10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarterly period ended December 31, 2009.

¨           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  1-33323

PHC, INC.

(Exact name of registrant as specified in its charter)

Massachusetts	04-2601571
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
200 Lake Street, Suite 102, Peabody MA	01960
(Address of principal executive offices)	(Zip Code)

978-536-2777

(Registrant’s telephone number)

_____________________________________________________________________________________________

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X   No___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ___   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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer    ___	Accelerated filer	___
Non accelerated filer      ___	Smaller reporting company	X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ____  No X

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Number of shares outstanding of each class of common equity as of February 4, 2010:

Class A Common Stock	18,990,422
Class B Common Stock	775,021

1

	PHC, Inc.
PART I.	FINANCIAL INFORMATION	Page
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets (unaudited) – December 31, 2009 and June 30, 2009	3
	Condensed Consolidated Statements of Operations (unaudited) - Three and six months ended December 31, 2009 and December 31, 2008	4
	Condensed Consolidated Statements of Cash Flows (unaudited) – Six months ended December 31, 2009 and December 31, 2008	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	19
Item 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION
Item 2.	Repurchase of Treasury Stock	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 6.	Exhibits	21
	Signatures

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
		December 31,		June 30,
		2009		2009
ASSETS
Current assets:
Cash and cash equivalents	$	2,782,395	$	3,199,344
Accounts receivable, net of allowance for doubtful accounts of $2,843,076 at
December 31, 2009 and $2,430,618 at June 30, 2009		7,630,903		6,315,693
Other receivables-third party		65,190		170,633
Prepaid expenses		438,284		441,945
Prepaid income taxes		21,966		33,581
Other receivables and advances		664,517		674,357
Deferred income tax asset – current		923,625		923,625
Total current assets		12,526,880		11,759,178
Restricted cash		512,197		512,197
Accounts receivable, non-current		41,964		35,000
Other receivables		76,996		55,627
Property and equipment, net		4,605,562		4,687,110
Deferred income tax asset – non-current		1,902,354		1,902,354
Deferred financing costs, net of amortization of $509,705 and $436,440 at
December 31, 2009 and June 30, 2009		262,536		335,801
Goodwill		969,098		969,098
Other assets		2,359,310		2,435,628
Total assets	$	23,256,897	$	22,691,993
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,386,724	$	1,375,436
Current maturities of long-term debt		798,171		652,837
Revolving credit note		1,044,064		863,404
Current portion of obligations under capital leases		109,503		103,561
Accrued payroll, payroll taxes and benefits		1,485,941		1,570,639
Accrued expenses and other liabilities		1,586,411		1,461,499
Total current liabilities		6,410,814		6,027,376
Long-term debt, net of current maturities		315,923		488,426
Obligations under capital leases		75,998		132,368
Total liabilities		6,802,735		6,648,170
Stockholders’ equity:
Preferred Stock, 1,000,000 shares authorized, none issued or outstanding		--		--
Class A common stock, $.01 par value, 30,000,000 shares authorized,
19,860,034 and 19,840,793 shares issued at December 31, 2009 and June 30,
2009, respectively		198,600		198,408
Class B common stock, $.01 par value, 2,000,000 shares authorized, 775,021
and 775,080 issued and outstanding at December 31, 2009 and June 30,
2009, respectively, each convertible into one share of Class A common stock		7,750		7,751
Additional paid-in capital		27,838,561		27,667,597
Treasury stock, 877,404 and 626,541 shares of Class A common stock at
December 31, 2009 and June 30, 2009, respectively, at cost		(1,398,365)		(1,125,707)
Accumulated deficit		(10,192,384)		(10,704,226)
Total stockholders’ equity		16,454,162		16,043,823
Total liabilities and stockholders’ equity	$	23,256,897	$	22,691,993

See Notes to Condensed Consolidated Financial Statements.

3

PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
		Three Months Ended				Six Months Ended
		December 31,				December 31,
		2009		2008		2009		2008
Revenues:
Patient care, net	$	11,992,372	$	10,105,942	$	23,760,040	$	20,665,438
Contract support services		872,191		914,374		1,751,951		2,046,783
Total revenues		12,864,563		11,020,316		25,511,991		22,712,221
Operating expenses:
Patient care expenses		6,439,782		5,906,307		12,878,345		12,064,464
Cost of contract support services		741,504		771,505		1,468,981		1,599,284
Provision for doubtful accounts		455,345		308,329		928,318		754,143
Administrative expenses		4,714,227		4,877,390		9,366,744		9,572,364
Total operating expenses		12,350,858		11,863,531		24,642,388		23,990,255
Income (loss) from operations		513,705		(843,215)		869,603		(1,278,034)
Other income (expense):
Interest income		29,733		44,206		62,107		95,475
Other income		74,305		24,888		123,661		55,742
Interest expense		(80,885)		(96,306)		(161,478)		(177,948)
Total other income (expense), net		23,153		(27,212)		24,290		(26,731)
Income (loss) before income taxes		536,858		(870,427)		893,893		(1,304,765)
Income tax (benefit) provision		248,619		(466,634)		382,050		(506,053)
Income (loss) from continuing operations		288,239		(403,793)		511,843		(798,712)
Discontinued operations – net of tax – Pivotal		--		(1,312,280)		--		(1,250,064)
Net income (loss) applicable to common    shareholders	$	288,239	$	(1,716,073)	$	511,843	$	(2,048,776)
Basic net income (loss) per common share
Continuing operations	$	0.01	$	(0.02)	$	0.03	$	(0.04)
Discontinued operations		--		(0.07)		--		(0.06)
	$	0.01	$	(0.09)	$	0.03	$	(0.10)
Basic weighted average number of shares outstanding		19,800,509		20,131,080		19,899,029		20,154,583
Diluted net income (loss) per common   share
Continuing operations		0.01		(0.02)		0.03		(0.04)
Discontinued operations		--		(0.07)		--		(0.06)
	$	0.01	$	(0.09)	$	0.03	$	(0.10)
Diluted weighted average number of shares outstanding		19,855,419		20,131,080		20,012,602		20,154,583

See Notes to Condensed Consolidated Financial Statements.

