Item 2. Management's Management’s Discussion and Analysis of Financial Statements and Results of Operations
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. For this purpose any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including statements about our revenue, spending, cash flow, products, actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “may,” “hope,” “will,” “expect,” “believe,” “anticipate,” “estimate” “projected” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainty, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industry in which we and our customers participate; competition within our industry, including competition from much larger competitors; legislative requirements or changes which could render our services less competitive or obsolete; our failure to successfully develop new services and/or products or to anticipate current or prospective customers’ needs; price increases or employee limitations; and delays, reductions, or cancellations of contracts we have previously entered.
Forward-looking statements are predictions and not guarantees of future performance or events. The forward-looking statements are based on current industry, financial and economic information, which we have assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements. We undertake no obligation to amend this report or revise publicly these forward looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Securities Exchange Act of 1934) to reflect subsequent events or circumstances.
The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Securities and Exchange Commission.
Throughout this report, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”) and Industrial Resolutions Coalition, Inc. (“IRC”).
Overview
We are in the business of managing and administering Health Care Organizations (“HCOs”) and Medical Provider Network (“MPNs”) in the state of California. For many years, workers’ compensation costs in California have been high. Since 1993, the legislature in California has enacted various laws designed to introduce alternatives to the traditional model of worker’s compensation aimed at controlling costs by giving employers greater control over the medical treatment of injured workers for a longer period of time.
Under the traditional model of workers’ compensation insurance coverage, the employer controls the selection of the medical provider for the first 30 days after the injury is reported. Thereafter the employee chooses the treating physician and the employer has no further control over the treatment of the patient.
In 1993 the California legislature passed a bill that established Health Care Organizations. An HCO is a network of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training. The benefit of the HCO to an employer is two-fold. First, the employer is able to control the medical treatment of the injured employee for 90 to 180 days rather than just during the first 30 days. Second, the HCO provides the employer a network of trained providers to which it can refer its injured employees who specialize in treating work place injuries.
Under the HCO guidelines, all HCOs are required to collect from each enrolled employerpay certain annual fees which are passed on to the California Division of Workers’ Compensation (“DWC”). These fees include an annual fee per employee enrolled in the HCO at the end of the calendar year. The HCO guidelines also impose certain data reporting requirements on the HCO and annual enrollment notice delivery requirements. These requirements increase the administrative costs of an HCO.
In 2004, the California legislature enacted new laws that created MPNs. Like an HCO, an MPN is a network of health care professionals, but MPN networks are not required to have the same level of medical expertise in treating employees’ work place injuries. Under an MPN program, the employer dictates which physician the injured employee will see for the initial visit. Thereafter, the employee can choose to treat with any physician within the MPN network.
By virtue of our continued certification as an HCO, we were statutorily deemed to be qualified as an approved MPN on January 1, 2005. As a licensed HCO and MPN, we are able to offer our clients an HCO program, an MPN program and a combination of the HCO and MPN programs. Under this combination model, an employer can enroll its employees in the HCO program, then prior to the expiration of the 90 or 180 day treatment period under the HCO program, the employer can enroll the employee into the MPN program. This allows employers to take advantage of both programs. To our knowledge, we are currently the only entity that offers both programs together.
Unlike HCOs, MPNs are not assessed the annual enrollee fee that must be paid to the DWC. MPNs have far fewer data reporting obligations and no annual enrollment notice delivery requirements. MPN’s are only required to provide an enrollment notice at the time the employee first joins the MPN and a second notice at the time the employee suffers a work place injury. We experienced small increases in total enrollment during the nine months ended
September 30, 2008.
Liquidity and Capital Resources
As of March 31,June 30, 2009, we had cash on hand of $539,196$518,661 compared to $624,401 at December 31, 2008. The $85,205$105,740 decrease in cash on hand is the result of decreases in tax payable,revenue from operations and unearned revenues and increasesrevenue, increase in accounts receivable, partiallyreceivables and prepaid income taxes offset by increases in accrued expenses.expenses and accounts payables. We believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating costs over the next twelve months. We do not anticipate needingthe need to find other sources of capital at this time. However, if our revenues are less than anticipated we may need to find other sources of capital to continue operations.
