10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

S	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2013; 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 S    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 S    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      S

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

There were 255,307,262 shares outstanding of the registrant's common stock as of November 7, 2013.

1

INTEGRATED HEALTHCARE HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets as of September 30 and March 31, 2013 – (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2013 and 2012 – (unaudited)	4
	Condensed Consolidated Statement of Stockholders’ Deficiency for the six months ended September 30, 2013 – (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2013 and 2012 – (unaudited)	6
	Notes to Condensed Consolidated Financial Statements – (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	33
Item 6.	Exhibits	33
	Signatures	33

2

PART I - FINANCIAL INFORMATION

Item 1.  Financial statements 

INTEGRATED HEALTHCARE HOLDINGS, INC.

 CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in 000's, except par value)

(unaudited)

	September 30,			March 31,
	2013			2013
ASSETS
Current assets:
Cash and cash equivalents	$	3,406		$	3,545
Restricted cash		5			13
Accounts receivable, net of allowance for doubtful accounts of $33,567 and $21,143, respectively		60,077			62,821
Inventories of supplies		6,980			6,738
Due from governmental payers		7,775			5,882
Hospital quality assurance fees receivable		70,210			7,690
Prepaid insurance		1,359			115
Deferred tax assets, net		–			6,328
Other prepaid expenses and current assets		7,364			9,208
Total current assets		157,176			102,340
Property and equipment, net		61,706			63,988
Deferred tax assets, net		–			380
Total assets	$	218,882		$	166,708
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Revolving line of credit, net of discount	$	18,730		$	29,527
Accounts payable		57,565			62,515
Accrued compensation and benefits		32,341			19,634
Accrued insurance retentions		14,490			12,938
Hospital quality assurance fees payable		11,850			7,226
Due to governmental payers		170			179
Income taxes payable		13,275			2,869
Other current liabilities		4,922			4,111
Total current liabilities		153,343			138,999
Debt, noncurrent, net of discount		45,836			45,530
Warrant liability, noncurrent		19,297			5,276
Capital lease obligations, net of current portion of $1,169 and $1,101, respectively		6,174			6,789
Total liabilities		224,650			196,594
Commitments and contingencies
Stockholders' equity (deficiency):
Integrated Healthcare Holdings, Inc. stockholders' equity (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		(62,343	)		(87,365	)
Total Integrated Healthcare Holdings, Inc. stockholders' equity (deficiency)		823			(24,199	)
Noncontrolling interests		(6,591	)		(5,687	)
Total stockholders' equity (deficiency)		(5,768	)		(29,886	)
Total liabilities and stockholders' equity (deficiency)	$	218,882		$	166,708

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

3

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in 000's, except per share amounts)

(unaudited)

	Three months ended September 30,						Six months ended September 30,
	2013			2012			2013			2012
Patient service revenues (net of contractual allowances and discounts)	$	97,072		$	138,491		$	334,592		$	229,238
Provision for bad debts		(12,811	)		(13,509	)		(27,176	)		(23,436	)
Net patient service revenues		84,261			124,982			307,416			205,802
Other operating revenues		950			880			1,759			1,725
		85,211			125,862			309,175			207,527
Operating expenses:
Salaries and benefits		69,343			53,287			125,406			106,278
Supplies		13,172			13,978			27,121			28,029
Other operating expenses		25,030			53,062			76,259			68,105
Depreciation and amortization		2,092			960			4,209			1,918
		109,637			121,287			232,995			204,330
Operating income (loss)		(24,426	)		4,575			76,180			3,197
Other expense:
Interest expense, net		(2,328	)		(3,018	)		(5,135	)		(5,450	)
Loss on warrants		(7,376	)		(1,125	)		(14,021	)		(395	)
		(9,704	)		(4,143	)		(19,156	)		(5,845	)
Income (loss) before income tax provision (benefit)		(34,130	)		432			57,024			(2,648	)
Income tax provision (benefit)		(14,078	)		(1,922	)		31,374			(1,878	)
Net income (loss)		(20,052	)		2,354			25,650			(770	)
Net (income) loss attributable to noncontrolling interests (Note 9)		(331	)		228			(628	)		(122	)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$	(20,383	)	$	2,582		$	25,022		$	(892	)
Per Share Data (Note 8):
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Basic	$	(0.08	)	$	0.01		$	0.10		$	(0.00	)
Diluted	$	(0.08	)	$	0.01		$	0.05		$	(0.00	)
Weighted average shares outstanding
Basic		255,307			255,307			255,307			255,307
Diluted		255,307			256,987			472,878			255,307

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

4

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

(amounts in 000's)

(unaudited)

	Integrated Healthcare Holdings, Inc. Stockholders
	Common Stock				Additional Paid-in		Accumulated			Noncontrolling
	Shares		Amount		Capital		Deficit			Interests			Total
Balance, March 31, 2013		255,307	$	255	$	62,911	$	(87,365	)	$	(5,687	)	$	(29,886	)
Net income		–		–		–		25,022			628			25,650
Noncontrolling interests distributions		–		–		–		–			(1,532	)		(1,532	)
Balance, September 30, 2013		255,307	$	255	$	62,911	$	(62,343	)	$	(6,591	)	$	(5,768	)

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

5

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in 000's)

(unaudited)

	Six months ended September 30,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	25,650		$	(770	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		4,209			1,918
Provision for bad debts		27,176			23,436
Amortization of debt discount		385			530
Loss on warrants		14,021			395
Deferred tax assets, net		6,708			–
Changes in operating assets and liabilities:
Accounts receivable		(24,432	)		(24,260	)
Inventories of supplies		(242	)		169
Due from governmental payers		(1,893	)		(2,665	)
Hospital quality assurance fees receivable		(62,520	)		(20,828	)
Prepaid expenses - hospital quality assurance fees		–			(9,174	)
Prepaid income taxes		–			(1,257	)
Prepaid insurance, other prepaid expenses and current assets, and other assets		600			(3,125	)
Accounts payable		(5,844	)		(1,209	)
Accrued compensation and benefits		12,707			(1,709	)
Hospital quality assurance fees payable		4,624			28,519
Due to governmental payers		(9	)		–
Income taxes payable		10,406			–
Accrued insurance retentions and other current liabilities		1,805			459
Net cash provided by (used in) operating activities		13,351			(9,571	)
Cash flows from investing activities:
Decrease in restricted cash		8			2
Additions to property and equipment		(543	)		(1,242	)
Net cash used in investing activities		(535	)		(1,240	)
Cash flows from financing activities:
Proceeds from (paydown on) revolving line of credit, net		(10,876	)		10,658
Noncontrolling interests distributions		(1,532	)		(1,012	)
Payments on capital lease obligations		(547	)		(544	)
Net cash provided by (used in) financing activities		(12,955	)		9,102
Net decrease in cash and cash equivalents		(139	)		(1,709	)
Cash and cash equivalents, beginning of period		3,545			11,829
Cash and cash equivalents, end of period	$	3,406		$	10,120
Supplemental information:
Cash paid for interest	$	4,653		$	4,590
Cash paid for income taxes	$	14,320		$	–

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

6

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

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 and six months ended September 30, 2013 are not necessarily indicative of the results for the entire 2014 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, 2013 filed with the SEC on June 28, 2013.

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 September 30, 2013, the Company had a total stockholders’ deficiency of $5.8 million and working capital of $3.8 million. For the three and six months ended September 30, 2013, the Company had net income (loss) of $(20.4) million and $25.0 million, respectively. At September 30, 2013, the Company had $15.9 million in additional availability under its revolving credit facility (Note 3). Through September 30, 2013, the Company has recorded $204.1 million in revenues and incurred $94.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $39.2 million in revenues and incurring approximately $13.9 million in provider fees and other expenses (Note 11). The Company is reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on its liquidity and financial position and value of its common stock.

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 income (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 67% and 63% of the patient service revenues for the three months ended September 30, 2013 and 2012, respectively, and 76% and 60% for the six months ended September 30, 2013 and 2012, 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 service area 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.

7

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

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 September 30,				Six months ended September 30,
	2013		2012		2013		2012
Medicare and Medicare managed care	$	24,196	$	22,728	$	47,582	$	48,592
Medicaid and Medicaid managed care		35,610		61,732		196,789		82,997
Managed care		26,827		33,016		56,203		61,134
Indemnity, self-pay and other		10,439		21,015		34,018		36,515
	$	97,072	$	138,491	$	334,592	$	229,238

The following is a summary of Medicaid and Medicaid managed care patient service revenues excluding QAF and Medicaid Disproportionate Share Hospital (“DSH”) payments:

	Three months ended September 30,						Six months ended September 30,
	2013			2012			2013			2012
Medicaid and Medicaid managed care	$	35,610		$	61,732		$	196,789		$	82,997
QAF		(7,783	)		(38,743	)		(150,001	)		(38,743	)
DSH		(4,196	)		(5,095	)		(7,493	)		(6,873	)
	$	23,631		$	17,894		$	39,295		$	37,381

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 payables of $170 and $179 as of September 30 and March 31, 2013, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medicaid 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 (repaid) supplemental payments of $4 and $(600) during the three months ended September 30, 2013 and 2012, respectively, and $5.6 million and $4.1 million during the six months ended September 30, 2013 and 2012, respectively. The related revenue recorded for the three months ended September 30, 2013 and 2012 was $4.2 million and $5.1 million, respectively, and $7.5 million and $6.9 million for the six months ended September 30, 2013 and 2012, respectively. As of September 30 and March 31, 2013, estimated DSH receivables were $7.8 million and $5.9 million, respectively, which are reflected as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

8

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $20.6 million and $19.7 million for the three months ended September 30, 2013 and 2012, respectively, and $40.4 million and $43.3 million for the six months ended September 30, 2013 and 2012, 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 September 30, 2013 and 2012 were approximately $1.7 million and $2.5 million, respectively, and $4.0 million and $4.6 million for the six months ended September 30, 2013 and 2012, 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 BAD DEBTS - 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 the 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.

LETTER OF CREDIT – At September 30 and March 31, 2013, the Company had an outstanding letter of credit totaling $761. This letter of credit correspondingly reduces the Company’s borrowing availability under its revolving line of credit (Note 3).

9

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – The following is a summary of the principal components of accounts receivable and due from/to government payers as of September 30 and March 31, 2013:

	September 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	93,644		$	83,964
Allowance for doubtful accounts		(33,567	)		(21,143	)
Accounts receivable, net	$	60,077		$	62,821
Due from government payers:
DSH	$	7,775		$	5,882
	$	7,775		$	5,882
Due to government payers:
Settlement payables	$	170		$	179
	$	170		$	179

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 6.1% and 6.5% as of September 30 and March 31, 2013, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of September 30 and March 31, 2013, the allowance for doubtful accounts for self-pay uninsured was 95.2% and 95.2%, respectively, of self-pay uninsured patient accounts receivable. As of September 30 and March 31, 2013, the allowance for doubtful accounts for self-pay balance after insurance was 76.1% and 78.0%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of September 30 and March 31, 2013, the allowance for doubtful accounts for managed care was 16.8% and 20.3%, 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 bad debts. 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 bad debts 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 September 30 and March 31, 2013 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.

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.

10

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

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 and February 2013 (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 September 30 and March 31, 2013:

	Total		Level 1		Level 2		Level 3
Warrant liability at September 30, 2013	$	19,297		–		–	$	19,297
Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$	5,276
Change in fair value of warrant liability included in earnings		6,645
Balance at June 30, 2013		11,921
Change in fair value of warrant liability included in earnings		7,376
Balance at September 30, 2013	$	19,297

Additional quantitative information about Level 3 fair value measurements is discussed in 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 exercise price is subject to a weighted average ratchet down provision if the Company subsequently sells shares at a price lower than the then exercise price.

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 net deferred tax assets since they did not meet the more-likely-than-not threshold.

11

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

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.

NOTE 2 – PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	September 30, 2013			March 31, 2013
Buildings	$	36,536		$	36,536
Land and improvements		13,523			13,523
Equipment		30,462			28,534
Assets under capital leases		13,263			13,267
		93,784			91,860
Less accumulated depreciation		(32,078	)		(27,872	)
Property and equipment, net	$	61,706		$	63,988

Accumulated depreciation on assets under capital leases as of September 30 and March 31, 2013 was $6.9 million and $6.2 million, respectively.

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 September 30, 2013.

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.