4

PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
		For the Six Months Ended December 31,
		2009		2008
Cash flows from operating activities:
Net income (loss)	$	511,843	$	(2,048,776)
Net loss from discontinued operations		--		1,250,064
Net income (loss) from continuing operations		511,843		(798,712)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		574,044		543,907
Non-cash interest expense		73,263		82,571
Deferred income tax benefit		--		(1,314,238)
Earnings of unconsolidated subsidiary		(49,084)		(14,203)
Stock based compensation		141,701		69,202
Provision for doubtful accounts		928,318		754,143
Changes in:
Accounts receivable and other receivable		(2,174,866)		(1,071,240)
Prepaid expenses and other current assets		15,276		(8,455)
Other assets		(2,653)		(4,639)
Accounts payable		11,288		27,830
Accrued expenses and other liabilities		40,214		48,533
Net cash provided by (used in) continuing operations		69,344		(1,685,301)
Net cash provided by discontinued operations		--		677,240
Net cash provided by (used in) operating activities		69,344		(1,008,061)
Cash flows from investing activities:
Acquisition of property and equipment		(364,441)		(1,095,907)
Equity investment in unconsolidated subsidiary		18,288		38,100
Net cash used in investing activities of continuing operations		(346,153)		(1,057,807)
Net cash used in investing activities of discontinued operations		--		(32,187)
Net cash used in investing activities		(346,153)		(1,089,994)
Cash flows from financing activities:
Revolving debt, net		180,660		141,307
Proceeds from borrowings on long term debt		--		800,000
Principal payments on long term debt		(77,597)		(117,707)
Proceeds from issuance of common stock		29,455		19,898
Purchase of treasury stock		(272,658)		(499,930)
Net cash (used in) provided by financing continuing operations		(140,140)		343,568
Net cash used in financing discontinued operations		--		(384,496)
Net cash used in financing activities		(140,140)		(40,928)
Net decrease in cash and cash equivalents, continuing operations		(416,949)		(2,399,540)
Net increase in cash and cash equivalents, discontinued operations		--		260,557
Net decrease in cash and cash equivalents		(416,949)		(2,138,983)
Beginning cash and cash equivalents		3,199,344		3,142,226
Ending cash and cash equivalents	$	2,782,395	$	1,003,243
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	88,210	$	112,762
Income taxes		351,525		161,764
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in a cashless exercise of options	$	--	$	84
Obligations under capital leases		--		3,470

See Notes to Condensed Consolidated Financial Statements.

5

PHC, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2009

Note A - The Company

PHC, Inc. (“PHC” or the “Company”) is incorporated in the Commonwealth of Massachusetts.  The Company is a national healthcare company which operates subsidiaries specializing in behavioral health services including the treatment of substance abuse, which includes alcohol and drug dependency and related disorders and the provision of psychiatric services.  The Company also operates help lines for employee assistance programs, call centers for state and local programs and provides management, administrative and online behavioral health services.  The Company primarily operates under three business segments:

Behavioral health treatment services, including two substance abuse treatment facilities:  Highland Ridge Hospital, located in Salt Lake City, Utah, which also treats psychiatric patients, and Mount Regis Center, located in Salem, Virginia, and eleven psychiatric treatment locations which include Harbor Oaks Hospital, a 73-bed psychiatric hospital located in New Baltimore, Michigan, Detroit Behavioral Institute, a 66-bed residential facility in Detroit, Michigan, a 55-bed psychiatric hospital in Las Vegas, Nevada and eight outpatient behavioral health locations (one in New Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, one in Monroeville, PA operating as Wellplace, three in Las Vegas, Nevada operating as Harmony Healthcare and three locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area);

Call center and help line services (contract services), including two call centers, one operating in Midvale, Utah and one in Detroit, Michigan.  The Company provides help line services through contracts with major railroads and a call center contract with Wayne County, Michigan.  The call centers both operate under the brand name Wellplace; and

Behavioral health administrative services, including delivery of management and administrative and online services.  The parent company provides management and administrative services for all of its subsidiaries and online services for its behavioral health treatment subsidiaries and its call center subsidiaries.  It also provides behavioral health information through its website, Wellplace.com.

Note B - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with  accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The balance sheet at June 30, 2009 has been derived from the audited consolidated balance sheet at that date.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the year ending June 30, 2010. The accompanying financial statements should be read in conjunction with the June 30, 2009 consolidated financial statements and notes thereto included in the Company’s 10-K, as amended, filed on October 5, 2009.

Estimates and assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  Such estimates include patient care billing rates, realizability of receivables from third-party payors, rates for Medicare and Medicaid and the realization of deferred tax benefits.

Revenue Recognition

The Company bills for its inpatient behavioral healthcare services upon discharge and for its outpatient facilities daily.  In all cases, the charges are contractually adjusted at the time of billing using adjustment factors based on agreements or contracts with the insurance carriers and the specific plans held by the individuals.  This method may still require additional adjustment based on ancillary services provided and deductibles and copays due from the individuals which are estimated at the time of admission based on information received from the individual.  Adjustments to these estimates are recognized as adjustments to revenue during the period identified, usually when payment is received.

6

The Company’s policy is to collect estimated co-payments and deductibles at the time of admission.  Payments are made by way of cash, check or credit card.  If the patient does not have sufficient resources to pay the estimated co-payment in advance, the Company’s policy is to allow payment to be made in three installments - one third due upon admission, one third due upon discharge and the balance due 30 days after discharge.  At times the patient is not physically or mentally stable enough to comprehend or agree to any financial arrangement.  In this case, the Company will make arrangements with the patient once his or her condition is stabilized.  At times, this situation will require the Company to extend payment arrangements beyond the three payment method previously outlined.  Whenever extended payment arrangements are made, the patient, or the individual who is financially responsible for the patient, is required to sign a promissory note to the Company, which includes interest on the balance due.

Prior to the sale of the Company’s research division, pharmaceutical study revenue was recognized only after a pharmaceutical study contract was awarded and the patient was selected and accepted based on study criteria and billable units of service were provided.  Where a contract required completion of the study by the patient, no revenue was recognized until the patient completed the study program.  All revenues and receivables from our research division were derived from pharmaceutical companies with no related bad debt allowance.  The results of operations for the research division are shown as discontinued operations on the accompanying statements of operations.

Contract support service revenue is a result of fixed fee contracts to provide telephone support.  Revenue for these services is recognized ratably over the service period.  All revenues and receivables from our contract services division are based on a prorated monthly allocation of the total contract amount and usually paid within 30 days of the end of the month.

Note C- Stock Based Compensation

The Company has three active stock plans: a stock option plan, an employee stock purchase plan and anon-employee directors’ stock option plan.

The stock option plan provides for the issuance of a maximum of 1,900,000 shares of Class A common stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others whose efforts are important to the success of the Company.  Subject to the provisions of this plan, the compensation committee of the Board of Directors has the authority to select the optionees and determine the terms of the options including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option will not be lessthan the market price of the Class A common stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options.

The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees.  A maximum of 500,000 shares may be issued under this plan.

The non-employee directors’ stock option plan provides for the grant of non-statutory stock options automatically at the time of each annual meeting of the Board.  Under the plan a maximum of 350,000 shares may be issued.  Each outside director is granted an option to purchase 20,000 shares of Class A common stock annually at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date.

The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Auditing Standards Codification (“ASC”) – “Compensation – Stock Compensation” (“ASC 718”).  Under the provisions of ASC 718, the Company recognizes the fair value of stock compensation in net income, over the requisite service period of the individual grantees, which generally equals the vesting period. All of the Company’s stock compensation is accounted for as an equity instrument and there have been no liability awards granted.  Any income tax benefit related to stock compensation will be shown under the financing section of the Statement of Cash Flows.  Based on the Company’s historical voluntary turnover rates for individuals in the positions who received options in the period, there was no forfeiture rate assumed.  It is assumed these options will remain outstanding for the full term of issue.  Under the true-up provisions of ASC 718, a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.

Under the provisions of ASC 718, the Company recorded stock-based compensation on its consolidated condensed statement of operations of $80,992 and $61,913 for the three months ended December 31, 2009 and 2008, respectively and $141,701 and $95,695 for the six months ended December 31, 2009 and 2008, respectively.  In addition, the Company recorded a recovery of previously charged compensation of $47,797 for the three months ended September 30, 2008.

