On May 14, 2018, the Company entered into Stock Option Cancellation Agreements (the “Cancellation Agreements”) with certain executive officers, directors and other senior level employees/consultants of the Company, pursuant to which such individuals (the “Optionholder”) agreed to the surrender and cancellation of certain previously granted stock options (the “Cancelled Options”) under the 2002 Plan and the 2005 Plan to purchase 85,000 pre-Forward Split shares (340,000 post-Forward Split shares) of the Company’s common stock. Under the terms of the Cancellation Agreements, each Optionholder and the Company acknowledged and agreed that the surrender and cancellation of the Cancelled Options was without any expectation on the part of the Optionholder to receive, and without any obligation on the Company to pay or grant, any cash, equity awards or other consideration presently or in the future with respect to the Cancelled Options. Following the surrender and cancellation of the Cancelled Options there were no awards outstanding under the 2002 Plan or the 2005 Plan and pursuant to the provisions of the 2002 Plan and the 2005 Plan, the Company’s board of directors terminated the 2002 Plan and the 2005 Plan.
Item 2. Management’s Discussion and Analysis of Financial Statements and Results of Operations
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our management’s beliefs and assumptions and on information currently available to them. 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, new customer acquisitions, trends, actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “may,” “hope,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “project,” “intend,” “budget,” “plan,” “forecast,” “predict,” “could,” “should,” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial riskrisks 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; cost reduction efforts by our existing and prospective customers; competition within our industry, including competition from much larger competitors; business combinations; 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; our ability to retain existing customers and to attract new customers; price increases; 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. 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. These forward-looking statements speak only as of their dates and should not be relied upon. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise (other than pursuant to reporting obligations imposed on registrants pursuant to the Exchange Act) to reflect subsequent events or circumstances.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
Throughout this quarterly report on Form 10-Q, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”), Industrial Resolutions Coalition, Inc. (“IRC”), Medex Managed Care, Inc. (“MMC”), Medex Medical Management, Inc. (“MMM”) and Medex Legal Support, Inc., (“MLS”).
Overview
We are workers’ compensation cost containment specialists. Our business objective is to deliver value to our clients that reduces their workers’ compensation related medical claims expense in a manner that will assure that injured employees receive high quality healthcare that allows them to recover from injury and return to gainful employment without undue delay. According to studies conducted by auditing bodies on behalf of the California Division of Workers’ Compensation, (“DWC”) the two most significant cost drivers for workers’ compensation are claims frequency and medical treatment costs.
Our core service focuses on the reduction of medical treatment costs by enabling our client/employers to share the control over the medical treatment process. This control is obtained by participation in one of our medical treatment networks. We hold several valuable government-issued licenses to operate medical treatment networks. Through Medex we hold two of the total of nine licenses issued by the State of California to establish and manage a Health Care Organization (“HCO”) within the state of California. We also hold approvals issued by the State of California to act as a Medical Provider Network (“MPN”). Our HCO and MPN programs provide our client/employers with provider networks within which the client/employer has some ability to direct the administration of the claim. This is designed to decrease the incidence of fraudulent claims and disability awards and ensure injured employees receive the necessary back-to-work rehabilitation and training they need. We also offer a Nurse Case Management program that keeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective. Nurse oversight is a collaborative process that assesses plans, implements, coordinates, monitors and evaluates the options and services required to meet an injured worker’s health needs.needs
Our clients include self-administered employers, insurers, third party administrators, municipalities and others. Our principal clients are located in the State of California where the high cost of workers’ compensation insurance is a critical problem for employers. Our networks have contracted with approximately 3,900 individual medical providers and clinics, as well as hospitals, pharmacies, rehabilitation centers and other ancillary services enabling our networks to provide comprehensive medical services throughout California. Our provider networks are composed of experts in treating worker injuries.