12

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

NOTE 3 – DEBT

As of September 30, 2013, the Company had the following Credit Agreements:

— A $47.277 million Term Loan issued under the $80.0 million Restated Credit Agreement by and among the Company, Silver Point Finance, LLC and its affiliate, SPCP Group, LLC (together with Silver Point Finance, LLC, “Silver Point”), and PCHI and Ganesha Realty, LLC, as Credit Parties, bearing an interest rate of LIBOR plus 10%, with the LIBOR floor set at 2% (12% at September 30, 2013). If any event of default occurs and continues, the lender can increase the interest rate by 5% per year. As of September 30, 2013, the Company was in compliance with all financial covenants. The stated maturity date for this Restated Credit Agreement is April 13, 2016.

— A $35.0 million Revolving Credit Agreement by and among the Company and MidCap Funding IV, LLC, as assigned to it from MidCap Financial, LLC, as agent and a lender, bearing an interest rate of 4.25% plus LIBOR, with a 2.5% floor, per year (6.75% at September 30, 2013) and an unused commitment fee of 0.5% per year ($19.1 million outstanding balance at September 30, 2013).  For purposes of calculating interest, all payments the Company makes on the Revolving Credit Agreement are subject to a five business day clearance period.  As of September 30, 2013, the Company was in compliance with all financial covenants. The stated maturity date for the Revolving Credit Agreement is March 25, 2016. At September 30, 2013, the Company had $15.9 million in additional availability under this facility.

The Company's outstanding debt consists of the following:

	September 30, 2013			March 31, 2013
Current:
Revolving line of credit	$	19,124		$	30,000
Discount		(394	)		(473	)
	$	18,730		$	29,527
Noncurrent:
Term loan	$	47,277		$	47,277
Discount		(1,441	)		(1,747	)
	$	45,836		$	45,530

NOTE 4 – COMMON STOCK WARRANTS

A summary of the warrants outstanding at September 30 and March 31, 2013 is presented as follows.

	Shares issuable under warrants	Weighted- average exercise price		Expiration date
Outstanding, September 30 and March 31, 2013	405,000	$	0.07		April 13, 2016

On April 13, 2010 the Company issued three-year warrants (the “Omnibus Warrants”) to purchase its common stock at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to its Term Loan lender, Silver Point (SPCP Group, LLC and SPCP Group IV, LLC) or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights.

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 common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling the Company to recover amounts due from its prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company.  The Release Warrant also provides the holder with certain pre-emptive, information and registration rights.

On February 7, 2013, in connection with the Restated Credit Agreement, the Company entered into the following transactions involving warrants:

13

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

The Company entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which it repurchased the outstanding common stock warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to purchase an aggregate of 16.8 million shares of the Company’s common stock at an exercise price of $0.07 per share. The Company repurchased the Cancelled Warrant for a purchase price of $0.12 per share minus the exercise price of $0.07 per share resulting in a net purchase price of $0.05 per share multiplied by 16.8 million shares for an aggregate purchase price of $840.9.

Immediately following the warrant repurchase, the Company issued a new common stock warrant (the “New Warrant”) to SPCP Group, LLC for a price of $0.05 per share (an aggregate price of $840.9) on the same terms as the Cancelled Warrant entitling the holder to purchase an aggregate of 16.8 million shares of common stock at an exercise price of $0.07 per share, except that the New Warrant expires on April 13, 2016.

Also simultaneous with the transactions described above, the Company extended the expiration date from April 13, 2013 to April 13, 2016 for the Omnibus Warrants issued to KPC and the remaining held by Silver Point (to purchase 79.2 million shares) and the Release Warrant issued to Dr. Chaudhuri. The extension of the warrant expiration date was intended to conform the terms of the warrants to that of the Restated Credit Agreement.

The Company assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan (Note 3) and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

As of September 30 and March 31, 2013, the fair value of the Company’s outstanding warrants was $19.3 million and $5.3 million, respectively. The loss related to the change in fair value of the Company’s outstanding warrants for the three months ended September 30, 2013 and 2012 was $7.4 million and $1.1 million, respectively, and $14.0 million and $395 for the six months ended September 30, 2013 and 2012, respectively.

The fair value of warrants issued by the Company is estimated using the Black-Scholes valuation model, which it 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 its 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:

	September 30, 2013		March 31, 2013
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.5%		0.4%
Expected volatility		37.9%		39.9%
Expected term (in years)		2.54		3.05

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.

14

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

The difference between the reported income tax provision and the amount computed by multiplying income (loss) before income tax provision (benefit) in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2013 and 2012 by the statutory federal income tax rate primarily relates to the impact of the valuation allowance reserving certain 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 income (loss) from continuing operations for the three and six months ended September 30, 2013, which resulted in the recognition of a tax (benefit) expense for the three and six months ended September 30, 2013, respectively.

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at September 30, 2013 could be realized and, based on this analysis, the Company concluded that there was not sufficient positive evidence to support further realization of its net deferred tax assets, and therefore, as of September 30, 2013, will maintain a 100% valuation allowance against its net deferred assets.

The Company’s federal income tax returns for the tax years ended March 31, 2011 and 2012 are currently under examination by the Internal Revenue Service. The Company does not expect that the results of these examinations will have a material effect on its financial condition or results of operations.

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.

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 September 30, 2013, the maximum aggregate number of shares under the Plan was 26.1 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 and six months ended September 30, 2013 and 2012. All outstanding options were fully vested as of September 30 and March 31, 2013.

A summary of stock option activity for the six months ended September 30, 2013 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, 2013		7,595		$	0.18
Granted		–		$	–	$	–
Exercised		–		$	–
Forfeited or expired		(70	)	$	0.26
Outstanding, September 30, 2013		7,525		$	0.18				1.2	$	75
Exercisable at September 30, 2013		7,525		$	0.18				1.2	$	75

15

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

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 September 30, 2013 and 2012, the Company incurred plan related expenses of $820 and $833, respectively, and $1.6 million and $1.6 million during the six months ended September 30, 2013 and 2012, respectively. These expenses are included in salaries and benefits in the accompanying unaudited condensed consolidated statements of operations.  At September 30 and March 31, 2013, accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets included $2.5 million and $4.1 million, respectively, in accrued employer contributions.

NOTE 8 – INCOME (LOSS) PER 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.

Stock options and warrants aggregating approximately 6 million shares and 411 million shares, respectively, were not included in the diluted calculation for the six months ended September 30, 2013 and the three months ended September 30, 2012 since they were anti-dilutive. Since the Company incurred a loss for the three months ended September 30, 2013 and the six months ended September 30, 2012, the potential shares of common stock consisting of approximately 413 million shares and 413 million shares, respectively, issuable under warrants and stock options were not included in the diluted calculations since they were anti-dilutive. Income (loss) per share for the three and six months ended September 30, 2013 and 2012 was computed as shown below.

	Three months ended September 30,					Six months ended September 30,
	2013			2012		2013		2012
Numerator:
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$	(20,383	)	$	2,582	$	25,022	$	(892	)
Denominator:
Weighted average common shares		255,307			255,307		255,307		255,307
Dilutive options		–			1,680		217,571		–
Denominator for diluted calculation		255,307			256,987		472,878		255,307
Income (loss) per share - basic	$	(0.08	)	$	0.01	$	0.10	$	(0.00	)
Income (loss) per share - diluted	$	(0.08	)	$	0.01	$	0.05	$	(0.00	)

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 $47.277 million term loan. The Company remains primarily liable as the borrower under the $47.277 million term loan notwithstanding its guarantee by PCHI. The $47.277 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 September 30, 2013, PCHI was owned 51% by various physician investors and 49% by Ganesha, which is managed by Dr. Chaudhuri (majority stockholder in the Company).

16

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

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 $47.277 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 $47.277 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 $47.277 million term loan, and cross-collateralization of the Company's non-real estate assets to secure the $47.277 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.

	September 30, 2013			March 31, 2013
Cash	$	184		$	147
Property, net		39,052			39,696
Other		118			49
Total assets	$	39,354		$	39,892
Debt ($47,277, net of discount) (as guarantor)	$	45,836		$	45,530
Other		468			488
Total liabilities		46,304			46,018
Deficiency		(6,950	)		(6,126	)
Total liabilities and accumulated deficit	$	39,354		$	39,892

As noted above, PCHI is a guarantor on the $47.277 million term loan should the Company not be able to perform.  PCHI's total liabilities (before debt discount of $1.4 million) represent the Company's maximum exposure to loss. Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Notes 2 and 13).

PCHI rental income and the Company’s related rental expense of $2.0 million and $1.9 million for the three months ended September 30, 2013 and 2012, respectively, and $4.0 million and $3.9 million for the six months ended September 30, 2013 and 2012, respectively, were eliminated upon consolidation.

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 September 30 and March 31, 2013, Dr. Chaudhuri and Mr. Thomas were 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.

17

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

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 Medicaid 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 Medicaid managed care plans that will be paid to hospitals under the program to the discretion of the plans.  The hospital quality assurance fee (“QAF”) program 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. 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 December 2011, CMS gave final approval for the extension of the QAF for the nine month period from January 1 through June 30, 2011 (“2011 QAF”).  Accordingly, for the year ended March 31, 2012 the Company recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 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”).  In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, which was further clarified in legislation approved by the governor of California in September 2012.  As a result, during the year ended March 31, 2013, the Company recognized revenue of $54.2 million and expenses of $52.5 million relating to the 2013 QAF for the periods from July 1, 2011 through March 31, 2013.

In May 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2011 through June 30, 2012. On June 26, 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2012 through June 30, 2013. As a result, during the three months ended June 30, 2013, the Company recognized revenue of $142.2 million and expenses of $33.5 million relating to the 2013 QAF for the periods from July 1, 2011 through June 30, 2013. During the three months ended September 30, 2013, the Company recognized revenue of $7.8 million and expenses of $8.0 million relating to the 2013 QAF for the period from July 1, 2013 through September 30, 2013.

Through September 30, 2013, the Company has recorded $204.1 million in revenues and incurred $94.0 million in provider fees and other expenses relating to the 2013 QAF. For the remaining term of the 2013 QAF, the Company anticipates recording approximately $39.2 million in QAF revenues ($31.2 million for the managed care portion and $8.0 million for the fee-for-service portion) and incurring approximately $13.9 million in QAF related expenses.

The Company cannot provide any assurances in connection with CMS’s final managed care approval of the 2013 QAF for the period from July 1, 2013 to December 31, 2013.

In October 2013, the Governor of California signed legislation that would continue the QAF program for the period from January 1, 2014 through December 31, 2016. The program is subject to CMS review and approval.

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 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.

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.

18

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

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. As of September 30, 2013 the Company completed conversion of all of its facilities to the McKesson system. The Company is also continuing to test and develop system applications where necessary.

OPERATING LEASES AND 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. The annual base rent is currently $7.8 million. If PCHI refinances the $47.277 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 2017. Assets under capital leases with a net book value of $6.4 million and $7.1 million are included in the accompanying unaudited condensed consolidated balance sheets as of September 30 and March 31, 2013, 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 an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2013, the Company had accrued $12.1 million and $10.6 million, respectively, which is comprised of $5.9 million and $5.5 million, respectively, in incurred and reported claims, along with $6.2 million and $5.1 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.6 million and $2.1 million are included in other prepaid expenses and current assets as of September 30 and March 31, 2013, respectively.

The Company has purchased statutory coverage insurance to fund its obligations under its workers compensation program. The Company has a large deductible rating plan program. The workers compensation program is a prefunded program, subject to a $250 deductible, per occurrence/loss limit. The prefunded program is subject to an annual adjustment until all losses are closed. 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 an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2013, the Company had accrued $544 and $500, respectively, comprised of $279 and $200, respectively, in incurred and reported claims, along with $265 and $300, 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 maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. The Company’s IBNR accruals at September 30 and March 31, 2013 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 September 30 and March 31, 2013, the Company had accrued $1.8 million and $1.9 million, respectively, in estimated IBNR.

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INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

The Company has also purchased excess liability policies with aggregate limits of $25 million. The excess liability 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 September 30, 2013, the Company finances various insurance policies at an interest rate of 4.1% per annum. The Company incurred finance charges relating to such policies of $12 and $13 for the three months ended September 30, 2013 and 2012, respectively, and $23 and $25 for the six months ended September 30, 2013 and 2012, respectively. As of September 30 and March 31, 2013, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

	September 30, 2013		March 31, 2013
Prepaid insurance	$	1,359	$	115
Accrued insurance premiums	$	–	$	69
(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. However, management cannot express an opinion as to the ultimate amounts, if any, of the Company’s liability, nor is it possible to estimate what litigation-related costs will be in future periods.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K filed on June 28, 2013 that may cause our Company's or our industry's actual results, levels of activity, performance, or achievements to be materially different from those expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as may be required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

As used in this report, the terms “we,” “us,” “our,” “the Company,” “Integrated Healthcare Holdings” or “IHHI” mean Integrated Healthcare Holdings, Inc., a Nevada corporation, unless otherwise indicated.