The Company had the following activity in its stock option plans for the six months ended December 31, 2009:

7

	Number Of Shares		Weighted-Average Exercise Price Per Share		Intrinsic Value At December 31, 2009
Balance – June 30, 2009	1,554,250	$	1.99
Granted	205,000		1.08
Exercised	(2,000)		0.81
Expired	(141,250)		1.43
Balance – December 31, 2009	1,616,000	$	1.92	$	63,570
Exercisable	1,168,496	$	2.01	$	55,783

The total intrinsic value of the options exercised during the six months ended December 31, 2009 was $680.

The following table summarizes the activity of the Company’s stock options that have not vested for the six months ended December 31, 2009.

	Number Of Shares		Weighted- Average Fair Value
Non-vested at July 1, 2009	569,191	$	0.67
Granted	205,000		0.58
Expired	(8,750)		0.60
Vested	(317,937)	$	0.64
Non-vested at December 31, 2009	447,504	$	0.66

The compensation cost related to the fair value of these shares of approximately $251,516 will be recognized as these options vest over the next three years.

The Company utilizes the Black-Scholes valuation model for estimating the fair value of the stock compensation granted.    The weighted-average fair values of the options granted under the stock option plans for the three months ended December 31, 2009 and December 31, 2008 was $0.58 and $0.71, respectively, and the weighted-average fair value of the options granted for the six months ended December 31, 2009 and December 31, 2008 was $0.58 and $0.71, respectively, using the following assumptions:

	Three Months Ended December 31, 2009	Three Months Ended December 31, 2008	Six Months Ended December 31, 2009	Six Months Ended December 31, 2008
Average risk-free interest rate	2.76%	4.00%	2.76%	4.00%
Expected dividend yield	None	None	None	None
Expected life	5.00 years	6.06 years	5.00 years	6.06 years
Expected volatility	60.66%	50.24%	60.66%	50.24%

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options. The risk-free interest rate is the U.S. Treasury rate on the date of grant. The expected life was calculated using the Company’s historical experience for the expected term of the option.

Note D- Discontinued Operations

During the quarter ended March 31, 2009, the Company sold the assets of its research division, Pivotal Research Centers, Inc. (“Pivotal”), a Delaware corporation, for $3,000,000, to Premier Research International, LLC (“Premier”) a Delaware limited liability company.  The other parties to the agreement included Premier Research Arizona, LLC, a Delaware limited liability company and wholly-owned subsidiary of Premier, and Pivotal Research Centers, LLC, an Arizona limited liability company.  See the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on March 16, 2009 for additional details regarding this transaction.

The following table summarizes the discontinued operations for the periods presented:

8

	For the three months ended December 31,		For the six months ended December 31,
		2008		2008
Revenue	$	667,641	$	1,963,094
Operating expenses	$	2,811,364	$	4,005,182
Loss before taxes	$	(2,143,723)	$	(2,042,088)
Income tax benefit	$	(831,443)	$	(792,024)
Net loss from      discontinued operations	$	(1,312,280)	$	(1,250,064)

There was no activity for discontinued operations in the current fiscal year as the operations were sold in February of 2009.

Note E – Business Segment Information

The Company’s behavioral health treatment services have similar economic characteristics, services, patients and clients.  Accordingly, all behavioral health treatment services are reported on an aggregate basis under one segment.  The Company’s segments are more fully described in Note A above.  Residual income and expenses from closed facilities are included in the administrative services segment.  The following summarizes the Company’s segment data:

		Treatment Services		Discontinued Operations		Contract Services		Administrative Services		Eliminations		Total
For the three months  ended December 31, 2009
Revenue–external customers	$	11,992,372	$	--	$	872,191	$	--	$	--	$	12,864,563
Revenues – intersegment		1,007,920		--		--		1,249,998		(2,257,918)		--
Segment net income   (loss)		1,538,056		--		130,722		(1,380,539)		--		288,239
Capital expenditures		85,570		--		10,051		19,264		--		114,885
Depreciation & amortization		195,123		--		14,891		62,104		--		272,118
Interest expense		39,198		--		--		41,687		--		80,885
Income tax provision		--		--		--		248,619		--		248,619
For the three months ended December 31, 2008
Revenue–external customers	$	10,105,942	$	--	$	914,374	$	--	$	--	$	11,020,316
Revenues – intersegment		653,700		--		--		1,423,500		(2,077,200)		--
Segment net income   (loss)		155,495		(1,312,280)		142,880		(702,168)		--		(1,716,073)
Capital expenditures		608,802		--		--		583		--		609,385
Depreciation & amortization		199,980		--		26,437		53,554		--		279,971
Interest expense		51,269		--		20		45,017		--		96,306
Income tax benefit		--		--		--		(466,634)		--		(466,634)

9

Note E – Business Segment Information (continued)

For the six months ended December 31, 2009
Revenue–external     customers	$	23,760,040	$	--	$	1,751,951	$	--	$	--	$	25,511,991
Revenues – intersegment		1,835,080		--		--		2,499,996		(4,335,076)		--
Segment net income (loss)		2,836,830		--		283,032		(2,608,019)		--		511,843
Capital expenditures		257,225		--		16,573		90,643		--		364,441
Depreciation & amortization		410,308		--		38,394		125,342		--		574,044
Interest expense		77,485		--		--		83,993		--		161,478
Income tax  provision		--		--		--		382,050		--		382,050
Identifiable assets		14,305,332		--		494,740		8,456,825		--		23,256,897
Goodwill and intangible assets		969,098		--		--		--		--		969,098
For the six months ended December 31, 2008
Revenue–external     Customers	$	20,665,438	$	--	$	2,046,783	$	--	$	--	$	22,712,221
Revenues – intersegment		1,342,150		--		--		2,777,200		(4,119,350)		--
Segment net income (loss)		507,293		(1,250,064)		447,546		(1,753,551)		--		(2,048,776)
Capital expenditures		1,083,251		--		3,863		8,793		--		1,095,907
Depreciation & amortization		392,283		--		52,839		98,785		--		543,907
Interest expense		92,085		--		20		85,843		--		177,948
Income tax benefit		--		--		--		(506,053)		--		(506,053)
At June 30, 2009
Identifiable assets		13,010,748		--		478,925		9,202,320		--		22,691,993
Goodwill and intangible assets		969,098		--		---		--		--		969,098

Note F - Recent accounting pronouncements

Recently Issued Standards

 In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit and modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. ASU 2009-13 significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted, provided that the guidance is retroactively applied to the beginning of the year of adoption. The Company is currently evaluating the impact this update will have on our consolidated financial statements.

Note G –Income Taxes

FASB Accounting Standards Codification (“ASC”) 740, “Income Taxes” (“ASC 740”), prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.  The Company adopted the provisions of ASC 740 on July 1, 2007.  ASC 740 required that a change in judgment related to prior years’ tax positions be recognized in the quarter of the change.  As a result of the implementation of ASC 740, the Company recognized no material adjustment in the liability for unrecognized tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2009, we have not recorded any provisions for accrued interest and penalties related to uncertain tax positions.

Tax years 2005-2008 remain open to examination by the major taxing authorities to which we are subject.