We do not currently have planned forany significant capital expenditures during the next twelve months any significant capital expenditures that we anticipate will require us to seek outside sources of funding. We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We have not identified any suitable opportunity at the current time. An expansion or acquisition of this sort may require greater capital resources than we possess. Should we need additional capital resources, we most likely would seek to obtain such through debt and/or equity financing. We do not currently possess a financial institution source of financing. Given current credit conditions, there is no assurance that we could be successful in obtaining additional debt financing on favorable terms, or at all. Similarly, given current market and economic conditions there is no guarantee that we could negotiate appropriate equity financing.
Results of Operations
Comparison of the three months ended March 31,June 30, 2009 and 2008
Revenue
The total number of employee enrollees decreased 9%6% during three months ended March 31,June 30, 2009 compared to March 31,June 30, 2008. Total revenues decreased 12%14% to $521,355.$506,690. As of March 31,June 30, 2009, we had approximately 213,000216,000 total enrollees. Enrollment consisted of approximately 59,00057,000 HCO enrollees and 154,000159,000 MPN enrollees. By comparison as of March 31,June 30, 2008 we had approximately 234,000228,000 enrollees, including approximately 73,00075,000 HCO enrollees and approximately 161,000153,000 MPN enrollees.
We believe the decrease in employee enrollees and revenue is indicative of the current economy. The economic slowdown has, and we expect will continue to impact us, as employers seek to address the effects of the current economic environment on their individual businesses. As a result of the economic slowdown, employers are reducing their workforce. However, this may lead to an increase in workers’ compensation claims.
Our business generally has a long sales cycle, typically in excess of one year. However, once we have established a customer relationship, our revenue adjusts with the growth or retraction of our customers’ managed headcount volume. New customers are added throughout the year and other customers terminate from the program for a variety of reasons. Our single largest customer will terminated its contract with us effective August 1, 2009. We anticipate the impact on revenue of this termination will be significant on a go forward basis as this customer accounted for approximately $158,000 and $161,000, of revenue for the quarters ending September 30, 2008 and December 31, 2008, respectively. The total 2008 revenue generated from this customer was approximately $681,000.
In the current economic environment, we anticipate businesses will seek ways to further reduce their workers’ compensation program costs. Even though the HCO and MPN programs create a favorable return on investment for employers as our services are a significant part of the employers’ loss prevention programs to avoid significant workers’ compensation claims and provide a framework for expeditiously returning their employees back to work at the lowest cost, it is always a challenge to justify our fees to our customers. As a result, we expect tomay experience some client turnover, in the form of existing employer clients short-sightedly seeking to terminate or renegotiate the scope and terms of existing services. We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house. As a result, theThe market is currently subject to restructuring in the type and pricing of services provided in our industry. We expect these factors may continue to erode HCO Fees, MPN Fees and Other Revenue until economic conditions improve.
Total revenues decreased 14% to $506,690, in the second quarter 2009 over the second quarter 2008. HCO revenues decreased 22% due to decreased HCO enrollees. MPN revenues increased 2% due to increases in MPN enrollees in the second quarter 2009. Other revenue decreased 14% as a result of providing decreased nurse case management services to our customers.
HCO Fees
During the three months ended March 31,June 30, 2009 and 2008, HCO fee revenues were $244,998$230,263 and $278,551$295,467 respectively. The 19%A 24% decrease in HCO enrollment during the three months ended March 31,June 30, 2009, resulted in a 12%this 22% decrease in revenue from HCO fees. This was attributable to decreased employee enrollment and re-notificationrenotification of existing clients.
MPN Fees
MPN Fee revenuesfee revenue for the three months ended March 31,June 30, 2009 were $149,560was $151,291 compared to $187,392$148,016 for the three months ended March 31,June 30, 2008. As of March 31, 2009During the second fiscal quarter we realized a 4% decreaseincrease in MPN enrollment when compared the same period 2007. Along with the decrease in2008. Although MPN enrollment andincreased 4%, because of differing fee terms, unbundling of services, price competition and similar factors, as compared to 2008, we realized only a 20% decrease2% increase in MPN revenues.revenue during the three months ended June 30, 2009.
Other Revenue
During the three months ended March 31,June 30, 2009, other revenue decreased 1%14% to $126,797$125,136 from $127,724$146,319 in the same period a year earlier. The primary component of other revenue is nurse case management. We retain nurses on our staff who, at the request of our customers, will review the medical portion of a claim on behalf of our employer clients, claims managers and injured workers. We offer nurse case management services to our customers on an optional basis. We charge an additional fee for nurse case management services.