Unless otherwise indicated, all amounts included in this Item 2 are expressed in thousands (except percentages and per share amounts).

OVERVIEW

On March 8, 2005, we completed our acquisition (the "Acquisition") of four Orange County, California hospitals and associated real estate, including: (i) 282-bed Western Medical Center - Santa Ana, CA; (ii) 188-bed Western Medical Center - Anaheim, CA; (iii) 178-bed Coastal Communities Hospital in Santa Ana, CA; and (iv) 114-bed Chapman Medical Center in Orange, CA (collectively, the "Hospitals") from Tenet Healthcare Corporation. The Hospitals were assigned to four of our wholly owned subsidiaries formed for the purpose of completing the Acquisition. We also acquired the following real estate, leases and assets associated with the Hospitals: (i) a fee interest in the Western Medical Center at 1001 North Tustin Avenue, Santa Ana, CA, a fee interest in the administration building at 1301 North Tustin Avenue, Santa Ana, CA, certain rights to acquire condominium suites located in the medical office building at 999 North Tustin Avenue, Santa Ana, CA; (ii) a fee interest in the Western Medical Center at 1025 South Anaheim Blvd., Anaheim, CA; (iii) a fee interest in the Coastal Communities Hospital at 2701 South Bristol Street, Santa Ana, CA, and a fee interest in the medical office building at 1901 North College Avenue, Santa Ana, CA; (iv) a lease for the Chapman Medical Center at 2601 East Chapman Avenue, Orange, CA, and a fee interest in the medical office building at 2617 East Chapman Avenue, Orange, CA; and (v) equipment and contract rights. At the closing of the Acquisition, we transferred all of the fee interests in the acquired real estate to Pacific Coast Holdings Investment, LLC (“PCHI”), a company owned 51% by various physician investors and 49% by our largest shareholder.

SIGNIFICANT CHALLENGES

COMPANY - Our Acquisition involved significant cash expenditures, debt incurrence and integration expenses that has seriously strained our consolidated financial condition. If we are required to issue equity securities to raise additional capital or for any other reasons, existing stockholders will likely be substantially diluted, which could affect the market price of our stock. In April 2010 we issued warrants to existing shareholders and a lender. In February 2013 we repurchased certain warrants, issued new warrants, and extended the expiration dates of the remaining warrants (see “WARRANTS”).

INDUSTRY - Our Hospitals receive a substantial portion of their revenues from Medicare and Medicaid. The healthcare industry is experiencing a strong trend toward cost containment, as the government seeks to impose lower reimbursement and resource utilization group rates, limit the scope of covered services and negotiate reduced payment schedules with providers. These cost containment measures generally have resulted in a reduced rate of growth in the reimbursement for the services that we provide relative to the increase in our cost to provide such services.

Changes to Medicare and Medicaid reimbursement programs have limited, and are expected to continue to have limited, payment increases. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints resulting in a risk that the time period between submission of claims and payment could increase. Further, within the statutory framework of the Medicare and Medicaid programs, a substantial number of areas are subject to administrative rulings and interpretations which may further affect payments.

Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the Medicare and Medicaid programs, licensure and certification of facilities, and reimbursement. These regulations relate, among other things, to the adequacy of physical property and equipment, qualifications of personnel, standards of care, government reimbursement and operational requirements. Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Since these regulations are amended from time to time and are subject to interpretation, we cannot predict when and to what extent liability may arise. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including (with respect to inpatient care) fines, restrictions on admissions, denial of payment for all or new admissions, the revocation of licensure, decertification, imposition of temporary management or the closure of a facility or site of service.

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We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. Rights and remedies available to these programs include repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. These programs may also impose fines, criminal penalties or program exclusions. Other third-party payer sources also reserve rights to conduct audits and make monetary adjustments in connection with or exclusive of audit activities.

The healthcare industry is highly competitive. We compete with a variety of other organizations in providing medical services, many of which have greater financial and other resources and may be more established in their respective communities than we are. Competing companies may offer newer or different centers or services than we do and may thereby attract patients or customers who are presently our patients or customers or are otherwise receiving our services.

An increasing trend in malpractice litigation claims, rising costs of malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for hospital facilities. Also, a tightening of the reinsurance market has affected property, vehicle, and excess liability insurance carriers.

We receive all of our inpatient services revenue from operations in Orange County, California. The economic condition of this market could affect the ability of our patients and third-party payers to reimburse us for our services through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs. An economic downturn, or changes in the laws affecting our business in our market and in surrounding markets, could have a material adverse effect on our financial position, results of operations, and cash flows.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. As of September 30, 2013, we had a total stockholders’ deficiency of $5.8 million and working capital of $3.8 million.  For the three and six months ended September 30, 2013, we had net income (loss) of $(20.4) million and $25.0 million, respectively. At September 30, 2013, we had $15.9 million in additional availability under our revolving credit facility (see “DEBT”). Through September 30, 2013, we have recorded $204.1 million in revenues and incurred $94.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, we anticipate recording approximately $39.2 million in revenues and incurring approximately $13.9 million in provider fees and other expenses (see “HOSPITAL QUALITY ASSURANCE FEES”). We are reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on our liquidity and financial position and value of our common stock.

Key items for the six months ended September 30, 2013 included:

1.   Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for doubtful accounts) for the six months ended September 30, 2013 and 2012 were $307.4 million and $205.8 million, respectively, representing an increase of $101.6 million, or 49.4%. The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental net revenues increased $122.9 million for the six months ended September 30, 2013 compared to the six months ended September 30, 2012.  The increase was primarily related to Hospital Quality Assurance Fee (“QAF”) revenues received from the State of California. For the six months ended September 30, 2013, we recorded $150.0 million in QAF revenues compared to $38.7 million during the six months ended September 30, 2012 (see “HOSPITAL QUALITY ASSURANCE FEES”).

Inpatient admissions decreased by 6.8% to 9.6 for the six months ended September 30, 2013 compared to 10.3 for the six months ended September 30, 2012. The decline in admissions is primarily related to reductions in managed care, shifts from inpatient to outpatient observation, and lower obstetrics admissions.

Uninsured patients, as a percentage of gross charges (retail charges), were 5.3% for the six months ended September 30, 2013 compared to 6.0% for the six months ended September 30, 2012.

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2.   Operating expenses: Management is working aggressively to reduce costs without reduction in service levels. These efforts have in large part been offset by inflationary pressures. Operating expenses for the six months ended September 30, 2013 were $233.0 million, representing an increase of $28.7 million, or 14.0%, compared to the six months ended September 30, 2012. The increase is primarily related to additional accruals for wage-related matters.

DEBT – As of September 30, 2013, we had the following Credit Agreements:

— A $47.277 million Term Loan issued under the $80.0 million Restated Credit Agreement by and among us, Silver Point Finance, LLC and its affiliate, SPCP Group, LLC (together with Silver Point Finance, LLC, “Silver Point”), and PCHI and Ganesha Realty, LLC, as Credit Parties, bearing an interest rate of LIBOR plus 10%, with the LIBOR floor set at 2% (12% at September 30, 2013). If any event of default occurs and continues, the lender can increase the interest rate by 5% per year. As of September 30, 2013, we were in compliance with all financial covenants. The stated maturity date for this Restated Credit Agreement is April 13, 2016.

— A $35.0 million Revolving Credit Agreement by and among us and MidCap Funding IV, LLC, as assigned to it from MidCap Financial, LLC, as agent and a lender, bearing an interest rate of 4.25% plus LIBOR, with a 2.5% floor, per year (6.75% at September 30, 2013) and an unused commitment fee of 0.5% per year ($19.1 million outstanding balance at September 30, 2013).  For purposes of calculating interest, all payments we make on the Revolving Credit Agreement are subject to a five business day clearance period.  As of September 30, 2013, we were in compliance with all financial covenants. The stated maturity date for this Revolving Credit Agreement is March 25, 2016. At September 30, 2013, we had $15.9 million in additional availability under this facility.

Our outstanding debt consists of the following:

	September 30, 2013			March 31, 2013
Current:
Revolving line of credit	$	19,124		$	30,000
Discount		(394	)		(473	)
	$	18,730		$	29,527
Noncurrent:
Term loan	$	47,277		$	47,277
Discount		(1,441	)		(1,747	)
	$	45,836		$	45,530

WARRANTS – On April 13, 2010 we issued three-year warrants (the “Omnibus Warrants”) to purchase our common stock at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to its Term Loan lender, Silver Point (SPCP Group, LLC and SPCP Group IV, LLC) or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights.

In addition, on April 13, 2010, we issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling us to recover amounts due from our prior lender and a $1.0 million reduction in principal of our outstanding debt, among other benefits to us.  The Release Warrant also provides the holder with certain pre-emptive, information and registration rights.

On February 7, 2013, in connection with the Restated Credit Agreement, we entered into the following transactions involving warrants:

We entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which it repurchased the outstanding common stock warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to purchase an aggregate of 16.8 million shares of our common stock at an exercise price of $0.07 per share. We repurchased the Cancelled Warrant for a purchase price of $0.12 per share minus the exercise price of $0.07 per share resulting in a net purchase price of $0.05 per share multiplied by 16.8 million shares for an aggregate purchase price of $840.9.

Immediately following the warrant repurchase, we issued a new common stock warrant (the “New Warrant”) to SPCP Group, LLC for a price of $0.05 per share (an aggregate price of $840.9) on the same terms as the Cancelled Warrant entitling the holder to purchase an aggregate of 16.8 million shares of common stock at an exercise price of $0.07 per share, except that the New Warrant expires on April 13, 2016.

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Also simultaneous with the transactions described above, we extended the expiration date from April 13, 2013 to April 13, 2016 for the Omnibus Warrants issued to KPC and the remaining held by Silver Point (to purchase 79.2 million shares) and the Release Warrant issued to Dr. Chaudhuri. The extension of the warrant expiration date was intended to conform the terms of the warrants to that of the Restated Credit Agreement.

We assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

As of September 30 and March 31, 2013, the fair value of our outstanding warrants was $19.3 million and $5.3 million, respectively. The loss related to the change in fair value of our outstanding warrants for the three months ended September 30, 2013 and 2012 was $7.4 million and $1.1 million, respectively, and $14.0 million and $395 for the six months ended September 30, 2013 and 2012, respectively.

HOSPITAL QUALITY ASSURANCE FEES - 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 Medicaid 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 Medicaid managed care plans that will be paid to hospitals under the program to the discretion of the plans.  The hospital quality assurance fee (“QAF”) program 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. During fiscal year 2011, we recognized $87.2 million in revenue and recorded expenses of $47.8 million relating to the 2010 QAF.

In December 2011, CMS gave final approval for the extension of the QAF for the nine month period from January 1 through June 30, 2011 (“2011 QAF”).  Accordingly, for the year ended March 31, 2012 we recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 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”).  In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, which was further clarified in legislation approved by the governor of California in September 2012.  As a result, during the year ended March 31, 2013, we recognized revenue of $54.2 million and expenses of $52.5 million relating to the 2013 QAF for the periods from July 1, 2011 through March 31, 2013.

In May 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2011 through June 30, 2012. On June 26, 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2012 through June 30, 2013. As a result, during the three months ended June 30, 2013, we recognized revenue of $142.2 million and expenses of $33.5 million relating to the 2013 QAF for the periods from July 1, 2011 through June 30, 2013. During the three months ended September 30, 2013, we recognized revenue of $7.8 million and expenses of $8.0 million relating to the 2013 QAF for the period from July 1, 2013 through September 30, 2013

Through September 30, 2013, we have recorded $204.1 million in revenues and incurred $94.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, we anticipate recording approximately $39.2 million in revenues ($31.2 million for the managed care portion and $8.0 million for the fee-for-service portion) and incurring approximately $13.9 million in provider fees and other expenses.

We cannot provide any assurances in connection with CMS’s final managed care approval of the 2013 QAF for the period from July 1, 2013 to December 31, 2013.

In October 2013, the Governor of California signed legislation that would continue the QAF program for the period from January 1, 2014 through December 31, 2016. The program is subject to CMS review and approval.

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 meaningful use of certified EHR technology.

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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. We have 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. We adopted certified EHR technology and we recognized other income of $6.8 million relative to the first year under the Medicaid EHR incentive program during fiscal year 2012.

LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY – On April 13, 2010, we 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 us 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. The annual base rent is currently $7.8 million. If PCHI refinances the $47.277 million term loan, the annual base rent will increase to $8.3 million. This lease commitment with PCHI is eliminated in consolidation.

COMMITMENTS AND CONTINGENCIES – 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. We do not have an estimate of the cost to remediate the seismic requirements for the administrative building as of September 30, 2013.