Beyond the core services we provide to facilitate client/employeremployers’ involvement in employee medical treatment claims administration and patient treatment options, we also provide to our HCO and MPN clients a number ofseveral claims-related services that bring efficiencies to claim processing and management that further reduce the overall burden of workers’ compensation claims resolution. These services include various back office type functions that assure cost efficiency and accuracy in claim processing, claim reimbursement and claim dispute resolution.
Recent Developments
MPN Enrollment Count
Changes to the MPN regulations in August 2014 eliminated the notice requirements to employees covered under an MPN program. This change eliminated the need for our MPN clients to submit employee rosters for MPN notice mailings. As a result, over the past several years, many of our MPN client/employers have stopped sending us employee rosters which we have historically used to determine employee/enrollee headcount information. Enough of our MPN client/employers have stopped submitting to us such information that we can no longer accurately track the overall number of MPN participants. Therefore, beginning in the first quarter 2017, we ceased tracking the overall number of MPN participants of all client/employers in our MPN program.
HCO Enrollment Count
Historically, the HCO employee/enrollee headcount was directly related to the amount of revenue generated by HCO clients. We were, however, at risk of losing several clients under this pricing model. To remain competitive in the marketplace, we developed a new pricing model, which includes both a fixed monthly flat rate pricing option that is negotiated per client and/or a per claim incurred pricing model. Under the per claim model, our client/employers do not incur this cost as an out of pocket cost, but rather apply the cost directly to the insured or self-insured claim. As a result of moving from our fixed fee per number of employee/enrollees per customer model, beginning in the first quarter 2017 we have discontinued reporting the direct relationship between the number of HCO employee/enrollees and total HCO revenues because that historical relationship has become distorted as a result of the implementation of our new pricing model. This change in our pricing model had no significant impact to our current level of HCO revenues and we expect the same level of impact over the remaining months of 2017.
Results of Operations
Comparison of the three months ended September 30, 2017 and 2016
The following represents selected components of our consolidated results of operations, for the three-month periodsperiod ended September 30,March 31, 2018 and 2017, and 2016, respectively, together with changes from period-to-period:
| | | For three months ended March 31, | |
| | For three months ended September 30, | | | | | | | | | 2018 | | | 2017 | | | Amount Change | | | % Change | |
| | 2017 | | | 2016 | | | Amount Change | | | % Change | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
HCO fees | | $ | 377,923 | | | $ | 276,951 | | | $ | 100,972 | | | | 36 | % | | $ | 399,442 | | | $ | 302,569 | | | $ | 96,873 | | | | 32 | % |
MPN fees | | | 142,257 | | | | 146,836 | | | | (4,579 | ) | | | (3 | %) | | | 134,644 | | | | 138,281 | | | | (3,637 | ) | | | (3 | %) |
NCM fees | | | 582,544 | | | | 499,118 | | | | 83,426 | | | | 17 | % | | | 582,569 | | | | 587,236 | | | | (4,667 | ) | | | (1 | %) |
UR fees | | | 277,886 | | | | 221,176 | | | | 56,710 | | | | 26 | % | | | 287,021 | | | | 237,045 | | | | 49,976 | | | | 21 | % |
MBR fees | | | 147,094 | | | | 187,829 | | | | (40,735 | ) | | | (22 | %) | | | 114,039 | | | | 156,778 | | | | (42,739 | ) | | | (27 | %) |