Expenses
Total expenses forduring the three months ended March 31,June 30, 2009 andcompared to 2008, were $515,582 and $516,143. The decreasedecreased 14% to $436,535 primarily as a result of $561 was the result in decreases in consulting fees,decreased professional fees insurance, employment enrollmentcaused by higher legal fees incurred in the 2008 quarter related to the reverse and data maintenance, partially offset by increases inforward stock splits. Additionally, during the three months ended June 30, 2009, salaries and wages and generaldata maintenance expense were lower by 5% and administrative expenses.25%, respectively, when compared to the same period a year earlier.
Consulting Fees
During the three months ended March 31,June 30, 2009, consulting fees decreased to $62,586$57,497 from $65,030$59,810 during the three months ended March 31,June 30, 2008. This decrease of $2,444 in consulting fees of $2,313 was primarily due to reduced level oflower lobbyist consulting fees. We do not anticipate that consulting fees will increase during fiscal 2009 unless we see an increased level of services requested from our customers, especially for nurse case management services which would require us to engage additional nurse case managers.
Salaries and Wages
Salaries and wages increased $35,379decreased $8,674 or 20%5% during the three months ended March 31, 2009.June 30, 2009 from the same period a year earlier. The increasedecrease in salaries & wages iswas due primarily due to the hiringtermination of an additional administrative staff member, a bonus paid to our CEOnurse case manager and merit increases to certain administrative staff members. Based upon the current trenda 10% reduction in declining revenues, we are contemplating the reduction of our current salary and wage levels by implementing a companywide salary cut, including the elimination of annual bonuses paid at the end of the year.wages for salaried employees that went into effect in May 2009.
Professional Fees
For the three months ended March 31,June 30, 2009, we incurred professional fees of $56,595$35,657 compared to $82,381$76,144 during the three months ended March 31, 2008.June 30, 2009. This 31%53% decrease in professional fees iswas the primarily the result of decreased accounting and legal fees partially offset by increases in medical consulting fees and NCM fees. The decrease in accounting fee was the result of terminating the outside accounting consultant in December 2008. The lower legal expenses during the firstthree months ended June 30, 2009 when compared to the previous year quarter 2009, resulted from the higher expense level in 2008which included legal fees associated with our the reverse and forward splits of our common stock. Should potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses arise, legal expenses may be considerably higher in future quarters.
Insurance
During the three months ended March 31,June 30, 2009, we incurred insurance expenses of $28,671,$28,115 a $2,057 decrease$1,776 increase over the prior year three months. The decrease in 2009 was primarily due to minor adjustments made to the health insurance premiums.months of 2008. We do not expect insurance expense to increase materially in 2009.
Employment Enrollment
Employment enrollment expenses decreased $3,000 to $15,000 during the three months ended March 31,June 30, 2009, compared to the three months ended March 31,June 30, 2008. As an HCO, we are required to pay a fee to the State of California – Division of Workers’ Compensation (DWC)DWC for each person enrolled at the end of the calendar year in our HCO program. Because employee enrollment expenses are not determined until year end, we accrue expenseexpenses during the year based on our estimation of what enrollment will be at year end. We anticipate that employee enrollment will be lower at December 31, 2009 than it was at December 31, 2008 due to lessfewer HCO enrolled employees.
Data Maintenance
Under regulations applicable to HCOs and MPNs we are required to comply with certain data reporting and document delivery obligations. We currently contract out much of these data reporting and document delivery obligations to third parties. The costs we incur to meet these requirements are reflected in our financial statements as “data maintenance.”
Data maintenance costs are impacted by several factors, including the overall mix of enrollees in our HCO and MPN programs and the number of new enrollees during the year. HCOs are required to deliver enrollment notices annually to each HCO enrollee. By comparison, MPNs are required to deliver an enrollment notice only at the time of initial enrollment and at the time an enrollee is injured. As a result, after the first year, data maintenance fees for MPN enrollees are consistently about 50% lower than data maintenance fees for HCO enrollees. Therefore, depending on the mix of HCO and MPN enrollees and the number of new MPN enrollees versus ongoing MPN enrollees, our data maintenance costs may vary significantly from year to year even in years when our overall enrollment does not change materially.
Data maintenance fees may also vary significantly from employment enrollment fees in any given year. Employment enrollment fees are determined based on the number of HCO enrollees at the end of the calendar year. Employment enrollment fees do not take into account fluctuations in HCO enrollment during the year. By comparison, data maintenance fees are billed as services are provided. Therefore, we may have years when HCO enrollment is higher during the year than it is at the end of the calendar year, resulting in variances in data maintenance fees and employment enrollment fees in a given year.