10

Note H – Restricted Cash

During the quarter ended December 31, 2008, certain litigation involving the Company and a terminated employee was resolved through binding arbitration.  As a result of this arbitration, the Arbitrator awarded the employee approximately $410,000. In the calculation of the amount awarded, the Company believes the Arbitrator erroneously took into consideration an employment agreement that was not in question and not terminated by the Company.  Based on this miscalculation, the Company’s attorney recommended an appeal, which the Company has initiated.  Since the Company’s attorney expects a favorable outcome, no provision has been made for this judgment in the accompanying financial statements; however, the Company has placed $512,197 in escrow as required by the courts.  This amount is shown as restricted cash on the accompanying balance sheet.

Note I -Basic and diluted income (loss) per share:

Income (loss) per share is computed by dividing the income applicable to common shareholders by the weighted average number of shares of both classes of common stock outstanding for each fiscal year.  Class B common stock has additional voting rights.  All dilutive common stock equivalents are included in the calculation of diluted earnings per share.  For the three months and six months ended December 31, 2009, all dilutive common stock equivalents were included in the calculation of diluted earnings per share using the treasury stock method; however, since the Company experienced a net loss for the three months and six months ended December 31, 2008, no additional common stock equivalents related to options or warrants were included since they would have been anti-dilutive.

The weighted average number of common shares outstanding used in the computation of earnings (loss) per share is summarized as follows:

	Three months ended  December 31,		Six months ended December 31,
	2009	2008	2009	2008
Weighted average shares outstanding – basic	19,800,509	20,131,080	19,899,029	20,154,583
Employee stock options	54,910	--	113,573	--
Warrants	--	--	--	--
Weighted average shares outstanding – fully diluted	19,855,419	20,131,080	20,012,602	20,154,583

The following table summarizes securities outstanding as of December 31, 2009 and 2008, but not included in the calculation of diluted net earnings per share because such shares are anti-dilutive:

	Three months ended		Six months ended
	December 31,		December 31,
	2009	2008	2009	2008
Employee stock options	1,311,500	154,766	996,500	251,908
Warrants	343,000	--	343,000	--
Total	1,654,500	154,766	1,339,500	251,908

Note J – Purchase of treasury stock:

During the quarter the company purchased 250,863 shares of PHC Class A Common Stock on the open market at an average share price of $1.07 under the treasury stock purchase plan approved by the PHC Board of Directors.  The company also paid approximately $4,600 in brokerage fees related to the purchases.

Note K –Subsequent events:

The Company evaluated subsequent events through February 12, 2010, which is the date these financial statements were available for issue, and did not find any reportable subsequent events.

11

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

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”) and are subject to the Safe Harbor provisions created by the statute. Generally words such as “may”, “will”, “should”, “could”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, and “believe” or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.  Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements.

Overview

The Company presently provides behavioral health care services through two substance abuse treatment centers, two psychiatric hospitals, a residential treatment facility and eight outpatient psychiatric centers (collectively called "treatment facilities").  The Company’s revenue for providing behavioral health services through these facilities is derived from contracts with managed care companies, Medicare, Medicaid, state agencies, railroads, gaming industry corporations and individual clients.  The profitability of the Company is largely dependent on the level of patient census and the payor mix at these treatment facilities.  Patient census is measured by the number of days a client remains overnight at an inpatient facility or the number of visits or encounters with clients at outpatient clinics.  Payor mix is determined by the source of payment to be received for each client being provided billable services.  The Company’s administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases.  The Company’s internet operation, Behavioral Health Online, Inc., continues to provide behavioral health information through its web site at Wellplace.com but its primary function is Internet technology support for the subsidiaries and their contracts.  As such, the expenses related to Behavioral Health Online, Inc. are included as corporate expenses. In March 2009, the Company completed the sale of the assets of its research division, Pivotal Research Centers, Inc.  As such, the results of operations for this division are shown as discontinued operations on the accompanying statements of operations.  (See the Company’s current report on Form 8-K filed with the U. S. Securities and Exchange Commission on March 16, 2009 for additional information regarding the sale of Pivotal).

The healthcare industry is subject to extensive federal, state and local regulation governing, among other things, licensure and certification, conduct of operations, audit and retroactive adjustment of prior government billings and reimbursement.   In addition, there are on-going debates and initiatives regarding the restructuring of the health care system in its entirety.  The extent of any regulatory changes and their impact on the Company’s business is unknown.  The previous administration put forth proposals to mandate equality in the benefits available to those individuals suffering from mental illness (The Parity Act).  This Act is now law and the implementation process began on January 1, 2010.  This legislation will improve access to the Company’s programs but its total effect on behavioral health providers has not yet been assessed.   The Company also anticipates that with the enactment of Healthcare reform legislation more individuals will have access and a means for reimbursement of the Company’s programs potentially improving revenue and profitability.  Managed care has had a profound impact on the Company's operations, in the form of shorter lengths of stay, extensive certification of benefits requirements and, in some cases, reduced payment for services.  The current economic conditions continue to challenge the Company’s profitability through increased uninsured patients in our fee for service business and increased utilization in our capitated business.

Critical Accounting Policies

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including but not limited to those related to revenue recognition, accounts receivable reserves, income tax valuation allowances, and the impairment of goodwill and other intangible assets. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue recognition and accounts receivable:

Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare.  Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment.  Provisions for estimated third party payor settlements are provided in the period the related services are rendered.  Differences between the amounts provided and subsequent settlements are recorded in operations in the year of settlement.  Amounts due as a result of cost report settlements is recorded and listed separately on the consolidated balance sheets as “Other receivables”.  The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable.  The allowance for doubtful accounts does not include the contractual allowances.

12

The Company currently has three “at-risk” contracts.  The contracts call for the Company to provide for all of the inpatient and outpatient behavioral health needs of the insurance carrier’s enrollees in Nevada for a fixed monthly fee per member per month.  Revenues are recorded monthly based on this formula and the expenses related to providing the services under these contracts are recorded as incurred.  The Company provides most of the care directly and, through utilization review, monitors closely, and pre-approves all inpatient and outpatient services not provided directly.  The contracts are considered “at-risk” because the payments to third-party providers for services rendered could equal or exceed the total amount of the revenue recorded.

All revenues reported by the Company are shown net of estimated contractual adjustment and charity care provided.  When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with FASB ASC 94-605-35 – Estimated and Final Settlements Under Rate Setting Systems.  Net contractual adjustments recorded in the three months ended December 31, 2009 for revenue booked in prior years resulted in an decrease in net revenue of approximately $20,500.  Net contractual adjustments recorded in fiscal 2009 for revenue booked in prior years resulted in an increase in net revenue for the year of approximately $59,200.

A Medicare cost report settlement in the amount of $129,333 was received during the three months ended September 30, 2009.  This settlement, although payment was received, was subject to review, therefore, no revenue had been recorded at the time.  During the quarter ended December 31, 2009, this amount was recorded as revenue as final settlement of fiscal 2009.  Also recorded during the second quarter 2010 were the final settlement of the fiscal 2007 appeal which resulted in net expense of $108,527 and the final settlement for fiscal year ended June 30, 2006 of $3,184.  No further adjustments are expected for these years.

