggregate intrinsic value
Outstanding, June 30, 2012, intrinsic value
Exercisable at June 30, 2012, intrinsic value

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14. SUBSEQUENT EVENTS

3 Months Ended

Jun. 30, 2012

Subsequent Events [Abstract]

NOTE 14 - SUBSEQUENT EVENTS

On August 1, 2012, the Company entered into Amendment No. 3 to Credit and Security Agreement (the “Revolving Loan Amendment”), which amends the Revolving Loan Agreement.

Under the Revolving Loan Amendment, the minimum Revolving Loan Commitment Amount under the Revolving Loan Agreement was increased from $14.0 million to $30.0 million, and the Company agreed to pay to the Lenders an origination fee of 1.0% of the Lenders’ increased commitment under the Revolving Loan Amendment, or $160.

In addition, under the Revolving Loan Amendment, the lockbox requirements under the Revolving Loan Agreement were amended to provide that in the event the Revolving Loan Commitment Amounts are $30.0 million or less during any period prior to March 31, 2013, or $20.0 million or less thereafter (and assuming there is no Event of Default at the time), the Company would be permitted to transfer funds that are deposited into any Lockbox Account, as defined, to a different bank account designated by the Company, subject to the other terms and conditions contained in the Revolving Loan Agreement.

Also on August 1, 2012, the Company entered into Amendment No. 4 to Credit Agreement and Consent (the “Credit Agreement Amendment”), which amends the Term Loan Credit Agreement.  

Under the Credit Agreement Amendment, Silver Point consented to and waived certain provisions under the Term Loan Credit Agreement in connection with the Company’s execution of the Revolving Loan Amendment. In addition, the provisions in the Term Loan Credit Agreement that provide for mandatory prepayment of the Company’s outstanding “A/R Financing,” as defined, upon receipt of certain federal matching funds under the QAF program were amended to replace 65% with 80%. In connection with the Credit Agreement Amendment, the Company agreed to pay Silver Point a one-time consent and amendment fee in an aggregate amount equal to $1.8 million, of which $450 was paid upon execution of the Credit Agreement Amendment and the balance was added to the principal amount of the Term Loan Credit Agreement.

On August 1, 2012, the Company borrowed $9.5 million under its amended Revolving Loan Agreement and used the funds to pay the first installment fee of $9.5 million under the 2013 QAF.