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 our cash flow.  In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.

On July 1, 2011, we entered into software and services agreements with McKesson Technologies Inc. (“McKesson”) to upgrade our information technology systems.

Under the agreements, McKesson will provide us with a variety of services, including new software implementation and education/training services for our personnel, software maintenance services and professional services related to movement and migration of data from legacy systems.  McKesson will also furnish to us 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.  We have entered into the arrangement to enhance our clinical information systems and upgrade our 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 us for successive periods.  The agreements do not provide that they may be terminated by us 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. As of September 30, 2013 we completed conversion of all of our facilities to the McKesson system. We are also continuing to test and develop system applications where necessary.

CASH FLOW – Net cash provided by (used in) operating activities for the six months ended September 30, 2013 and 2012 was $13.3 million and $(9.6) million, respectively. Net income, adjusted for depreciation and other non-cash items, excluding the provision for bad debts and net income from non-controlling interests (not a measurement under accounting principles generally accepted in the United States of America (“GAAP”), totaled $51.0 million and $2.1 million for the six months ended September 30, 2013 and 2012, respectively. We used $30.3 million and $11.5 million in working capital for the six months ended September 30, 2013 and 2012, respectively. Net cash provided by (used in) payment of accounts payable, accrued compensation and benefits and other current liabilities was $8.7 million and $(2.5) million for the six months ended September 30, 2013 and 2012, respectively. Cash provided (used) by accounts receivable, net of provision for bad debts, was $2.7 million and $(0.8) million for the six months ended September 30, 2013 and 2012, respectively.

Net cash used in investing activities during the six months ended September 30, 2013 and 2012 was $0.5 million and $1.2 million, respectively. In the six months ended September 30, 2013 and 2012, we invested $0.5 million and $1.2 million in cash, respectively, in new property and equipment.

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Net cash provided by (used in) financing activities for the six months ended September 30, 2013 and 2012 was $(13.0) million and $9.1 million, respectively. The increase in net cash used in financing activities for the six months ended September 30, 2013 was primarily related to a paydown on our revolving line of credit of $10.9 million.    

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following table sets forth, for the three and six months ended September 30, 2013 and 2012 our unaudited condensed consolidated statements of operations expressed as a percentage of revenues.

	Three months ended September 30,						Six months ended September 30,
	2013			2012			2013			2012
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
Salaries and benefits		81.4	%		42.3	%		40.6	%		51.2	%
Supplies		15.5	%		11.1	%		8.8	%		13.5	%
Other operating expenses		29.4	%		42.2	%		24.7	%		32.9	%
Depreciation and amortization		2.4	%		0.8	%		1.3	%		0.9	%
		128.7	%		96.4	%		75.4	%		98.5	%
Operating income (loss)		(28.7	%)		3.6	%		24.6	%		1.5	%
Other expense:
Interest expense, net		(2.7	%)		(2.4	%)		(1.7	%)		(2.6	%)
Income (loss) on warrants		(8.7	%)		(0.9	%)		(4.5	%)		(0.2	%)
		(11.4	%)		(3.3	%)		(6.2	%)		(2.8	%)
Income (loss) before income tax provision (benefit)		(40.1	%)		0.3	%		18.4	%		(1.3	%)
Income tax provision (benefit)		(16.5	%)		(1.5	%)		10.1	%		(0.9	%)
Net income (loss)		(23.6	%)		1.8	%		8.3	%		(0.4	%)
Net (income) loss attributable to noncontrolling interests		(0.4	%)		0.2	%		(0.2	%)		(0.1	%)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.		(24.0	%)		2.0	%		8.1	%		(0.5	%)

THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2012

NET PATIENT SERVICE REVENUES – Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for doubtful accounts) for the three months ended September 30, 2013 and 2012 were $84.3 million and $125.0 million, respectively, representing a decrease of $40.7 million, or 32.6%. The decrease in net patient service revenues was primarily related to QAF revenues. If the QAF payments noted above are excluded, net patient service revenues for the three months ended September 30, 2013 were $76.5 million, or 11.4%, lower than the three months ended September 30, 2012. For the three months ended September 30, 2013, we recorded $7.8 million in QAF payments compared to $38.7 million during the three months ended September 30, 2012. The provision for bad debts for the three months ended September 30, 2013 was $12.8 million compared to $13.5 million for the three months ended September 30, 2012, representing a 5.2% decrease. 

Admissions for the three months ended September 30, 2013 decreased 7.1% compared to the three months ended September 30, 2012. The decline in admissions is the combined result of lower obstetrical deliveries and psychiatric admissions. Net patient service revenues per admission decreased 27.5% during the three months ended September 30, 2013. This decrease was primarily due to the QAF revenues. Excluding QAF revenues, net patient service revenues per admission decreased 3.5% during the three months ended September 30, 2013 compared to the same period in fiscal year 2013.

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 67% and 63% of patient service revenues for the three months ended September 30, 2013 and 2012, respectively.

26

The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental revenues (net of contractual allowances and discounts), including QAF funds, decreased $18.8 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. 

Other operating revenues of $950 and $880 for the three months ended September 30, 2013 and 2012, respectively, consist primarily of rental income and cafeteria sales.

OPERATING EXPENSES – Operating expenses for the three months ended September 30, 2013 decreased to $109.6 million from $121.3 million, a decrease of $11.7 million, or 9.6%, compared to fiscal year 2013. Operating expenses expressed as a percentage of revenues for the three months ended September 30, 2013 and 2012 were 128.7% and 96.4%, respectively. On a per admission basis, operating expenses decreased 2.7%. The decrease is primarily related to QAF expenses of $8.0 million incurred during the three months ended September 30, 2013 compared to $38.3 million in fiscal year 2013. Also, for the three months ended September 30, 2013, depreciation and amortization relating to the conversion of all of our facilities to the McKesson computer system was $1.3 million compared to $0 for the comparable period in fiscal year 2013 (see “ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM” and “COMMITMENTS AND CONTINGENCIES”).

Salaries and benefits increased $16.1 million (30.1%) for the three months ended September 30, 2013 compared to the same period in fiscal year 2013. The increase is primarily related to additional accruals for wage-related matters.

Supplies for the three months ended September 30, 2013 were comparable to the amounts incurred during the same period in fiscal 2013.

Other operating expenses during the three months ended September 30, 2013 decreased to $25.0 million from $53.1 million, a decrease of $28.1 million, or 52.9%, compared to the same period in fiscal year 2013. The increase is primarily related to QAF expenses of $8.0 million incurred during the three months ended September 30, 2013 compared to $38.3 million during the three months ended September 30, 2012.

OPERATING INCOME (LOSS) – The operating income (loss) for the three months ended September 30, 2013 and 2012 was $(24.4) million and $4.6 million, respectively.

OTHER INCOME (EXPENSE) – Interest expense for the three months ended September 30, 2013 was $2.3 million compared to $3.0 million for the same period in fiscal year 2013. The decrease related to lower outstanding loan balances and lower interest rates.

As of September 30, 2013, the aggregate fair value of our outstanding warrants was $19.3 million.  A loss relating to the change in fair value of the outstanding warrants of $7.4 million and $1.1 million was recorded during the three months ended September 30, 2013 and 2012, respectively (see “WARRANTS”).

NET INCOME (LOSS) - Net income (loss) for the three months ended September 30, 2013 and 2012 was $(20.4) million and $2.6 million, respectively.

SIX MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 2012

NET PATIENT SERVICE REVENUES – Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for doubtful accounts) for the six months ended September 30, 2013 and 2012 were $307.4 million and $205.8 million, respectively, representing an increase of $101.6 million, or 49.4%. The increase in net patient service revenues was primarily related to QAF revenues. If the QAF payments noted above are excluded, net patient service revenues for the six months ended September 30, 2013 were $157.4 million, or 5.8%, lower than the same period in fiscal year 2013. For the six months ended September 30, 2013, we recorded $150.0 million in QAF payments compared to $38.7 million during the six months ended September 30, 2012. The provision for bad debts for the six months ended September 30, 2013 was $27.2 million compared to $23.4 million for the six months ended September 30, 2012, representing a 16.2% increase. The increase in the provision for bad debts is primarily related to an increase in self-pay. During the implementation of the McKesson system some delays in classification of patient accounts occurred, as a result a portion of the increase in self-pay may be reclassified to Medicaid which will result in a reduction to the provision for bad debts in future periods (see “ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM” and “COMMITMENTS AND CONTINGENCIES”).

Admissions for the six months ended September 30, 2013 decreased 6.8% compared to the same period in fiscal year 2013. The decline in admissions is the combined result of lower obstetrical deliveries and psychiatric admissions. Net patient service revenues per admission increased 61.3% during the six months ended September 30, 2013. This increase was primarily due to the QAF revenues. Excluding QAF revenues, the increase in net patient service revenues per admission increased 2.4% during the six months ended September 30, 2013 compared to the same period in fiscal year 2013.

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 76% and 60% of patient service revenues for the six months ended September 30, 2013 and 2012, respectively.

27

The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental revenues (net of contractual allowances and discounts), including QAF funds, increased $122.9 million for the six months ended September 30, 2013 compared to the six months ended September 30, 2012. 

Other operating revenues of $1.8 million and $1.7 million for the six months ended September 30, 2013 and 2012, respectively, consist primarily of rental income and cafeteria sales.

OPERATING EXPENSES – Operating expenses for the six months ended September 30, 2013 increased to $233.0 million from $204.3 million, an increase of $28.7 million, or 14.0%, compared to the same period in fiscal year 2013. Operating expenses expressed as a percentage of revenues for the six months ended September 30, 2013 and 2012 were 75.4% and 98.5%, respectively. On a per admission basis, operating expenses increased 23.2%. The increase is primarily related to additional accruals for wage-related matters. Also, for the six months ended September 30, 2013, depreciation and amortization relating to the conversion of all of our facilities to the McKesson computer system was $2.6 million compared to $0 during the same period in fiscal year 2013 (see “COMMITMENTS AND CONTINGENCIES” and “ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM”).

Salaries and benefits increased $19.1 million (18.0%) for the six months ended September 30, 2013 compared to the same period in fiscal year 2013. The increase is primarily related to additional accruals for wage-related matters.

Supplies for the six months ended September 30, 2013 were comparable to the amounts incurred during the same period in fiscal 2013.

Other operating expenses during the six months ended September 30, 2013 increased to $76.3 million from $68.1 million, an increase of $8.2 million, or 12.0%, compared to the same period in fiscal year 2013. The increase is primarily related to QAF expenses of $41.4 million incurred during the six months ended September 30, 2013 compared to $38.3 million during the six months ended September 30, 2012 and purchased services of $4.8 million incurred during the six months ended September 30, 2013 compared to $3.4 million during the same period in fiscal 2013.

OPERATING INCOME – The operating income for the six months ended September 30, 2013 and 2012 was $76.2 million and $3.2 million, respectively.

OTHER INCOME (EXPENSE) – Interest expense for the six months ended September 30, 2013 was $5.1 million compared to $5.5 million for fiscal year 2013. The decrease related to lower outstanding loan balances and lower interest rates.

As of September 30, 2013, the aggregate fair value of our outstanding warrants was $19.3 million.  A loss relating to the change in fair value of the outstanding warrants of $14.0 million and $0.4 million was recorded during the six months ended September 30, 2013 and 2012, respectively (see “WARRANTS”).

NET INCOME (LOSS) - Net income (loss) for the six months ended September 30, 2013 and 2012 was $25.0 million and $(0.9) million, respectively.

CRITICAL ACCOUNTING POLICIES AND 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.

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. We established settlement payables of $170 and $179 as of September 30 and March 31, 2013, respectively.

28

The Hospitals receive supplemental payments from the State of California to support indigent care (Medicaid 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 (repaid) supplemental payments of $4 and $(600) during the three months ended September 30, 2013 and 2012, respectively, and $5.6 million and $4.1 million during the six months ended September 30, 2013 and 2012, respectively. The related revenue recorded for the three months ended September 30, 2013 and 2012 was $4.2 million and $5.1 million, respectively, and $7.5 million and $6.9 million for the six months ended September 30, 2013 and 2012, respectively. As of September 30 and March 31, 2013, estimated DSH receivables were $7.8 million and $5.9 million, respectively.

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $20.6 million and $19.7 million for the three months ended September 30, 2013 and 2012, respectively, and $40.4 million and $43.3 million for the six months ended September 30, 2013 and 2012, 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. We do 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 September 30, 2013 and 2012 were approximately $1.7 million and $2.5 million, respectively, and $4.0 million and $4.6 million for the six months ended September 30, 2013 and 2012, respectively.

We are 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 BAD DEBTS - We provide 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.

Our 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.