Our accounts receivable systems are capable of providing an aging based on responsible party or payor.  This information is critical in estimating our required allowance for bad debts.  Below is revenue by payor for the three and six months ended December 31, 2009 and 2008 and the fiscal year ended June 30, 2009 and the accounts receivable aging information as of December 31, 2009 and June 30, 2009, for our treatment services segment.

Net Revenue by Payor (in thousands)_
	For the Three Months Ended December 31,						For the Six Months Ended December 31,						For the Fiscal Year  Ended June 30,
	2009			2008			2009			2008			2009
	$		%	$		%	$		%	$		%	$		%
Private Pay	$	807	7	$	513	5	$	1,642	7	$	1,051	5	$	2,224	5
Commercial		8,154	68		6,819	67		16,040	68		13,961	68		29,553	70
Medicare *		569	5		275	3		1,005	4		581	3		1,027	2
Medicaid	$	2,438	20	$	2,499	25	$	5,049	21	$	5,072	24	$	9,796	23
Net Revenue	$	11,968		$	10,106		$	23,736		$	20,665		$	42,600

* Includes Medicare settlement revenue as noted above

Accounts Receivable Aging (Net of allowance for bad debts- in thousands)

As of December 31, 2009

Payor		Current		Over 30		Over 60		Over 90		Over 120		Over 150		Over 270		Over 360		Total
Private Pay	$	139	$	158	$	159	$	109	$	137	$	248	$	54	$	129	$	1,133
Commercial		2,455		1,260		405		156		119		144		7		52		4,598
Medicare		83		37		11		45		17		6		10		1		210
Medicaid		1,398		103		45		48		44		60		17		17		1,732
Total	$	4,075	$	1,558	$	620	$	358	$	317	$	458	$	88	$	199	$	7,673

13

As of June 30, 2009

Payor		Current		Over 30		Over 60		Over 90		Over 120		Over 150		Over 270		Over 360		Total
Private Pay	$	102	$	123	$	114	$	139	$	139	$	283	$	45	$	214	$	1,159
Commercial		2,161		981		226		181		70		111		4		41		3,775
Medicare		49		--		5		--		2		--		--		--		56
Medicaid		1,110		157		26		32		16		18		--		2		1,361
Total	$	3,422	$	1,261	$	371	$	352	$	227	$	412	$	49	$	257	$	6,351

The Company’s days sales outstanding (“DSO”) are significantly different for each type of service and each facility based on the payors for each service.  Overall, the DSO for the combined operations of the Company were 59 days at December 31, 2009 and 62 days at June 30, 2009.  The table below shows the DSO by segment for the same periods.

Period	Treatment	Contract
End	Services	Services
12/31/2009	56	53
06/30/2009	52	51

Contract services DSO’s fluctuate dramatically by the delay in payment of a few days for any of our large contracts.  A delay in payment from a major contract occurred when a payment routinely paid by the end of the month was not received until January 15, 2010.

Prior to the sale of the Company’s research division, pharmaceutical study revenue was recognized only after a pharmaceutical study contract was awarded and the patient was selected and accepted based on study criteria and billable units of service were provided.  Where a contract required completion of the study by the patient, no revenue was recognized until the patient completed the study program.  All revenues and receivables from our research division were derived from pharmaceutical companies with no related bad debt allowance.  The results of operations for the research division are shown as discontinued operations on the accompanying statements of operations.

Contract support service revenue is a result of fixed fee contracts to provide telephone support.  Revenue for these services is recognized ratably over the service period.  Revenues and receivables from our contract services division are based on a prorated monthly allocation of the total contract amount and usually paid within 30 days of the end of the month.

Allowance for doubtful accounts:

The provision for bad debts is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account remains outstanding until the account is over 300 days outstanding, at which time the provision is 80-100% of the outstanding balance.  These percentages vary by facility based on each facility’s experience in and expectations for collecting older receivables.  The Company compares this required reserve amount to the current “Allowance for doubtful accounts” to determine the required bad debt expense for the period.  This method of determining the required “Allowance for doubtful accounts” has historically resulted in an allowance for doubtful accounts of 20% or greater of the total outstanding receivables balance.

Income Taxes:

The Company follows the liability method of accounting for income taxes, as set forth in ASC 740.  ASC 740 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities.  The Company’s policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods.  During fiscal 2009, the Company recorded a tax expense from continuing operations of $65,764.  The company recorded estimated tax expense of $248,619 and $382,050 for the three and six months ended December 31, 2009, respectively, based on net income and projected net income for the fiscal year.

In accordance with ASC 740, we may establish reserves for tax uncertainties that reflect the use of the comprehensive model for the recognition and measurement of uncertain tax positions.  Tax authorities periodically challenge certain transactions and deductions reported on our income tax returns.  We do not expect the outcome of these examinations, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations, or cash flows.

14

Valuation of Goodwill and Other Intangible Assets

Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions.  The Company makes significant estimates and assumptions, which are derived from information obtained from the management of the acquired businesses and the Company’s business plans for the acquired businesses in determining the value ascribed to the assets acquired.  Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to:  (i) future expected cash flows from services to be provided, (ii) customer contracts and relationships, and (iii) the acquired market position.  These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur.  If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company identifies the impairment.

In the fiscal year ended June 30, 2009, the Company recorded an impairment loss on the intangible assets of the Company’s research segment of $1,500,000 based on the annual review and valuation of intangible assets.  The fair value was determined using a combination of approaches including a trading multiple, an acquisition multiple and the income approach.

Results of Operations

The following table illustrates our consolidated results of operations for the three months and six months ended December 31, 2009 and 2008 (in thousands):

	For the Three Months Ended						For the Six Months ended
	December 31,						December 31,
	2009			2008			2009			2008
	(in thousands)
Statements of Operations Data:		Amount	%		Amount	%		Amount	%		Amount	%
Revenue	$	12,865	100.0	$	11,020	100.0	$	25,512	100.0	$	22,712	100.0
Cost and Expenses:
Patient care expenses		6,440	50.1		5,906	53.6		12,878	50.5		12,065	53.1
Contract expenses		742	5.8		772	7.0		1,469	5.8		1,599	7.0
Provision for bad debts		455	3.5		308	2.8		928	3.6		754	3.3
Administrative expenses		4,714	36.6		4,878	44.3		9,367	36.7		9,572	42.1
Interest expense		81	0.6		96	0.9		162	0.6		178	0.8
Other (income) expenses, net		(104)	(0.8)		(69)	(0.6)		(186)	(0.7)		(151)	(0.7)
Total expenses		12,328	95.8		11,891	107.9		24,618	96.5		24,017	105.7
Income (loss) before income taxes		537	4.2		(871)	(7.9)		894	3.5		(1,305)	(5.7)
Income tax (benefit) provision		249	1.9		(467)	(4.2)		382	1.5		(506)	(2.2)
Income (loss) from continuing operations		288	2.3		(404)	(3.7)		512	2.0		(799)	(3.5)
Discontinued operations		--	--		(1,312)	(11.9)		--	--		(1,250)	(5.5)
Net income (loss)	$	288	2.3	$	(1,716)	(15.6)	$	512	2.0	$	(2,049)	(9.0)

Results of Operations

Total net revenue from operations increased 16.7% to $12,864,563 for the three months ended December 31, 2009 from $11,020,316 for the three months ended December 31, 2008 and increased 12.3% to $25,511,991 for the six months ended December 31, 2009 from $22,712,221 for the six months ended December 31, 2008.