Other | | | 73,203 | | | | 111,686 | | | | (38,483 | ) | | | (34 | %) | | | 65,594 | | | | 119,347 | | | | (53,753 | ) | | | (45 | %) |
Total revenues | | | 1,600,907 | | | | 1,443,596 | | | | 157,311 | | | | 11 | % | | | 1,583,309 | | | | 1,541,256 | | | | 42,053 | | | | 3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 19,462 | | | | 20,925 | | | | (1,463 | ) | | | (7 | %) | |
Depreciation | | | | 16,344 | | | | 19,827 | | | | (3,483 | ) | | | (18 | %) |
Bad debt provision | | | 15,750 | | | | 4,500 | | | | 11,250 | | | | 250 | % | | | - | | | | (3,250 | ) | | | 3,250 | | | | 100 | % |
Consulting fees | | | 90,079 | | | | 75,228 | | | | 14,851 | | | | 20 | % | | | 78,814 | | | | 77,260 | | | | 1,554 | | | | 2 | % |
Salaries and wages | | | 547,963 | | | | 574,100 | | | | (26,137 | ) | | | (5 | %) | | | 491,478 | | | | 588,657 | | | | (97,179 | ) | | | (17 | %) |
Professional fees | | | 109,064 | | | | 82,105 | | | | 26,959 | | | | 33 | % | | | 77,470 | | | | 82,084 | | | | (4,614 | ) | | | (6 | %) |
Insurance | | | 79,489 | | | | 81,452 | | | | (1,963 | ) | | | (2 | %) | | | 67,029 | | | | 87,275 | | | | (20,246 | ) | | | (23 | %) |
Outsource service fees | | | 146,287 | | | | 113,017 | | | | 33,270 | | | | 29 | % | | | 95,881 | | | | 112,748 | | | | (16,867 | ) | | | (15 | %) |
Data maintenance | | | 12,160 | | | | 30,160 | | | | (18,000 | ) | | | (60 | %) | | | 32,431 | | | | 34,619 | | | | (21,188 | ) | | | (6 | %) |
General and administrative | | | 162,164 | | | | 157,894 | | | | 4,270 | | | | 3 | % | | | 168,205 | | | | 161,388 | | | | 6,817 | | | | 4 | % |
Total expenses | | | 1,182,418 | | | | 1,139,381 | | | | 43,037 | | | | 4 | % | | | 1,027,652 | | | | 1,160,608 | | | | (132,956 | ) | | | (11 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from operations | | | 418,489 | | | | 304,215 | | | | 114,274 | | | | 38 | % | | | 555,657 | | | | 380,648 | | | | 175,009 | | | | 46 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Income before taxes | | | 418,489 | | | | 304,215 | | | | 114,274 | | | | 38 | % | | | 555,657 | | | | 380,648 | | | | 175,009 | | | | 46 | % |
Income tax provision | | | 174,560 | | | | 126,882 | | | | 47,678 | | | | 38 | % | | | 155,976 | | | | 158,391 | | | | (2,415 | ) | | | (2 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 243,929 | | | $ | 177,333 | | | $ | 66,596 | | | | 38 | % | | $ | 399,681 | | | $ | 222,257 | | | $ | 177,424 | | | | 80 | % |
Revenue
Total revenues during the three-month period ended September 30, 2017,March 31, 2018, increased 11%3% to 1,600,907$1,583,309 compared to $1,443,596$1,541,256 during the three-month period ended September 30, 2016.March 31, 2017.
During the thirdfirst quarter 2017,2018, HCO nurse case management, and utilization reviewUR fees increased 36%, 17%,32% and 26%21%, respectively, while MPN, Medical Bill ReviewMBR, NCM and other feesrevenue decreased by 3%, 22%27%, 1% and 34%45%, respectively. Other revenues consisted of revenues derived primarily from network claims repricing services, lien representation services, legal support services, workers’ compensation carve out revenues and Medicare set asideMedicare-set-aside revenues.
HCO fees
During the three-month periods ended
September 30,March 31, 2018 and 2017,
and 2016, HCO fee revenues were
$377,923$399,442 and
$276,951,$302,569 respectively. The
36%32% increase in HCO revenue was primarily attributable to
adding two new customers, increased
revenues derived from one major client during the third quarter of 2017, coupled with increased fees primarily from three other existing customers.10
employee enrollment and rate increases in program administration services.