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. We assess the realization of deferred tax assets to determine whether an income tax valuation allowance is required. We have recorded a 100% valuation allowance on our net deferred tax since they did not meet the more-likely-than-not threshold.

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.

29

We and our 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 our income tax provision.

INSURANCE – We accrue for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. We have 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 an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2013, we had accrued $12.1 million and $10.6 million, respectively, which is comprised of $5.9 million and $5.5 million, respectively, in incurred and reported claims, along with $6.2 million and $5.1 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.6 million and $2.1 million are included in other prepaid expenses and current assets as of September 30 and March 31, 2013, respectively.

We have purchased statutory coverage insurance to fund our obligations under our workers compensation program. We have a large deductible rating plan program. The workers compensation program is a prefunded program, subject to a $250 deductible, per occurrence/loss limit. The prefunded program is subject to an annual adjustment until all losses are closed. We accrue 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 an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2013, we had accrued $544 and $500, respectively, comprised of $279 and $200, respectively, in incurred and reported claims, along with $265 and $300, respectively, in estimated IBNR.

In addition, we have a self-insured health benefits plan for our employees. As a result, we have established and maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. Our IBNR accruals at September 30 and March 31, 2013 were based upon projections. We determine the adequacy of this accrual by evaluating our limited historical experience and trends related to both health insurance claims and payments, information provided by our 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 our unaudited condensed consolidated financial statements. As of September 30 and March 31, 2013, we had accrued $1.8 million and $1.9 million, respectively, in estimated IBNR.

We have also purchased excess liability policies with aggregate limits of $25 million. The excess liability 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).

30

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As of September 30, 2013, the Company did not have any investment in, or outstanding liabilities under, market rate sensitive instruments. The Company does not enter into hedging instrument arrangements.

ITEM 4. CONTROLS AND PROCEDURES.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 15d-15(e) under the Exchange Act. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching the Company's desired disclosure control objectives. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2013, the end of the period of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2013 the Company's disclosure controls and procedures were effective to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the three months ended September 30, 2013, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

31

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. However, management cannot express an opinion as to the ultimate amounts, if any, of the Company’s liability, nor is it possible to estimate what litigation-related costs will be in future periods.

Update on Avery/Ross vs. IHHI lawsuit: Since the Court of Appeal affirmed the trial court’s decision to deny the Company’s motions to compel arbitration on June 27, 2013, remittitur issued and the case was sent back to the trial court. A mediation was held on October 10, 2013. The case did not settle at mediation. The Company intends to vigorously defend itself in connection with the claims.

32

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

ITEM 6. EXHIBITS

Exhibit Number	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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: November 14, 2013	By:	/s/ Steven R. Blake
		Steven R. Blake
		Chief Financial Officer (Principal Financial Officer)

33

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Kenneth K. Westbrook, Chief Executive Officer of Integrated Healthcare Holdings, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated, or caused such disclosure controls and procedures to be designed under our supervision, subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 14, 2013	By:	/s/ Kenneth K. Westbrook
		Kenneth K. Westbrook Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Steven R. Blake, Chief Financial Officer of Integrated Healthcare Holdings, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated, or caused such disclosure controls and procedures to be designed under our supervision, subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 14, 2013	By:	/s/ Steven R. Blake
		Steven R. Blake Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc. (the "Company") for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the period indicated.

This Certificate has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 14, 2013	By:	/s/ Kenneth K. Westbrook
		Kenneth K. Westbrook Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc. (the "Company") for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the period indicated.

This Certificate has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: November 14, 2013	By:	/s/ Steven R. Blake
		Steven R. Blake Chief Financial Officer

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11. HOSPITAL QUALITY ASSURANCE FEES (QAF)

6 Months Ended

Sep. 30, 2013

Hospital Quality Assurance Fees Qaf

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 Medicaid 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 Medicaid managed care plans that will be paid to hospitals under the program to the discretion of the plans.  The hospital quality assurance fee (“QAF”) program 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. 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 December 2011, CMS gave final approval for the extension of the QAF for the nine month period from January 1 through June 30, 2011 (“2011 QAF”).  Accordingly, for the year ended March 31, 2012 the Company recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 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”).  In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, which was further clarified in legislation approved by the governor of California in September 2012.  As a result, during the year ended March 31, 2013, the Company recognized revenue of $54.2 million and expenses of $52.5 million relating to the 2013 QAF for the periods from July 1, 2011 through March 31, 2013.

In May 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2011 through June 30, 2012. On June 26, 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2012 through June 30, 2013. As a result, during the three months ended June 30, 2013, the Company recognized revenue of $142.2 million and expenses of $33.5 million relating to the 2013 QAF for the periods from July 1, 2011 through June 30, 2013. During the three months ended September 30, 2013, the Company recognized revenue of $7.8 million and expenses of $8.0 million relating to the 2013 QAF for the period from July 1, 2013 through September 30, 2013.

Through September 30, 2013, the Company has recorded $204.1 million in revenues and incurred $94.0 million in provider fees and other expenses relating to the 2013 QAF. For the remaining term of the 2013 QAF, the Company anticipates recording approximately $39.2 million in QAF revenues ($31.2 million for the managed care portion and $8.0 million for the fee-for-service portion) and incurring approximately $13.9 million in QAF related expenses.

The Company cannot provide any assurances in connection with CMS’s final managed care approval of the 2013 QAF for the period from July 1, 2013 to December 31, 2013.

In October 2013, the Governor of California signed legislation that would continue the QAF program for the period from January 1, 2014 through December 31, 2016. The program is subject to CMS review and approval.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Statement [Abstract]
Patient service revenues (net of contractual allowances and discounts)	$ 97,072	$ 138,491	$ 334,592	$ 229,238
Provision for bad debts	(12,811)	(13,509)	(27,176)	(23,436)
Net patient service revenues	84,261	124,982	307,416	205,802
Other operating revenues	950	880	1,759	1,725
Total operating revenue	85,211	125,862	309,175	207,527
Operating expenses:
Salaries and benefits	69,343	53,287	125,406	106,278
Supplies	13,172	13,978	27,121	28,029
Other operating expenses	25,030	53,062	76,259	68,105
Depreciation and amortization	2,092	960	4,209	1,918
Total Operating Expenses	109,637	121,287	232,995	204,330
Operating income (loss)	(24,426)	4,575	76,180	3,197
Other expense:
Interest expense, net	(2,328)	(3,018)	(5,135)	(5,450)
Loss on warrants	(7,376)	(1,125)	(14,021)	(395)
Total Other Expense	(9,704)	(4,143)	(19,156)	(5,845)
Income (loss) before income tax provision (benefit)	(34,130)	432	57,024	(2,648)
Income tax provision (benefit)	(14,078)	(1,922)	31,374	(1,878)
Net income (loss)	(20,052)	2,354	25,650	(770)
Net (income) loss attributable to noncontrolling interests (Note 9)	(331)	228	(628)	(122)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$ (20,383)	$ 2,582	$ 25,022	$ (892)
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Basic	$ (0.08)	$ 0.01	$ 0.10	$ 0.00
Diluted	$ (0.08)	$ 0.01	$ 0.05	$ 0.00
Weighted average shares outstanding
Basic	255,307,000	255,307,000	255,307,000	255,307,000
Diluted	255,307,000	256,987,000	472,878,000	255,307,000

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4. COMMON STOCK WARRANTS

6 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

NOTE 4 - COMMON STOCK WARRANTS

A summary of the warrants outstanding at September 30 and March 31, 2013 is presented as follows.

	Shares issuable under warrants	Weighted- average exercise price		Expiration date
Outstanding, September 30 and March 31, 2013	405,000	$	0.07		April 13, 2016

On April 13, 2010 the Company issued three-year warrants (the “Omnibus Warrants”) to purchase its common stock at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to its Term Loan lender, Silver Point (SPCP Group, LLC and SPCP Group IV, LLC) or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights.

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 common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling the Company to recover amounts due from its prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company.  The Release Warrant also provides the holder with certain pre-emptive, information and registration rights.

On February 7, 2013, in connection with the Restated Credit Agreement, the Company entered into the following transactions involving warrants:

The Company entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which it repurchased the outstanding common stock warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to purchase an aggregate of 16.8 million shares of the Company’s common stock at an exercise price of $0.07 per share. The Company repurchased the Cancelled Warrant for a purchase price of $0.12 per share minus the exercise price of $0.07 per share resulting in a net purchase price of $0.05 per share multiplied by 16.8 million shares for an aggregate purchase price of $840.9.

Immediately following the warrant repurchase, the Company issued a new common stock warrant (the “New Warrant”) to SPCP Group, LLC for a price of $0.05 per share (an aggregate price of $840.9) on the same terms as the Cancelled Warrant entitling the holder to purchase an aggregate of 16.8 million shares of common stock at an exercise price of $0.07 per share, except that the New Warrant expires on April 13, 2016.

Also simultaneous with the transactions described above, the Company extended the expiration date from April 13, 2013 to April 13, 2016 for the Omnibus Warrants issued to KPC and the remaining held by Silver Point (to purchase 79.2 million shares) and the Release Warrant issued to Dr. Chaudhuri. The extension of the warrant expiration date was intended to conform the terms of the warrants to that of the Restated Credit Agreement.

The Company assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan (Note 3) and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

As of September 30 and March 31, 2013, the fair value of the Company’s outstanding warrants was $19.3 million and $5.3 million, respectively. The loss related to the change in fair value of the Company’s outstanding warrants for the three months ended September 30, 2013 and 2012 was $7.4 million and $1.1 million, respectively, and $14.0 million and $395 for the six months ended September 30, 2013 and 2012, respectively.

The fair value of warrants issued by the Company is estimated using the Black-Scholes valuation model, which it 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 its 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:

	September 30, 2013		March 31, 2013
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.5%		0.4%
Expected volatility		37.9%		39.9%
Expected term (in years)		2.54		3.05

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4. COMMON STOCK WARRANTS (Tables)

6 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Common Stock Warrants

A summary of the warrants outstanding at September 30 and March 31, 2013 is presented as follows.

	Shares issuable under warrants	Weighted- average exercise price		Expiration date
Outstanding, September 30 and March 31, 2013	405,000	$	0.07		April 13, 2016

Assumptions used in the Black-Scholes valuation model

The assumptions used in the Black-Scholes valuation model are as follows:

	September 30, 2013		March 31, 2013
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.5%		0.4%
Expected volatility		37.9%		39.9%
Expected term (in years)		2.54		3.05

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12. ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM

6 Months Ended

Sep. 30, 2013

Electronic Health Records Incentive Program

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 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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13. Financed Insurance Policy Schedule (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Commitments and Contingencies Disclosure [Abstract]
Prepaid insurance	$ 1,359	$ 115
Accrued insurance premiums (Included in other current liabilities)	$ 0	$ 69

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4. Warrants Outstanding (Details) (Warrants)	6 Months Ended
	Sep. 30, 2013	Mar. 31, 2013
Warrants
Warrant shares outstanding	405,000	405,000
Weighted-average exercise price	0.07
Expiration date	Apr. 13, 2016

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9. VARIABLE INTEREST ENTITY (Tables)

6 Months Ended

Sep. 30, 2013

Variable Interest Entity

Variable Interest Entity

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

	September 30, 2013			March 31, 2013
Cash	$	184		$	147
Property, net		39,052			39,696
Other		118			49
Total assets	$	39,354		$	39,892
Debt ($47,277, net of discount) (as guarantor)	$	45,836		$	45,530
Other		468			488
Total liabilities		46,304			46,018
Deficiency		(6,950	)		(6,126	)
Total liabilities and accumulated deficit	$	39,354		$	39,892

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8. INCOME (LOSS) PER SHARE (Tables)

6 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Schedule of Earnings Per Share

Income (loss) per share for the three and six months ended September 30, 2013 and 2012 was computed as shown below.

	Three months ended September 30,					Six months ended September 30,
	2013			2012		2013		2012
Numerator:
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$	(20,383	)	$	2,582	$	25,022	$	(892	)
Denominator:
Weighted average common shares		255,307			255,307		255,307		255,307
Dilutive options		–			1,680		217,571		–
Denominator for diluted calculation		255,307			256,987		472,878		255,307
Income (loss) per share - basic	$	(0.08	)	$	0.01	$	0.10	$	(0.00	)
Income (loss) per share - diluted	$	(0.08	)	$	0.01	$	0.05	$	(0.00	)

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9. Variable Interest Entity (Narrative) (USD $)

3 Months Ended

6 Months Ended

Sep. 30, 2013

Sep. 30, 2012

Sep. 30, 2013

Sep. 30, 2012

Variable Interest Entity

VIE, arrangements

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 $47.277 million term loan. The Company remains primarily liable as the borrower under the $47.277 million term loan notwithstanding its guarantee by PCHI. The $47.277 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.