15

Net patient care revenue increased 18.7% to $11,992,372 for the three months ended December 31, 2009 from $10,105,942 for the three months ended December 31, 2008 and increased 15.0% to $23,760,040 for the six months ended December 31, 2009 from $20,665,438 for the six months ended December 31, 2008.  These increases in revenue are due primarily to a change in general economic conditions and an overall increase in census at our inpatient facilities, including Seven Hills Hospital and our new Chemical Dependency unit at Harbor Oaks.  Census at our inpatient facilities increased 6.5% for the six months ended December 31, 2009 compared to the same six months last year.  Included in the census are patients admitted to or being seen at our own facilities.  The revenues associated with these intercompany admissions and visits are eliminated in the consolidation which may result in higher census and lower net revenue depending on the payor mix of other admissions.

Two key indicators of profitability of inpatient facilities are patient days, or census, and payor mix. Patient days is the product of the number of patients times length of stay.  Increases in the number of patient days result in higher census, which coupled with a more favorable payor mix (more patients with higher paying insurance contracts or paying privately) will usually result in higher profitability.  Therefore, patient census and payor mix are monitored very closely.

Contract support services revenue provided by Wellplace decreased 4.6% to $872,191 for the three months ended December 31, 2009 compared to $914,374 for the three months ended December 31, 2008 and 14.4% to $1,751,951 for the six months ended December 31, 2009 from $2,046,783 for the six months ended December 31, 2008. This decrease in the quarter is due to minor changes in covered lives in our EAP contracts and the decrease for the six months is primarily due to the expiration of a smoking cessation contract with a government contractor that was complete in September 2008.  The Company has bid to continue and expand the contract should the contractor decide to continue the program.  The Company expects to increase this revenue through new contracts for EAP (Employee Assistance Programs) and by expanding the services provided to the County.

Patient care expenses in our treatment centers increased 9.0% to $6,439,782 for the three months ended December 31, 2009 from $5,906,307 for the three months ended December 31, 2008 and 6.8% to $12,878,345 for the six months ended December 31, 2009 from $12,064,464 for the six months ended December 31, 2008.  This increase in expenses is due to increased census at Seven Hills Hospital in Las Vegas, Capstone Academy and the Harbor Oaks Hospital Chemical Dependency Unit and higher utilization under the capitated contracts, with the majority of the increases in direct care expenses.  Payroll and service related expenses increased 10.2% to $4,869,592 for the three months ended December 31, 2009 from $4,419,798 for the three months ended December 31, 2008 and 10.0% to $9,863,642 for the six months ended December 31, 2009 from $8,874,627 for the same period a year ago.  Payroll tax expenses increased 11.0% to $318,514 for the three months ended December 31, 2009 from $287,048 for the three months ended December 31, 2008 and 12.8% to $620,990 for the six months ended December 31, 2009 from $550,688 for the same period a year ago.  Contract expenses related to the capitated contracts increased 44.8% to $1,410,839 for the three months ended December 31, 2009 from $974,346 for the three months ended December 31, 2008 and 19.3% to $2,623,929 for the six months ended December 31, 2009 from $2,200,271 for the same period a year ago due to increased utilization under our capitated contracts.  Food expenses increased 9.4% to $273,633 for the three months ended December 31, 2009 from $250,061 for the three months ended December 31, 2008 and 8.1% to $539,664 for the six months ended December 31, 2009 from $499,406 for the same period a year ago.  Hospital supplies expenses increased 97.1% to $35,962 for the three months ended December 31, 2009 from $18,244 for the three months ended December 31, 2008 and 73.3% to $66,657 for the six months ended December 31, 2009 from $38,472 for the same period a year ago.  Pharmacy expenses decreased 10.7% to $217,488 for the three months ended December 31, 2009 from $243,478 for the three months ended December 31, 2008 and 17.9% to $394,532 for the six months ended December 31, 2009 from $480,316 for the same period a year ago.  Other patient related expenses decreased 65.5% to $28,647 for the three months ended December 31, 2009 from $83,074 for the three months ended December 31, 2008 and 53.3% to $83,996 for the six months ended December 31, 2009 from $179,831 for the same period a year ago.  All of the increases in patient care expenses are a direct result of increases in census and the comparisons period over period are expected to reflect similar increases as the census grows in the new facilities and programs.

Contract support services expenses related to Wellplace decreased 3.9% to $741,504 for the three months ended December 31, 2009 from $771,505 for the three months ended December 31, 2008 and 8.2% to $1,468,981 for the six months ended December 31, 2009 from $1,599,284 for the six months ended December 31, 2008.  This decrease is primarily the result of the expiration of the previously mentioned smoking cessation contract, which eliminated staff and administrative expenses including software maintenance to support the contract.

   Administrative expenses decreased 3.3% to $4,714,227 for the quarter ended December 31, 2009 from $4,877,390 for the quarter ended December 31, 2008 and 2.2% to $9,366,744 for the six months ended December 31, 2009 from $9,572,364 for the six months ended December 31, 2008.  Rent expense increased over 11.4% for the quarter and 2.2% for the six months ended December 31, 2009, as compared to the same periods last year, due to the buy-out of the closed Longford clinic lease of $135,000 and additional rent expense for Capstone Academy and the Post Road out-patient clinic.   Marketing expense increased 45.9% for the quarter ended December 31, 2009 and 16.5% for the six months ended December 31, 2009 as compared to the same periods last year as we continue to market the new facilities and the new program at Harbor Oaks.  Consultant fees decreased 21.4% for the quarter ended December 31, 2009 and 17.3% for the six months ended December 31, 2009.  The majority of these consultant fees were incurred as Seven Hills prepared for the Joint Commission Survey and the CMS survey.  We have received Joint Commission accreditation and are awaiting the CMS re-survey which is expected at any time.  Fees and licenses decreased 107.4% for the quarter ended December 31, 2009 and 89.9% for the six months ended December 31, 2009 as Seven Hills and Capstone Academy have been fully licensed and all licensure fees paid and the Michigan Hospital Association CHAP program is reimbursing the company for part of the Michigan Medicaid fee.

16

Provision for doubtful accounts increased 47.7% to $455,345 for the three months ended December 31, 2009 from $308,329 for the three months ended December 31, 2008 and 23.1% to $928,318 for the six months ended December 31, 2009 from $754,143 for the six months ended December 31, 2008.  This bad debt expense is less than the Company’s projected cost of 5% of Net Revenue and is largely attributable to the overall increase in receivable as a result of increased patient care revenue.  The Company’s policy is to maintain reserves based on the age of its receivables. This amount includes the utilization of the allowance of $517,712 against accounts receivable during the six months ended December 31, 2009.

Interest income decreased 32.7% to $29,733 for the three months ended December 31, 2009 from $44,206 for the three months ended December 31, 2008 and decreased 35.0% to $62,107 for the six months ended December 31, 2009 from $95,475 for the six months ended December 31, 2008.  These changes are a result of decreases in interest rates paid on our short-term investment accounts.