MPN fees
MPN fee revenue for the three-month periods ended September 30,March 31, 2018 and 2017, was $134,644 and 2016, were $142,257 and $146,836,$138,281, respectively, a decrease of 3%, resulting mainly from lower revenues from one existing customer.customer phasing out its business through bankruptcy.
NCM fees
During the three months ended September 30,March 31, 2018 and 2017, and 2016, nurse case management revenue was $582,544$582,569 and $499,118,$587,236, respectively. The increasedecrease in nurse case management revenue of $83,426$4,667 was primarily from increased revenues from five existing customersthe result of a net decrease in case management activity during the first quarter of 2018 when compared to the same period in 2016. There is no assurance that nurse case management revenue will continue to grow at the rate realized in the quarter ended September 30, 2017 for the remaining months of fiscal 2017.
UR fees
During the three-month periods ended September 30,March 31, 2018 and 2017, and 2016, utilization review revenue was $277,886$287,021 and $221,176$237,045, respectively. The increase of $56,710$49,976 in the 20172018 period was primarily attributable to addingincreased utilization reviews from two new clients in the fourth quarter of fiscal 2016 and increases in revenues from other existingmajor customers. Utilization review can provide a safeguard against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, etc. Through our skilled staff and automated review system, we are able to deliver utilization review services that cut overhead costs for the self-insured clients, insurance companies and the public entities we service.
MBR fees
During the three-month period ended September 30, 2017,March 31, 2018, medical bill review revenue decreased $40,735$42,739 to $147,094$114,039 when compared to the same period a year earlier. This decrease was mainly caused by processing fewer hospital bills from existing customers.terminations of three customers during fiscal 2017. Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. Such services include, but are not limited to, coding review and rebundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. These services can result in significant network savings.
Other
Other fees consist of revenue derived from network access and claims repricing, lien representation, legal support services, Medicare set asideMedicare-set-aside and worker’sworkers’ compensation carve-outcarve-outs services. Other fee revenue for three-month periods ended September 30,March 31, 2018 and 2017, was $65,594 and 2016, were $73,203 and $111,686$119,347, respectively. The decrease of $38,483$53,753 was mainlyprimarily the result of decreased network access fees from one customer having realized lower levels of savings from using our PPO network. We expect this downward trend for this customer to continue fornetwork access revenues and the remainderloss of 2017.one major customer.
Expenses
Total expenses for the three months ended September 30,March 31, 2018 and 2017, were $1,027,652 and 2016, were $1,182,418 and $1,139,381,$1,160,608, respectively. The increasedecrease of $43,037$132,956 was the result primarily of increases in bad debt provision, consulting fees, professional fees, outsource service fees, and general and administrative expense partially offset by decreases in depreciation and amortization,lower salaries and wages, professional fees, insurance expense and data maintenance expense.outsource service fees.
Depreciation
During the three-month period ended March 31, 2018, we recorded depreciation expense of $16,344 compared to $19,827 during the comparable 2017 period. The decrease in depreciation was primarily attributable to certain fixed assets being fully depreciated during the last nine months of 2017 and the first quarter of 2018.
Depreciation and Amortization
During the three-month period ended September 30, 2017, we recorded depreciation and amortization expense of $19,462 compared to $20,925 during the comparable 2016 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the fourth quarter of 2016.
Bad Debt
During the three-month period ended September 30, 2017,March 31, 2018, we did not record any bad debt provision increased by $11,250 compared towhich resulted in our allowance for bad debt allowance remaining at $60,150 for the three-month period ended September 30, 2016. This increase was primarily the result of recording additional bad debt provision for one existing uncollectable account.March 31, 2018 and 2017.
Consulting Fees
During the three months ended September 30, 2017,March 31, 2018, consulting fees increased to $90,079$78,814 from $75,228$77,260 during the three months ended September 30, 2016.March 31, 2017. This increase of $1,554 was primarily the result on hiring aof an increase in fees paid to one consultant as Directorduring the first quarter of Medical Management in August 2017.2018.