VIE, ownership

As of September 30, 2013, PCHI was owned 51% by various physician investors and 49% by Ganesha, which is managed by Dr. Chaudhuri

VIE, Financial support

$ 47,277,000

Exposure amount, VIE

As noted above, PCHI is a guarantor on the $47.277 million term loan should the Company not be able to perform.  PCHI's total liabilities (before debt discount of $1.4 million) represent the Company's maximum exposure to loss. Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Notes 2 and 13).

Rental expense eliminated upon consolidation

$ 2,000,000

$ 1,900,000

$ 4,000,000

$ 3,900,000

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1. Description of Business (Narrative) (USD $)	3 Months Ended		6 Months Ended			9 Months Ended		3 Months Ended		6 Months Ended			3 Months Ended		6 Months Ended								3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Mar. 31, 2013	Sep. 30, 2013 Building and Building Improvements	Sep. 30, 2013 Equipment	Sep. 30, 2013 DSH and CMAC	Sep. 30, 2012 DSH and CMAC	Sep. 30, 2013 DSH and CMAC	Sep. 30, 2012 DSH and CMAC	Mar. 31, 2013 DSH and CMAC	Sep. 30, 2013 Medicare and Medicaid	Sep. 30, 2012 Medicare and Medicaid	Sep. 30, 2013 Medicare and Medicaid	Sep. 30, 2012 Medicare and Medicaid	Sep. 30, 2013 Self-Pay Uninsured and Insured	Mar. 31, 2013 Self-Pay Uninsured and Insured	Sep. 30, 2013 Self-Pay Uninsured	Mar. 31, 2013 Self-Pay Uninsured	Sep. 30, 2013 Self-Pay After Insurance	Mar. 31, 2013 Self-Pay After Insurance	Sep. 30, 2013 Managed Care	Sep. 30, 2012 Managed Care	Sep. 30, 2013 Managed Care	Sep. 30, 2012 Managed Care	Mar. 31, 2013 Managed Care
Liquidity
Working capital	$ 3,800,000		$ 3,800,000
Credit line facility availability	15,900,000		15,900,000
Concentration of Risk
Percentage of patient service revenue													67.00%	63.00%	76.00%	60.00%
Patient Service Revenues
Settlement payables	170,000		170,000		179,000
Proceeds from supplemental payments								4,000	(600,000)	5,600,000	4,100,000
Revenue received from supplemental payments	97,072,000	138,491,000	334,592,000	229,238,000				4,200,000	5,100,000	7,500,000	6,900,000		20,600,000	19,700,000	40,400,000	43,300,000							26,827,000	33,016,000	56,203,000	61,134,000
Accounts receivable from government payors	7,775,000		7,775,000		5,882,000			7,800,000		7,800,000		5,900,000
Charity care cost													$ 1,700,000	$ 2,500,000	$ 4,000,000	$ 4,600,000
Receivables and Allowance for Doubtful Accounts
Self pay collection rate																	6.10%	6.50%
Self pay collection rate - allowance for doubtful accounts																			95.20%	95.20%	76.10%	78.00%	16.80%		16.80%		20.30%
Property and Equipment
Estimated useful lives						25 years	3-15 years

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4. Common Stock Warrants (Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Mar. 31, 2013
Fair value of outstanding warrants	$ 19,297		$ 19,297		$ 5,276
Warrants
Fair value of outstanding warrants	19,300		19,300		5,300
Change in fair value of warrants	$ 7,400	$ 1,100	$ 14,000	$ 395

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1. Fair value of financial assets and liabilities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	$ 19,297	$ 11,921	$ 5,276
Fair Value Inputs Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	0		0
Fair Value Inputs Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	0		0
Fair Value Inputs Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	19,297		5,276
Total
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	$ 19,297

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8. Income (Loss) Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Numerator:
Net income attributable to Integrated Healthcare Holdings, Inc.	$ (20,383)	$ 2,582	$ 25,022	$ (892)
Denominator:
Weighted average common shares	255,307,000	255,307,000	255,307,000	255,307,000
Dilutive options		1,680	217,571
Denominator for diluted calculation	255,307,000	256,987,000	472,878,000	255,307,000
Income per share - basic	$ (0.08)	$ 0.01	$ 0.10	$ 0.00
Income per share - diluted	$ (0.08)	$ 0.01	$ 0.05	$ 0.00

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6. STOCK INCENTIVE PLAN (Tables)

6 Months Ended

Sep. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK INCENTIVE PLAN

A summary of stock option activity for the six months ended September 30, 2013 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, 2013		7,595		$	0.18
Granted		–		$	–	$	–
Exercised		–		$	–
Forfeited or expired		(70	)	$	0.26
Outstanding, September 30, 2013		7,525		$	0.18				1.2	$	75
Exercisable at September 30, 2013		7,525		$	0.18				1.2	$	75

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net income (loss)	$ 25,650	$ (770)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization of property and equipment	4,209	1,918
Provision for bad debts	27,176	23,436
Amortization of debt discount	385	530
Loss on warrants	14,021	395
Deferred tax assets, net	6,708	0
Changes in operating assets and liabilities:
Accounts receivable	(24,432)	(24,260)
Inventories of supplies	(242)	169
Due from governmental payers	(1,893)	(2,665)
Hospital quality assurance fees receivable	(62,520)	(20,828)
Prepaid expenses - hospital quality assurance fees	0	(9,174)
Prepaid income taxes	0	(1,257)
Prepaid insurance, other prepaid expenses and current assets, and other assets	600	(3,125)
Accounts payable	(5,844)	(1,209)
Accrued compensation and benefits	12,707	(1,709)
Hospital quality assurance fees payable	4,624	28,519
Due to governmental payers	(9)	0
Income taxes payable	10,406	0
Accrued insurance retentions and other current liabilities	1,805	459
Net cash provided by (used in) operating activities	13,351	(9,571)
Cash flows from investing activities:
Decrease in restricted cash	8	2
Additions to property and equipment	(543)	(1,242)
Net cash used in investing activities	(535)	(1,240)
Cash flows from financing activities:
Proceeds from (paydown on) revolving line of credit, net	(10,876)	10,658
Noncontrolling interests distributions	(1,532)	(1,012)
Payments on capital lease obligations	(547)	(544)
Net cash provided by (used in) financing activities	(12,955)	9,102
Net decrease in cash and cash equivalents	(139)	(1,709)
Cash and cash equivalents, beginning of period	3,545	11,829
Cash and cash equivalents, end of period	3,406	10,120
Supplemental information:
Cash paid for interest	4,653	4,590
Cash paid for income taxes	$ 14,320	$ 0

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2. PROPERTY AND EQUIPMENT

6 Months Ended

Sep. 30, 2013

Property, Plant and Equipment [Abstract]

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	September 30, 2013			March 31, 2013
Buildings	$	36,536		$	36,536
Land and improvements		13,523			13,523
Equipment		30,462			28,534
Assets under capital leases		13,263			13,267
		93,784			91,860
Less accumulated depreciation		(32,078	)		(27,872	)
Property and equipment, net	$	61,706		$	63,988

Accumulated depreciation on assets under capital leases as of September 30 and March 31, 2013 was $6.9 million and $6.2 million, respectively.

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 September 30, 2013.

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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5. INCOME TAXES

6 Months Ended

Sep. 30, 2013

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 and the amount computed by multiplying income (loss) before income tax provision (benefit) in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2013 and 2012 by the statutory federal income tax rate primarily relates to the impact of the valuation allowance reserving certain 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 income (loss) from continuing operations for the three and six months ended September 30, 2013, which resulted in the recognition of a tax (benefit) expense for the three and six months ended September 30, 2013, respectively.

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at September 30, 2013 could be realized and, based on this analysis, the Company concluded that there was not sufficient positive evidence to support further realization of its net deferred tax assets, and therefore, as of September 30, 2013, will maintain a 100% valuation allowance against its net deferred assets.

The Company’s federal income tax returns for the tax years ended March 31, 2011 and 2012 are currently under examination by the Internal Revenue Service. The Company does not expect that the results of these examinations will have a material effect on its financial condition or results of operations.

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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3. DEBT

6 Months Ended

Sep. 30, 2013

Debt Disclosure [Abstract]

NOTE 3 - DEBT

As of September 30, 2013, the Company had the following Credit Agreements:

— A $47.277 million Term Loan issued under the $80.0 million Restated Credit Agreement by and among the Company, Silver Point Finance, LLC and its affiliate, SPCP Group, LLC (together with Silver Point Finance, LLC, “Silver Point”), and PCHI and Ganesha Realty, LLC, as Credit Parties, bearing an interest rate of LIBOR plus 10%, with the LIBOR floor set at 2% (12% at September 30, 2013). If any event of default occurs and continues, the lender can increase the interest rate by 5% per year. As of September 30, 2013, the Company was in compliance with all financial covenants. The stated maturity date for this Restated Credit Agreement is April 13, 2016.

— A $35.0 million Revolving Credit Agreement by and among the Company and MidCap Funding IV, LLC, as assigned to it from MidCap Financial, LLC, as agent and a lender, bearing an interest rate of 4.25% plus LIBOR, with a 2.5% floor, per year (6.75% at September 30, 2013) and an unused commitment fee of 0.5% per year ($19.1 million outstanding balance at September 30, 2013).  For purposes of calculating interest, all payments the Company makes on the Revolving Credit Agreement are subject to a five business day clearance period.  As of September 30, 2013, the Company was in compliance with all financial covenants. The stated maturity date for the Revolving Credit Agreement is March 25, 2016. At September 30, 2013, the Company had $15.9 million in additional availability under this facility.

The Company's outstanding debt consists of the following:

	September 30, 2013			March 31, 2013
Current:
Revolving line of credit	$	19,124		$	30,000
Discount		(394	)		(473	)
	$	18,730		$	29,527
Noncurrent:
Term loan	$	47,277		$	47,277
Discount		(1,441	)		(1,747	)
	$	45,836		$	45,530

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6. Options Outstanding (Details) (Options, USD $)	6 Months Ended
	Sep. 30, 2013
Options
Outstanding beginning balance	7,595
Granted, Shares	0
Exercised, Shares	0
Forfeited or expired, Shares	(70)
Outstanding, ending balance	7,525
Exercisable	7,525
Weighted- Average Exercise Price
Granted, exercise price
Exercised, exercise price
Forfeited or expired, exercise price	$ 0.26
Outstanding, ending balance	$ 0.18
Exercisable	$ 0.18
Weighted - average grant date fair value
Granted
Weighted- Average remaining contractual term (years)
Outstanding, beginning balance	1 year 2 months 12 days
Exercisable	1 year 2 months 12 days
Aggregate intrinsic value
Outstanding, ending balance	$ 75
Exercisable	$ 75

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13. COMMITMENTS AND CONTINGENCIES (Tables)

6 Months Ended

Sep. 30, 2013

Commitments And Contingencies Tables

Financed insurance policies

As of September 30 and March 31, 2013, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

	September 30, 2013		March 31, 2013
Prepaid insurance	$	1,359	$	115
Accrued insurance premiums	$	–	$	69
(Included in other current liabilities)

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1. Warrant liability (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Sep. 30, 2013	Jun. 30, 2013
Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance, beginning	$ 11,921	$ 5,276
Change in fair value of warrant liability included in earnings	7,376	6,645
Balance, ending	$ 19,297	$ 11,921

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3. DEBT (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Current:
Revolving line of credit	$ 19,124	$ 30,000
Discount	(394)	(473)
Net revolving line of credit	18,730	29,527
Noncurrent:
Term loan	47,277	47,277
Discount	(1,441)	(1,747)
Term loan	$ 45,836	$ 45,530

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9. Variable Interest Entity (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Property, net	$ 61,706	$ 63,988
Total assets	218,882	166,708
Total liabilities	224,650	196,594
Deficiency	(5,768)	(29,886)
Total liabilities and accumulated deficit	218,882	166,708
PCHI [Member]
Cash	184	147
Property, net	39,052	39,696
Other	118	49
Total assets	39,354	39,892
Debt (as guarantor)	45,836	45,530
Other	468	488
Total liabilities	46,304	46,018
Deficiency	(6,950)	(6,126)
Total liabilities and accumulated deficit	$ 39,354	$ 39,892

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Current assets:
Allowance for doubtful accounts	$ 33,567	$ 21,143
Current liabilities:
Current portion of Capial Lease Obligation	$ 1,169	$ 1,101
Integrated Healthcare Holdings, Inc. stockholders' equity (deficiency):
Common stock par value (in Dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	800,000,000	800,000,000
Common stock, shares issued	255,307,000	255,307,000
Common stock, shares outstanding	255,307,000	255,307,000

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8. INCOME (LOSS) PER SHARE

6 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

NOTE 8 - INCOME (LOSS) PER 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.