Other income / expense increased 198.6% to $74,305 for the three months ended December 31, 2009 from $24,888 for the three months ended December 31, 2008 and 121.9% to $123,661 for the six months ended December 31, 2009 from $55,742 for the six months ended December 31, 2008.  This increase is primarily due to the earnings recorded by the Company from its investments in its unconsolidated subsidiaries, Seven Hills Psych Center, LLC and Behavioral Health Partners, LLC.

Interest expense decreased 16.0% to $80,885 for the three months ended December 31, 2009 from $96,306 for the three months ended December 31, 2008 and 9.3% to $161,478 for the six months ended December 31, 2009 from $177,948 for the six months ended December 31, 2008.  This decrease is primarily due to the general decrease in interest rates as the interest rate on our revolving credit line and our long term debt is tied to the Prime rate.

The Company’s income tax expense of $382,050 for the six months ended December 31, 2009 is based on an estimated combined tax rate of approximately 43% for both Federal and State taxes calculated using net income for the six months and projected net income for the fiscal year.  If this estimate is found to be high or low, adjustments will be made in the period of the determination.

There are no trends that the Company expects will have a material impact on the Company’s revenues or net income.

Liquidity and Capital Resources

The Company’s net cash provided by operating activities was $69,344 for the six months ended December 31, 2009 compared to $1,008,061 used in operating activities for the six months ended December 31, 2008.  Cash flow provided by operations in the six months ended December 31, 2009 consists of net income of $511,843 plus depreciation and amortization of $574,044, non–cash interest expense of $73,263, non-cash share based charges of $141,701, provision for doubtful accounts of $928,318, a decrease in prepaid expenses and a decrease in prepaid income taxes, an increase in accounts payable of $11,288 and an increase in accrued expenses of $40,214.  These sources of cash were offset by non-cash earnings in an unconsolidated subsidiary of $49,084, an increase in accounts receivable of $2,174,866 and an increase in other assets of $2,653.  The Company expects increased cash use in operations as Seven Hills, Capstone and Harbor Oaks receivables increase from the expanded operations.

Cash used in investing activities in the six months ended December 31, 2009 consisted of $364,441 in capital expenditures and $18,288 investment in an unconsolidated subsidiary, compared to $1,095,907 in capital expenditures and $38,100 investment in unconsolidated subsidiary during the same period last year.  The Company expects lower use of cash in investing activities as the Seven Hills, Capstone and Harbor Oaks build outs are completed.

Cash used in financing activities of $140,140 in the six months ended December 31, 2009 consisted of proceeds from borrowings of $180,660 and proceeds from the issuance of common stock of $29,455 offset by payments on long term debt of $77,597 and the acquisition of treasury stock of $272,658.

A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of December 31, 2009, accounts receivable from patient care, net of allowance for doubtful accounts, increased 20.8% to $7,672,867 from $6,350,693 on June 30, 2009.  This increase is a result of increased revenue from Seven Hills Hospital and Capstone Academy.  The Company monitors increases in accounts receivable closely and, based on the aging of the receivables outstanding, is confident that the increase is not indicative of a payor problem.  Over the years, we have increased staff, standardized some procedures for determining insurance eligibility and collecting receivables and established a more aggressive collection policy.  The increased staff has allowed the Company to concentrate on current accounts receivable and resolve any issues before they become uncollectible.  The Company’s collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process.  Our collectors will also seek assistance through every legal means, including the State Insurance Commissioner’s office, when appropriate, to collect claims.  In light of the current economy the Company has redoubled its efforts to collect accounts early.  The Company will continue to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections.

17

Contractual Obligations

The Company’s future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of December 31, 2009 are as follows (in thousands):

YEAR ENDING December 31,		TERM NOTES			CAPITAL LEASES					OPERATING LEASES		TOTAL*
		Principal		Interest			Principal		Interest
2010	$	798	$	14		$	109	$	14	$	3,156		$	4,091
2011		233		10			76		4		3,172			3,495
2012		53		5			--		--		2,966			3,024
2013		30		1			--		--		2,735			2,766
2014		--		--			--		--		2,546			2,546
Thereafter		--		--			--		--		8,829			8,829
Total	$	1,114	$	30		$	185	$	18	$	23,404		$	24,751

*   Total does not include the amount due under the revolving credit note of $1,044,064.  This amount represents accounts receivable funding as described below and is shown as a current note payable in the accompanying financial statements.

In October 2004, the Company entered into a revolving credit, term loan and security agreement with CapitalSource Finance, LLC to replace the Company’s primary lender and provide additional liquidity.  Each of the Company’s material subsidiaries is a co-borrower under the agreement. This agreement was amended on June 13, 2007 to increase the amount available under the term loan, extend the term, decrease the interest rates and modify the covenants based on the Company’s current financial position.  The agreement now includes a term loan in the amount of $3,000,000, with a balance of $935,000 at December 31, 2009, and an accounts receivable funding revolving credit agreement with a maximum loan amount of $3,500,000 and a current balance of $1,044,064.  In conjunction with this refinancing, the Company paid $32,500 in commitment fees and approximately $53,000 in legal fees and issued a warrant to purchase 250,000 shares of Class A Common Stock at $3.09 per share valued at $456,880.  The relative fair value of the warrants was recorded as deferred financing costs and is being amortized over the period of the loan as additional interest.

 The term loan note carries interest at prime plus .75%, but not less than 6.25%, with twelve monthly reductions in available credit of $50,000 beginning July 1, 2007 and increasing to $62,500 on July 1, 2009 until the expiration of the loan.   As of December 31, 2009, the Company had $490,000 available under the term loan.

The revolving credit note carries interest at prime (3.25% at December 31, 2009) plus 0.25%, but not less than 4.75% paid through lockbox payments of third party accounts receivable.  The revolving credit term is three years, renewable for two additional one-year terms.  The balance on the revolving credit agreement as of December 31, 2009 was $1,044,064.  For additional information regarding this transaction, see the Company’s current report on form 8-K filed with the Securities and Exchange Commission on October 22, 2004.  The balance outstanding as of December 31, 2009 for the revolving credit note is not included in the above table.  The average interest rate paid on the revolving credit loan, which includes the amortization of deferred financing costs related to the financing of the debt, was 7.76%.

This agreement was amended on June 13, 2007 to modify the terms of the agreement.  Advances are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable.  The amended term of the agreement is for two years, automatically renewable for two additional one year terms.  Upon expiration, all remaining principal and interest are due.  The revolving credit note is collateralized by substantially all of the assets of the Company’s subsidiaries and guaranteed by PHC.  Availability under this agreement is based on eligible accounts receivable and fluctuates with the accounts receivable balance and aging.

On February 5, 2009, the Company signed the first amendment to the amended and restated revolving credit term loan and security agreement as outlined above, to increase availability under its revolving credit line for six months or until the Pivotal sale was complete (the “overline”).  The interest rate on the overline was Prime plus 3.25% with an origination fee of $25,000.  In addition to increasing the availability for borrowing as noted above, it provided for additional availability of $200,000 as part of this short-term borrowing.  This overline was paid in full from operations prior to the closing of Pivotal.

In addition to the above overline, during the quarter ended March 31, 2009, the Company’s Board of Directors voted by unanimous written consent to allow short-term borrowing from related parties up to a maximum of $500,000, with an annual interest rate of 12% and a 2% origination fee.  The Company utilized this funding during the March 31, 2009 quarter for a total of $275,000.  This amount was paid in full in March 2009.