Data maintenance fees are also impacted by the prices we can negotiate with our third party service providers.
During the three months ended March 31, 2009 we experienced a 19% decrease in HCO enrollment and a 4% decrease in MPN enrollment, resulting in an overall enrollment decrease of 9%. Data maintenance fees decreased 14% to $55,63225% during the three months ended March 31, 2008.June 30, 2009. The decrease in data maintenance fees iswas primarily attributable to the decreased level of HCO enrollees, lower data maintenance costs associated with the renewal of MPN enrollees and lower prices negotiated with third party service providers. We expect data maintenance fees will be lower throughout 2009 as compared to 2008.
General and Administrative
General and administrative expenses for the three months ended June 30, 2009 and 2008 were $71,360 and $71,747, respectively. We expect current general and administrative expenses to be lower in the remaining months of 2009, as compared to the comparable period of 2008, as a result of cutting operating costs in proportion to the anticipated decline in revenues.
Net Income
While we realized a 14% decrease in our total revenue during the quarter, this decrease was partially offset by a 13% decrease in total expenses during the three months ended June 30, 2009, which led to a $14,659 decrease in income from operations during three months ended June 30, 2009.
As a result of lower revenues and lower expenses, we realized a net income of $41,347 compared to $49,098 during three months ended June 30, 2009 and 2008, respectively.
Comparison of the six months ended June 30, 2009 and 2008
Revenue
The total number of employee enrollees decreased 6% during six months ended June 30, 2009 compared to June 30, 2008. As a result, total revenues decreased 13% to $1,028,045. As of June 30, 2009, we had approximately 216,000 total enrollees. Enrollment consisted of approximately 57,000 HCO enrollees and 159,000 MPN enrollees. By comparison as of June 30, 2008 we had approximately 228,000 enrollees, including approximately 75,000 HCO enrollees and approximately 153,000 MPN enrollees.
HCO Fees
During the six months ended June 30, 2009 and 2008, HCO fee revenues were $475,261 and $574,018 respectively. The 24% decrease in HCO enrollment during the six months ended June 30, 2009, resulted in a 17% decrease in revenue from HCO fees. This was attributable to decreased employee enrollment and decreased re-notification of existing clients.
MPN Fees
MPN Fee revenues for the six months ended June 30, 2009 were $300,851 compared to $335,408 for the six months ended June 30, 2008. As of June 30, 2009 we realized a 4% increase in MPN enrollment when compared the same period 2008. Although we had an increase in MPN enrollment during the six months ended June 30, 2009, factors such as differing fee terms, unbundling of services, price competition and other similar factors as compared to 2008, resulted in a 10% decrease in MPN revenues compared to the same period 2008.
Other Revenue
During the six months ended June 30, 2009, other revenue decreased 8% to $251,933 from $274,043 in the same period a year earlier. As noted above, the primary component of other revenue is nurse case management. Other revenue decreased during the six months ended June 30, 2009 because of the decline in demand for nurse case management services.
Expenses
Total expenses for the six months ended June 30, 2009 and 2008 were $952,117 and $1,021,131. The decrease of $69,014 was the result in decreases in consulting fees, professional fees, insurance, employment enrollment and data maintenance, partially offset by increases in salaries and wages and general and administrative expenses.
Consulting Fees
During the six months ended June 30, 2009, consulting fees decreased to $120,083 from $124,840 during the six months ended June 30, 2008. This decrease of $4,757 in consulting fees was primarily due to reduced level of lobbyist fees. We do not anticipate that consulting fees will increase during fiscal 2009 unless we see an increased level of services requested from our customers, especially for nurse case management services which would require us to engage additional nurse case managers.
Salaries and Wages
Salaries and wages increased $26,705 or 7% during the six months ended June 30, 2009. The increase in salaries & wages is primarily, due to the hiring of an additional administrative staff member, a bonus paid to our CEO and merit increases to certain administrative staff members, offset by a 10% wage reduction implemented in May 2009 for our salaried employees and the termination of a nurse case manager.
Professional Fees
For the six months ended June 30, 2009, we incurred professional fees of $92,252 compared to $158,525 during the six months ended June 30, 2008. This 42% decrease in fees is the result of decreased accounting and legal fees, partially offset by increases in medical consulting fees and NCM fees. The decrease in accounting fee was the result of terminating the outside accounting consultant in December 2008. The lower legal expenses during the six months ended June 30, 2009, resulted from the higher expense level in 2008 associated with the reverse and forward splits of our common stock.