Stock options and warrants aggregating approximately 6 million shares and 411 million shares, respectively, were not included in the diluted calculation for the six months ended September 30, 2013 and the three months ended September 30, 2012 since they were anti-dilutive. Since the Company incurred a loss for the three months ended September 30, 2013 and the six months ended September 30, 2012, the potential shares of common stock consisting of approximately 413 million shares and 413 million shares, respectively, issuable under warrants and stock options were not included in the diluted calculations since they were anti-dilutive. Income (loss) per share for the three and six months ended September 30, 2013 and 2012 was computed as shown below.

	Three months ended September 30,					Six months ended September 30,
	2013			2012		2013		2012
Numerator:
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$	(20,383	)	$	2,582	$	25,022	$	(892	)
Denominator:
Weighted average common shares		255,307			255,307		255,307		255,307
Dilutive options		–			1,680		217,571		–
Denominator for diluted calculation		255,307			256,987		472,878		255,307
Income (loss) per share - basic	$	(0.08	)	$	0.01	$	0.10	$	(0.00	)
Income (loss) per share - diluted	$	(0.08	)	$	0.01	$	0.05	$	(0.00	)

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (USD $) In Thousands, except Share data	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Noncontrolling Interest	Total
Beginning Balance, Amount at Mar. 31, 2013	$ 255	$ 62,911	$ (87,365)	$ (5,687)	$ (29,886)
Beginning Balance, Shares at Mar. 31, 2013	255,307,000
Net income (loss)			25,022	628	25,650
Noncontrolling interest distributions				(1,532)	(1,532)
Ending Balance, Amount at Sep. 30, 2013	$ 255	$ 62,911	$ (62,343)	$ (6,591)	$ (5,768)
Ending Balance, Shares at Sep. 30, 2013	255,307,000

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (USD $)	Sep. 30, 2013	Mar. 31, 2013
Current assets:
Cash and cash equivalents	$ 3,406,000	$ 3,545,000
Restricted cash	5,000	13,000
Accounts receivable, net of allowance for doubtful accounts of $33,567 and $21,143, respectively	60,077,000	62,821,000
Inventories of supplies	6,980,000	6,738,000
Due from governmental payers	7,775,000	5,882,000
Hospital quality assurance fee receivable	70,210,000	7,690,000
Prepaid insurance	1,359,000	115,000
Deferred tax assets, net	0	6,328,000
Other prepaid expenses and current assets	7,364,000	9,208,000
Total current assets	157,176,000	102,340,000
Property and equipment, net	61,706,000	63,988,000
Deferred tax assets, net	0	380,000
Total assets	218,882,000	166,708,000
Current liabilities:
Revolving line of credit, net of discount	18,730,000	29,527,000
Accounts payable	57,565,000	62,515,000
Accrued compensation and benefits	32,341,000	19,634,000
Accrued insurance retentions	14,490,000	12,938,000
Hospital quality assurance fees payable	11,850,000	7,226,000
Due to governmental payers	170,000	179,000
Income taxes payable	13,275,000	2,869,000
Other current liabilities	4,922,000	4,111,000
Total current liabilities	153,343,000	138,999,000
Debt, noncurrent, net of discount	45,836,000	45,530,000
Warrant liability, noncurrent	19,297,000	5,276,000
Capital lease obligations, net of current portion of $1,169 and $1,101 respectively	6,174,000	6,789,000
Total liabilities	224,650,000	196,594,000
Commitments and contingencies
Integrated Healthcare Holdings, Inc. stockholders' equity (deficiency):
Common stock, $0.001 par value; 800,000 shares authorized; 255,307 shares issued and outstanding	255,000	255,000
Additional paid in capital	62,911,000	62,911,000
Accumulated deficit	(62,343,000)	(87,365,000)
Total Integrated Healthcare Holdings, Inc. stockholders' equity (deficiency)	823,000	(24,199,000)
Noncontrolling interests	(6,591,000)	(5,687,000)
Total stockholders' equity (deficiency)	(5,768,000)	(29,886,000)
Total liabilities and stockholders' equity (deficiency)	$ 218,882,000	$ 166,708,000

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1. Summary of patient service revenues (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	$ 97,072	$ 138,491	$ 334,592	$ 229,238
Medicare
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	24,196	22,728	47,582	48,592
Medicaid
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	35,610	61,732	196,789	82,997
Managed Care
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	26,827	33,016	56,203	61,134
Indemnity Self Pay And Other
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	$ 10,439	$ 21,015	$ 34,018	$ 36,515

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3. DEBT (Tables)

6 Months Ended

Sep. 30, 2013

Debt Disclosure [Abstract]

Outstanding Debt

The Company's outstanding debt consists of the following:

	September 30, 2013			March 31, 2013
Current:
Revolving line of credit	$	19,124		$	30,000
Discount		(394	)		(473	)
	$	18,730		$	29,527
Noncurrent:
Term loan	$	47,277		$	47,277
Discount		(1,441	)		(1,747	)
	$	45,836		$	45,530

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8. Income (Loss) Per Share (Narrative)	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Tax Disclosure [Abstract]
Shares excluded from the calculations of diluted loss per share	413,000,000	411,000,000	6,000,000	413,000,000

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4. Warrant assumptions (Details) (Warrants)	6 Months Ended	12 Months Ended
	Sep. 30, 2013	Mar. 31, 2013
Warrants
Expected dividend yield	0.00%	0.00%
Risk-free interest rate	0.50%	0.40%
Expected volatility	37.90%	39.90%
Expected term (in years)	2 years 6 months 15 days	3 years 18 days

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2. Schedule of Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Property and equipment, gross	$ 93,784	$ 91,860
Less accumulated depreciation	(32,078)	(27,872)
Property and equipment, net	61,706	63,988
Buildings
Property and equipment, gross	36,536	36,536
Land and Improvements
Property and equipment, gross	13,523	13,523
Equipment
Property and equipment, gross	30,462	28,534
Assets Held under Capital Leases
Property and equipment, gross	$ 13,263	$ 13,267

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2. PROPERTY AND EQUIPMENT (Narrative) (USD $)	Sep. 30, 2013	Mar. 31, 2013
Property, Plant and Equipment [Abstract]
Earthquake insurance with a policy limit	$ 50,000,000
Accumulated depreciation on assets under capital lease	$ 6,900,000	$ 6,200,000

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7. RETIREMENT PLAN

6 Months Ended

Sep. 30, 2013

Retirement Plan

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 September 30, 2013 and 2012, the Company incurred plan related expenses of $820 and $833, respectively, and $1.6 million and $1.6 million during the six months ended September 30, 2013 and 2012, respectively. These expenses are included in salaries and benefits in the accompanying unaudited condensed consolidated statements of operations.  At September 30 and March 31, 2013, accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets included $2.5 million and $4.1 million, respectively, in accrued employer contributions.

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1. Summary of accounts receivable and due from/to government payers (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Mar. 31, 2013
Accounts receivable:
Patient accounts receivable	$ 93,644	$ 83,964
Allowance for doubtful accounts	(33,567)	(21,143)
Accounts receivable, net	60,077	62,821
Due from government payers:
DSH	7,775	5,882
Total Amount due from Government	7,775	5,882
Due to government payers:
Settlement payables	170	179
Total Amount due to Government	$ 170	$ 179

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6. Stock Incentive Plan (Narrative)

6 Months Ended

Sep. 30, 2013

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Maximum aggregate number of shares under the plan

26.1

Stock Incentive 2006 Plan

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Plan description

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.

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.

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10. RELATED PARTY TRANSACTIONS

6 Months Ended

Sep. 30, 2013

Related Party Transactions [Abstract]

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 September 30 and March 31, 2013, Dr. Chaudhuri and Mr. Thomas were 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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6. STOCK INCENTIVE PLAN

6 Months Ended

Sep. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

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 September 30, 2013, the maximum aggregate number of shares under the Plan was 26.1 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 and six months ended September 30, 2013 and 2012. All outstanding options were fully vested as of September 30 and March 31, 2013.

A summary of stock option activity for the six months ended September 30, 2013 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, 2013		7,595		$	0.18
Granted		–		$	–	$	–
Exercised		–		$	–
Forfeited or expired		(70	)	$	0.26
Outstanding, September 30, 2013		7,525		$	0.18				1.2	$	75
Exercisable at September 30, 2013		7,525		$	0.18				1.2	$	75

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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 and six months ended September 30, 2013 are not necessarily indicative of the results for the entire 2014 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, 2013 filed with the SEC on June 28, 2013.

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 September 30, 2013, the Company had a total stockholders’ deficiency of $5.8 million and working capital of $3.8 million. For the three and six months ended September 30, 2013, the Company had net income (loss) of $(20.4) million and $25.0 million, respectively. At September 30, 2013, the Company had $15.9 million in additional availability under its revolving credit facility (Note 3). Through September 30, 2013, the Company has recorded $204.1 million in revenues and incurred $94.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $39.2 million in revenues and incurring approximately $13.9 million in provider fees and other expenses (Note 11). The Company is reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on its liquidity and financial position and value of its common stock.

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 income (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 67% and 63% of the patient service revenues for the three months ended September 30, 2013 and 2012, respectively, and 76% and 60% for the six months ended September 30, 2013 and 2012, 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 service area 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 September 30,				Six months ended September 30,
	2013		2012		2013		2012
Medicare and Medicare managed care	$	24,196	$	22,728	$	47,582	$	48,592
Medicaid and Medicaid managed care		35,610		61,732		196,789		82,997
Managed care		26,827		33,016		56,203		61,134
Indemnity, self-pay and other		10,439		21,015		34,018		36,515
	$	97,072	$	138,491	$	334,592	$	229,238

The following is a summary of Medicaid and Medicaid managed care patient service revenues excluding QAF and Medicaid Disproportionate Share Hospital (“DSH”) payments:

	Three months ended September 30,						Six months ended September 30,
	2013			2012			2013			2012
Medicaid and Medicaid managed care	$	35,610		$	61,732		$	196,789		$	82,997
QAF		(7,783	)		(38,743	)		(150,001	)		(38,743	)
DSH		(4,196	)		(5,095	)		(7,493	)		(6,873	)
	$	23,631		$	17,894		$	39,295		$	37,381

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 payables of $170 and $179 as of September 30 and March 31, 2013, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medicaid 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 (repaid) supplemental payments of $4 and $(600) during the three months ended September 30, 2013 and 2012, respectively, and $5.6 million and $4.1 million during the six months ended September 30, 2013 and 2012, respectively. The related revenue recorded for the three months ended September 30, 2013 and 2012 was $4.2 million and $5.1 million, respectively, and $7.5 million and $6.9 million for the six months ended September 30, 2013 and 2012, respectively. As of September 30 and March 31, 2013, estimated DSH receivables were $7.8 million and $5.9 million, respectively, which are reflected 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 $20.6 million and $19.7 million for the three months ended September 30, 2013 and 2012, respectively, and $40.4 million and $43.3 million for the six months ended September 30, 2013 and 2012, 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 September 30, 2013 and 2012 were approximately $1.7 million and $2.5 million, respectively, and $4.0 million and $4.6 million for the six months ended September 30, 2013 and 2012, 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 BAD DEBTS - 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 the 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.

LETTER OF CREDIT – At September 30 and March 31, 2013, the Company had an outstanding letter of credit totaling $761. This letter of credit correspondingly reduces the Company’s borrowing availability under its revolving line of credit (Note 3).

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – The following is a summary of the principal components of accounts receivable and due from/to government payers as of September 30 and March 31, 2013:

	September 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	93,644		$	83,964
Allowance for doubtful accounts		(33,567	)		(21,143	)
Accounts receivable, net	$	60,077		$	62,821
Due from government payers:
DSH	$	7,775		$	5,882
	$	7,775		$	5,882
Due to government payers:
Settlement payables	$	170		$	179
	$	170		$	179

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 6.1% and 6.5% as of September 30 and March 31, 2013, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of September 30 and March 31, 2013, the allowance for doubtful accounts for self-pay uninsured was 95.2% and 95.2%, respectively, of self-pay uninsured patient accounts receivable. As of September 30 and March 31, 2013, the allowance for doubtful accounts for self-pay balance after insurance was 76.1% and 78.0%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of September 30 and March 31, 2013, the allowance for doubtful accounts for managed care was 16.8% and 20.3%, 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 bad debts. 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 bad debts 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 September 30 and March 31, 2013 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.