18

Off Balance Sheet Arrangements

The Company has no off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company.

Litigation

The Company is subject to various claims and legal action that arise in the ordinary course of business.  In the opinion of management, the Company is not currently a party to any proceeding that would have a material adverse affect on its financial condition or results of operations.

Item 3.    Quantitative and Qualitative Disclosure About Market Risk

The market price of our common stock could be volatile and fluctuate significantly in response to various factors, including:

·   Differences in actual and estimated earnings and cash flows;

·   Operating results differing from analysts’ estimates;

·   Changes in analysts’ earnings estimates;

·   Quarter-to-quarter variations in operating results;

·   Changes in market conditions in the behavioral health care industry;

·   Changes in general economic conditions; and

·   Fluctuations in securities markets in general.

 Financial Risk

·   Our interest expense is sensitive to changes in the general level of interest rates.  With respect to our interest-bearing liabilities, all of our long-term debt outstanding is subject to rates at prime plus .25% and prime plus .75%, which makes interest expense fluctuate with changes in the prime rate. On this debt, each 25 basis point increase or decrease in the prime rate will affect an annual increase or decrease in interest expense of approximately $2,200; however, the prime rate is currently lower than the base interest rate of 4.50% therefore the Prime rate would have to increase 1.25% before there would be any interest expense increase.

·   Failure to meet targeted revenue projections could cause us to be out of compliance with covenants in our debt agreements requiring a waiver from our lender.  A waiver of the covenants may require our lender to perform additional audit procedures to assure the stability of their security which could require additional fees.

Operating Risk

·   Aging of accounts receivables could result in our inability to collect receivables. As our accounts receivable age and become uncollectible our cash flow is negatively impacted.Our accounts receivable from patient accounts (net of allowance for bad debts) were $7,672,867 at December 31, 2009, $6,350,693 at June 30, 2009 and $6,474,733 at June 30, 2008.  As we expand, we will be required to seek payment from a larger number of payors and the amount of accounts receivable will likely increase.  We have focused on better accounts receivable management through increased staff, standardization of some procedures for collecting receivables and a more aggressive collection policy in order to keep the change in receivables consistent with the change in revenue.  We have also established a reserve policy, allowing greater amounts of reserves as accounts age from the date of billing.  If the amount of receivables, which eventually become uncollectible, exceeds such reserves, we could be materially adversely affected.  The following chart represents our Accounts Receivable and Allowance for Doubtful Accounts at December 31, 2009 and June 30, 2009, respectively, and Bad Debt Expense for the six months ended December 31, 2009 and the year ended June 30, 2009:

		Accounts Receivable		Allowance for doubtful accounts		Bad Debt Expense
December 31, 2009	$	10,515,943	$	2,843,076	$	928,318
June 30, 2009		8,781,311		2,430,618		1,637,738

·   The Company relies on contracts with more than ten clients to maintain patient census at its inpatient facilities and the loss of any of such contracts would impact our ability to meet our fixed costs.  We have entered into relationships with large employers, health care institutions and labor unions to provide treatment for psychiatric disorders, chemical dependency and substance abuse in conjunction with employer-sponsored employee assistance programs.  The employees of such institutions may be referred to us for treatment, the cost of which is reimbursed on a per diem or per capita basis.  Approximately 25% of our total revenue is derived from these clients.  No one of these large employers, health care institutions or labor unions individually accounts for 10% or more of our consolidated revenues, but the loss of any of these clients would require us to expend considerable effort to replace patient referrals and would result in revenue losses and attendant loss in income.

19

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, our 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 was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud.  A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of a control system are met.  Further, any control system reflects limitations on resources and the benefits of a control system must be considered relative to its costs.  These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control.  A design of a control system is also based upon certain assumptions about potential future conditions and over time controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures to meet the criteria referred to above.  Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.

Change in Internal Controls

During the three months ended December 31, 2009, there were no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

20

PART II.  OTHER INFORMATION

Item 2.                      Repurchase of Treasury Stock

During the Quarter the Company purchased equity securities as follows:

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share
October 1, 2009 – October 31, 2009	250,863	$	1.07
November 1, 2009 – November 30, 2009	--	$	--
December 1, 2009 – December 31, 2009	--	$	--

All of the listed shares were PHC Class A Common Stock purchased on the open market.  In addition to the price per share the company paid approximately $4,600 in brokerage fees related to the purchases.

There were no sales of unregistered securities during the period.

Item 4.                       Submission of Matters to a Vote of Security Holders

The Company’s annual meeting of stockholders was held on December 18, 2009.  In addition to the election of directors (with regards to which (i) proxies were solicited pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, (ii) there was no solicitation in opposition to the management’s nominees as listed on the proxy statement, and (iii) all of such nominees were elected), the shareholders voted to ratify the selection of BDO Seidman, LLP, Registered Public Accounting firm, to audit the Company’s books and records for the fiscal year ending June 30, 2010.  No other matters were brought before the shareholders.  The following table provides the total vote information on each matter voted upon during the 2009 annual meeting:

DIRECTOR VOTE	FOR	WITHHELD	UNVOTED
Class A Directors
Donald E. Robar	13,447,442	2,544,755	3,038,533
Howard W. Phillips	14,170,707	1,821,490	3,038,533
Class B Directors
Bruce A. Shear	725,304	--	49,717
William F. Grieco	725,304	--	49,717
David E. Dangerfield	725,304	--	49,717

PROPOSAL VOTE	FOR	AGAINST	ABSTAINED
To ratify the selection of BDO Seidman, LLP	19,520,966	55,181	42,569

Item 6.                      Exhibits

Exhibit List

Exhibit No.	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 and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

21

Signatures

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

	PHC, Inc.
	Registrant
Date: February 12, 2010	/s/ Bruce A. Shear
	Bruce A. Shear
	President
	Chief Executive Officer

Date: February 12, 2010	/s/ Paula C. Wurts
	Paula C. Wurts
	Treasurer
	Chief Financial Officer

22

EX-31.1

EXHIBIT 31.1

PHC, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Section 302 Certification

I, Bruce A. Shear, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of PHC, Inc., a Massachusetts corporation;

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, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated 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 fiscal 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 the registrant’s board of directors (or person’s 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.

Date:  February 12, 2010	By:   /s/  Bruce A. Shear__________
	Bruce A. Shear, President
	and Chief Executive Officer

23

EX-31.2

EXHIBIT 31.2

PHC, INC.

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Section 302 Certification

I, Paula C. Wurts, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of PHC, Inc., a Massachusetts corporation;

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, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated 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 fiscal 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 the registrant’s board of directors (or person’s 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.

Date:  February 12, 2010	By:   /s/  Paula C. Wurts__________
	Paula C. Wurts,
	Chief Financial Officer

24

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

Each of the undersigned officers of PHC, Inc. (the “Company”) hereby certifies that, to the best of their knowledge, the Quarterly Report on Form 10-Q for the quarter ended December 31, 2009 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  February 12, 2010	By:   /s/  Bruce A. Shear__________
	Bruce A. Shear, President
	and Chief Executive Officer
Date:  February 12, 2010	By:   /s/  Paula C. Wurts__________
	Paula C. Wurts,
	Chief Financial Officer

25