Insurance
During the six months ended June 30, 2009, we incurred insurance expenses of $56,786, a $281 decrease over the prior year six months. The decrease in 2009 was primarily due to minor adjustments made to the health insurance premiums.
Employment Enrollment
Employment enrollment expenses decreased $6,000 to $30,000 during the six months ended June 30, 2009, compared to the six months ended June 30, 2008. As an HCO, we are required to pay a fee to the DWC for each person enrolled at the end of the calendar year in our HCO program. Because employee enrollment expenses are not determined until year end, we accrue expense during the year based on our estimation of what enrollment will be at year end.
Data Maintenance
During six months ended June 30, 2009 we experienced a 32% decrease in HCO enrollment and a 4% increase in MPN enrollment, resulting in an overall enrollment decrease of 6%. Data maintenance fees decreased 19% to $102,537 during the six months ended June 30, 2009. The decrease in data maintenance fees is primarily attributable to lower data maintenance costs associated with the renewal of MPN enrollees and lower prices negotiated with third party service providers.
General and Administrative
General and administrative expenses increased 9%4% to $84,501$155,861 during the threesix months ended March 31,June 30, 2009. This increase in general and administrative expense was attributable to increases in expenses associated with maintaining a provider network site, printing and reproduction and miscellaneous expense partially offset by decreases in advertising expense, equipment repairs, travel and entertainment expense and shareholders’ meeting expense. We expect current general and administrative expenses to be lower in the remaining months of 2009 as a result of cutting operating costs in proportion to the anticipated decline in revenues.
Net Income
During the threesix months ended March 31, 2008,June 30, 2009, total revenues of $521,355$1,028,045 were lower by $73,312$155,424 when compared to the same period in 2008. This decrease in total revenues was slightly offset by the $521$69,014 decrease in total expenses resulting in an income from operations of $5,773$75,928 compared to an income from operations of $77,524$162,338 during threesix months ended March 31,June 30, 2008. Correspondingly, we only realized a net profit of $5,052$46,399 for the threesix months ended March 31,June 30, 2009, compared to a net income of $45,408,$94,506, during the threesix months ended March 31,June 30, 2008. As the current recession has had an adverse impact on our gross revenues and net income during the three and six month periodperiods ending March 31,June 30, 2009, we expect this trend will continue throughout 2009.
Cash Flow
During the threesix months ended March 31,June 30, 2009 cash was primarily used to fund operations. We had a net decrease in cash of $85,205$105,740 during the threesix months ended March 31, 2009.June 30, 2009 as compared an increase in cash of $148,646 at June 30, 2008. See below for additional discussion and analysis of cash flow.
| | | For the six months ended June 30, | |
| | | 2009 | | | 2008 | |
| | | (unaudited) | | | (unaudited) | |
| | | | | | | |
| Net cash provided by (used in) operating activities | | $ | (105,740 | ) | | $ | 149,651 | |
| Net cash used in investing activities | | | - | | | | (1,005 | ) |
| Net cash provided by financing activities | | | - | | | | - | |
| | | | | | | | | |
| Net Change in Cash | | $ | (105,740 | ) | | $ | 148,646 | |
| | | For the three months ended March 31, | |
| | | 2009 (unaudited) | | | 2008 (unaudited) | |
| Net cash provided by (used in) operating activities | | $ | (85,205 | ) | | $ | 77,169 | |
| Net cash used in investing activities | | | - | | | | - | |
| Net cash provided by financing activities | | | - | | | | - | |
| | | | | | | | | |
| Net Change in Cash | | $ | (85,205 | ) | | $ | 77,169 | |
During the threesix months ended March 31,June 30, 2009, net cash used in operating activities was $85,205,$105,740 compared to net cash provided by operating activities of $77,169$149,651 during the threesix months ended March 31,June 30, 2008. As discussed herein we realized net income from operations of $5,052$46,399 during the threesix months ended March 31,June 30, 2009, compared to a net income of $45,408$94,506 during the threesix months ended March 31,June 30, 2008.
We did not engage in investing or financing activities during the threesix months ended March 31,June 30, 2009 and used only $1,005 in investing activities during the six months ended June 30, 2008 for the cash-out of fractional shares of common stock resulting from the reverse split of our common stock in May 2008. We did not engage in any financing activities in six months ended June 30, 2009 or 2008.