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 and February 2013 (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 September 30 and March 31, 2013:

	Total		Level 1		Level 2		Level 3
Warrant liability at September 30, 2013	$	19,297		–		–	$	19,297
Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$	5,276
Change in fair value of warrant liability included in earnings		6,645
Balance at June 30, 2013		11,921
Change in fair value of warrant liability included in earnings		7,376
Balance at September 30, 2013	$	19,297

Additional quantitative information about Level 3 fair value measurements is discussed in 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 exercise price is subject to a weighted average ratchet down provision if the Company subsequently sells shares at a price lower than the then exercise price.

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 net deferred tax assets since they did not meet the more-likely-than-not threshold.

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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10. Related Party Transactions (Narrative)	Sep. 30, 2013	Mar. 31, 2013
Related Party Transactions [Abstract]
Common Stock Outstanding by beneficial owners	447,500,000	447,500,000

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1. Patient Service Revenues (Details) (USD $)	3 Months Ended		6 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Medicaid and Medicaid managed care patient service revenues excluding QAF and Medicaid DSH payments	$ 23,631	$ 17,894	$ 39,295	$ 37,381
Medicaid
Medicaid and Medicaid managed care patient service revenues excluding QAF and Medicaid DSH payments	35,610	61,732	196,789	82,997
QAF
Medicaid and Medicaid managed care patient service revenues excluding QAF and Medicaid DSH payments	(7,783)	(38,743)	(150,001)	(38,743)
DSH
Medicaid and Medicaid managed care patient service revenues excluding QAF and Medicaid DSH payments	$ (4,196)	$ (5,095)	$ (7,493)	$ (6,873)

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13. COMMITMENTS AND CONTINGENCIES

6 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

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. As of September 30, 2013 the Company completed conversion of all of its facilities to the McKesson system. The Company is also continuing to test and develop system applications where necessary.

OPERATING LEASES AND 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. The annual base rent is currently $7.8 million. If PCHI refinances the $47.277 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 2017. Assets under capital leases with a net book value of $6.4 million and $7.1 million are included in the accompanying unaudited condensed consolidated balance sheets as of September 30 and March 31, 2013, 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 an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2013, the Company had accrued $12.1 million and $10.6 million, respectively, which is comprised of $5.9 million and $5.5 million, respectively, in incurred and reported claims, along with $6.2 million and $5.1 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.6 million and $2.1 million are included in other prepaid expenses and current assets as of September 30 and March 31, 2013, respectively.

The Company has purchased statutory coverage insurance to fund its obligations under its workers compensation program. The Company has a large deductible rating plan program. The workers compensation program is a prefunded program, subject to a $250 deductible, per occurrence/loss limit. The prefunded program is subject to an annual adjustment until all losses are closed. 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 an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of September 30 and March 31, 2013, the Company had accrued $544 and $500, respectively, comprised of $279 and $200, respectively, in incurred and reported claims, along with $265 and $300, 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 maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. The Company’s IBNR accruals at September 30 and March 31, 2013 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 September 30 and March 31, 2013, the Company had accrued $1.8 million and $1.9 million, respectively, in estimated IBNR.

The Company has also purchased excess liability policies with aggregate limits of $25 million. The excess liability 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 September 30, 2013, the Company finances various insurance policies at an interest rate of 4.1% per annum. The Company incurred finance charges relating to such policies of $12 and $13 for the three months ended September 30, 2013 and 2012, respectively, and $23 and $25 for the six months ended September 30, 2013 and 2012, respectively. As of September 30 and March 31, 2013, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

	September 30, 2013		March 31, 2013
Prepaid insurance	$	1,359	$	115
Accrued insurance premiums	$	–	$	69
(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. However, management cannot express an opinion as to the ultimate amounts, if any, of the Company’s liability, nor is it possible to estimate what litigation-related costs will be in future periods.

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9. VARIABLE INTEREST ENTITY

6 Months Ended

Sep. 30, 2013

Variable Interest Entity

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 $47.277 million term loan. The Company remains primarily liable as the borrower under the $47.277 million term loan notwithstanding its guarantee by PCHI. The $47.277 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 September 30, 2013, PCHI was owned 51% by various physician investors and 49% by Ganesha, which is managed by Dr. Chaudhuri (majority stockholder in the Company).

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 $47.277 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 $47.277 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 $47.277 million term loan, and cross-collateralization of the Company's non-real estate assets to secure the $47.277 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.

	September 30, 2013			March 31, 2013
Cash	$	184		$	147
Property, net		39,052			39,696
Other		118			49
Total assets	$	39,354		$	39,892
Debt ($47,277, net of discount) (as guarantor)	$	45,836		$	45,530
Other		468			488
Total liabilities		46,304			46,018
Deficiency		(6,950	)		(6,126	)
Total liabilities and accumulated deficit	$	39,354		$	39,892

As noted above, PCHI is a guarantor on the $47.277 million term loan should the Company not be able to perform.  PCHI's total liabilities (before debt discount of $1.4 million) represent the Company's maximum exposure to loss. Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Notes 2 and 13).

PCHI rental income and the Company’s related rental expense of $2.0 million and $1.9 million for the three months ended September 30, 2013 and 2012, respectively, and $4.0 million and $3.9 million for the six months ended September 30, 2013 and 2012, respectively, were eliminated upon consolidation.

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2. PROPERTY AND EQUIPMENT (Tables)

6 Months Ended

Sep. 30, 2013

Property, Plant and Equipment [Abstract]

Property and Equipment

Property and equipment consists of the following:

	September 30, 2013			March 31, 2013
Buildings	$	36,536		$	36,536
Land and improvements		13,523			13,523
Equipment		30,462			28,534
Assets under capital leases		13,263			13,267
		93,784			91,860
Less accumulated depreciation		(32,078	)		(27,872	)
Property and equipment, net	$	61,706		$	63,988

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

6 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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 and six months ended September 30, 2013 are not necessarily indicative of the results for the entire 2014 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, 2013 filed with the SEC on June 28, 2013.

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

LIQUIDITY - As of September 30, 2013, the Company had a total stockholders’ deficiency of $5.8 million and working capital of $3.8 million. For the three and six months ended September 30, 2013, the Company had net income (loss) of $(20.4) million and $25.0 million, respectively. At September 30, 2013, the Company had $15.9 million in additional availability under its revolving credit facility (Note 3). Through September 30, 2013, the Company has recorded $204.1 million in revenues and incurred $94.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $39.2 million in revenues and incurring approximately $13.9 million in provider fees and other expenses (Note 11). The Company is reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on its liquidity and financial position and value of its common stock.

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 income (loss) of the Company.

CONCENTRATION OF RISK

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 67% and 63% of the patient service revenues for the three months ended September 30, 2013 and 2012, respectively, and 76% and 60% for the six months ended September 30, 2013 and 2012, 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 service area 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 – 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 September 30,				Six months ended September 30,
	2013		2012		2013		2012
Medicare and Medicare managed care	$	24,196	$	22,728	$	47,582	$	48,592
Medicaid and Medicaid managed care		35,610		61,732		196,789		82,997
Managed care		26,827		33,016		56,203		61,134
Indemnity, self-pay and other		10,439		21,015		34,018		36,515
	$	97,072	$	138,491	$	334,592	$	229,238

The following is a summary of Medicaid and Medicaid managed care patient service revenues excluding QAF and Medicaid Disproportionate Share Hospital (“DSH”) payments:

	Three months ended September 30,						Six months ended September 30,
	2013			2012			2013			2012
Medicaid and Medicaid managed care	$	35,610		$	61,732		$	196,789		$	82,997
QAF		(7,783	)		(38,743	)		(150,001	)		(38,743	)
DSH		(4,196	)		(5,095	)		(7,493	)		(6,873	)
	$	23,631		$	17,894		$	39,295		$	37,381

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 payables of $170 and $179 as of September 30 and March 31, 2013, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medicaid 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 (repaid) supplemental payments of $4 and $(600) during the three months ended September 30, 2013 and 2012, respectively, and $5.6 million and $4.1 million during the six months ended September 30, 2013 and 2012, respectively. The related revenue recorded for the three months ended September 30, 2013 and 2012 was $4.2 million and $5.1 million, respectively, and $7.5 million and $6.9 million for the six months ended September 30, 2013 and 2012, respectively. As of September 30 and March 31, 2013, estimated DSH receivables were $7.8 million and $5.9 million, respectively, which are reflected 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 $20.6 million and $19.7 million for the three months ended September 30, 2013 and 2012, respectively, and $40.4 million and $43.3 million for the six months ended September 30, 2013 and 2012, 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 September 30, 2013 and 2012 were approximately $1.7 million and $2.5 million, respectively, and $4.0 million and $4.6 million for the six months ended September 30, 2013 and 2012, 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 BAD DEBTS

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 the 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.

LETTER OF CREDIT

At September 30 and March 31, 2013, the Company had an outstanding letter of credit totaling $761. This letter of credit correspondingly reduces the Company’s borrowing availability under its revolving line of credit (Note 3).

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following is a summary of the principal components of accounts receivable and due from/to government payers as of September 30 and March 31, 2013:

	September 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	93,644		$	83,964
Allowance for doubtful accounts		(33,567	)		(21,143	)
Accounts receivable, net	$	60,077		$	62,821
Due from government payers:
DSH	$	7,775		$	5,882
	$	7,775		$	5,882
Due to government payers:
Settlement payables	$	170		$	179
	$	170		$	179

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 6.1% and 6.5% as of September 30 and March 31, 2013, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of September 30 and March 31, 2013, the allowance for doubtful accounts for self-pay uninsured was 95.2% and 95.2%, respectively, of self-pay uninsured patient accounts receivable. As of September 30 and March 31, 2013, the allowance for doubtful accounts for self-pay balance after insurance was 76.1% and 78.0%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of September 30 and March 31, 2013, the allowance for doubtful accounts for managed care was 16.8% and 20.3%, 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 bad debts. 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 bad debts 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 September 30 and March 31, 2013 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.

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 and February 2013 (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 September 30 and March 31, 2013:

	Total		Level 1		Level 2		Level 3
Warrant liability at September 30, 2013	$	19,297		–		–	$	19,297
Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$	5,276
Change in fair value of warrant liability included in earnings		6,645
Balance at June 30, 2013		11,921
Change in fair value of warrant liability included in earnings		7,376
Balance at September 30, 2013	$	19,297

Additional quantitative information about Level 3 fair value measurements is discussed in 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 exercise price is subject to a weighted average ratchet down provision if the Company subsequently sells shares at a price lower than the then exercise price.

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 net deferred tax assets since they did not meet the more-likely-than-not threshold.

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.

XML

Document and Entity Information	6 Months Ended
	Sep. 30, 2013	Nov. 07, 2013
Document And Entity Information
Entity Registrant Name	Integrated Healthcare Holdings Inc
Entity Central Index Key	0001051488
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
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	Q2
Document Fiscal Year Focus	2014

XML

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

6 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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 September 30,				Six months ended September 30,
	2013		2012		2013		2012
Medicare and Medicare managed care	$	24,196	$	22,728	$	47,582	$	48,592
Medicaid and Medicaid managed care		35,610		61,732		196,789		82,997
Managed care		26,827		33,016		56,203		61,134
Indemnity, self-pay and other		10,439		21,015		34,018		36,515
	$	97,072	$	138,491	$	334,592	$	229,238

The following is a summary of Medicaid and Medicaid managed care patient service revenues excluding QAF and Medicaid Disproportionate Share Hospital (“DSH”) payments:

	Three months ended September 30,						Six months ended September 30,
	2013			2012			2013			2012
Medicaid and Medicaid managed care	$	35,610		$	61,732		$	196,789		$	82,997
QAF		(7,783	)		(38,743	)		(150,001	)		(38,743	)
DSH		(4,196	)		(5,095	)		(7,493	)		(6,873	)
	$	23,631		$	17,894		$	39,295		$	37,381

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following is a summary of the principal components of accounts receivable and due from/to government payers as of September 30 and March 31, 2013:

	September 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	93,644		$	83,964
Allowance for doubtful accounts		(33,567	)		(21,143	)
Accounts receivable, net	$	60,077		$	62,821
Due from government payers:
DSH	$	7,775		$	5,882
	$	7,775		$	5,882
Due to government payers:
Settlement payables	$	170		$	179
	$	170		$	179

FAIR VALUE MEASUREMENTS:

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 September 30 and March 31, 2013:

	Total		Level 1		Level 2		Level 3
Warrant liability at September 30, 2013	$	19,297		–		–	$	19,297
Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276

Warrant liability - fair value measurements using significant unobservable inputs

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$	5,276
Change in fair value of warrant liability included in earnings		6,645
Balance at June 30, 2013		11,921
Change in fair value of warrant liability included in earnings		7,376
Balance at September 30, 2013	$	19,297