Summary of Material Contractual Commitments
The following is a summary of our material contractual commitments as of March 31, 2009:
| | | Payments Due By Period | | | Payments Due By Period | |
| Contractual obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
| Operating Leases: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equipment Leases | | $ | 11,336 | | | $ | 5,232 | | | $ | 6,104 | | | $ | - | | | $ | - | | | $ | 10,028 | | | $ | 5,232 | | | $ | 4,796 | | | $ | - | | | $ | - | |
| Office Leases | | | 200,960 | | | | 114,192 | | | | 86,768 | | | | - | | | | - | | | | 171,968 | | | | 108,864 | | | | 63,104 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 212,296 | | | $ | 119,424 | | | $ | 92,872 | | | $ | - | | | $ | - | | | $ | 181,996 | | | $ | 114,096 | | | $ | 67,900 | | | $ | - | | | $ | - | |
Off-Balance Sheet Financing Arrangements
As of March 31,June 30, 2009 we had no off-balance sheet financing arrangements.
Recent Accounting Pronouncements
The FASB has issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts. SFAS No. 163 clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, and addresses the recognition and measurement of premium revenue and claim liabilities. It requires expanded disclosures about contracts, and recognition of claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations, and (b) the insurance enterprise’s surveillance or watch list. We are currently evaluating the impact of SFAS No. 163.
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature. We are currently assessing the impact of SGAS No. 162 on our financial position and results of operations.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009. SFAS 161 requires enhanced
disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. SFAS 161 is not currently applicable to the Company since we do not have derivative instruments or engage in hedging activity.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141 (R) did not have an impact on the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160. is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 did not have an impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which permits entities to choose to measure at fair value eligible financial instruments and certain other items that are not currently required to be measured at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have an impact on the Company’s financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the financial statements and the revenues recognized and expenses incurred during the reporting period. Our estimates and assumptions affect our recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. We evaluate the reasonableness of these estimates and assumptions continually based on a combination of historical information and other information that comes to its attention that may vary its outlook for the future. Actual results may differ from these estimates under different assumptions.
Management suggests that our Summary of Significant Accounting Policies, as described in Note 2 of Notes toour Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe the critical accounting policies that most impact our consolidated financial statementsConsolidated Financial Statements are described below.
Basis of Accounting — We use the accrual method of accounting.
Revenue Recognition — We apply the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (“SAB 104”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, we recognize revenue related to monthly contracted amounts for services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectibility is reasonably assured.
Health care service revenues are recognized in the period in which fees are fixed or determinable and the related services are provided to the subscriber.
Our subscribers generally pay in advance for their services by check payment, and revenue is then recognized ratably over the period in which the related services are provided. Advance payments from subscribers are recorded on the balance sheet as deferred revenue. In circumstance where payment is not received in advance, revenue is only recognized if collectability is reasonably assured. An allowance for uncollectible accounts is established for any customer who is deemed as possibly uncollectible.
Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Item 4T.4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, our disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met.
As of the end of the period covered by this Report we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31,June 30, 2009.
Changes in Internal Control
There was no change in our internal control over financial reporting during the threesix months ended March 31,June 30, 2009, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Exhibits. The following exhibits are included as part of this Quarterly Report:
| | Exhibit Number | | Title of Document |
| Exhibit 31.1 | | | |
| | | Certification of Principal Executive Officer Pursuant to |
| | | Section 302 of the SarbanesSarbannes Oxley Act of 20022002. |
| Exhibit 31.2 | | | |
| | | Certification of Principal Financial Officer Pursuant to |
| | | Section 302 of the Sarbanes-OxleySarbannes Oxley Act of 20022002. |
| Exhibit 32.1 | | | |
| | | Certification Pursuant to Section 906 of the Sarbanes- |
| | | OxleySarbannes-Oxley Act of 2002. |
| Exhibit 32.2 | | | |
| | | Certification Pursuant to Section 906 of the Sarbanes- |
| | | OxleySarbannes-Oxley Act of 2002. |
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf, thereunto duly authorized.
| | PACIFIC HEALTH CARE ORGANIZATION,ORGNIZATION, INC. | |
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Date: May 15,August 14, 2009 | By: | /s/ Tom Kubota | |
| | | Tom Kubota, Chief Executive Officer | |
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| Date: August 14, 2009 | By: | /S/ Fred Odaka | |
| | Fred Odaka, Chief ExecutiveFinancial Officer | |
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Date: May 15, 2009 | By: | /s/ Fred Odaka | |
| | Fred Odaka | |
| | Chief Financial Officer | |
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