Salaries and Wages
During the three-month period ended September 30, 2017,March 31, 2018, salaries and wages decreased 5%17% to $547,963$491,478 compared to $574,100$588,657 during the same period in 2016. The2017. This decrease in salaries and wages of $26,137 was primarily the result of lower deferred compensation expense, payroll related taxes, commission expensethe net termination of six employees from April 2017 to March 2018. We employed 33 and lower levels39 full-time employees as of other salariesMarch 31, 2018 and wages in Medex and PHCO.2017, respectively.
Professional Fees
For the three months ended September 30, 2017,March 31, 2018, we incurred professional fees of $109,064$77,470, compared to $82,105$82,084 during the three months ended September 30, 2016.March 31, 2017. The $26,959 increase$4,614 decrease in professional fees was primarilymainly the result of higher accounting expense, legal expenses, medical consultant fees anddecreased professional fees paid for nurse case management services resulting from increased numbers of cases processed.partially offset by fee increases to our medical consultant.
Insurance
During the three-month period ended September 30, 2017,March 31, 2018, we incurred insurance expenses of $79,489,$67,029, a 2%23% decrease over the same three-month period in 2016. This2017. The decrease in insurance expense was primarily attributableattributed to lower group healthworkers compensation and director and officer’s insurance premiums resulting from a decreased numberduring the first three months of employees when2018 compared to the same period in 2016.2017. We do not expect current insurance fees to moderately increase significantly over the remaining months of 2017.2018.
Outsource Service Fees
Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review Medicare set aside services and fieldnurse case management feesservices, and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services. We incurred $146,287$95,881 and $113,017$112,748 in outsource service fees during the three-month periods ended September 30,March 2018 and 2017, and 2016, respectively. The increasedecrease of $33,270$16,867 was primarily the result of increasesdecreases in outsource services required for utilization review, Medicare set aside servicesMedicare-set-aside, NCM and nurse case management.MBR, partially offset by increases in UR. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review and certain nurse case management services we provide in the future.
Data Maintenance
During the three-month periodsperiod ended September 30,March 31, 2018 and 2017, and 2016, data maintenance fees were $12,160$32,431 and $30,160,$34,619, respectively. The decrease of $18,000$2,188 was primarily the result of recording lower levels of customer notificationsnotification fees realized for new and existing customersassociated with a customer’s annual renewal during the three-month period ended September 30, 2017March 31, 2018 when compared to the same period in 2016. Data maintenance fees tend to fluctuate from month to month depending on when new customers are enrolled and when the annual renewal of existing customer notification are due.2017.
General and Administrative
During the three-month period ended September 30, 2017,March 31, 2018, general and administrative expenses increased 3%4% to $162,164$168,205 when compared to the three-month period ended September 30, 2016.March 31, 2017. This increase of $4,270$6,817 was primarily attributable to increases in auto expense, duestelephone, office rent IT enhancement, office rent and subscriptions, employment agency fees, IT enhancements, rental equipment, telephone expense and travel and entertainmentshareholders expense, partially offset by decreases in office rent expense, office supplies, postage expense, paid time off expensemiscellaneous general and miscellaneousadministrative expenses. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2017.2018, providing revenues continue to also increase.
Income from Operations
As a result of the 11%3% increase in total revenue during the three-month period ended September 30, 2017, which was partially offset by the 4% increaseMarch 31, 2018, together with an 11% decrease in total expenses, during the same period, our income from operations increased by 38% during the three-month period ended September 30, 2017,46% when compared to the same period in 2016.quarter 2017.
Income Tax Provision
Because weWe realized income before taxes of $418,489$555,657 and $304,215$380,648 during the three-month periods ended September 30,March 31, 2018 and 2017, respectively. As a result of Federal and 2016, respectively,State income tax reductions of approximately 13% we realized a $47,678,$2,415, or 38%2%, increasedecrease in our income tax provision.
Net Income
During the three-month period ended September 30, 2017,March 31, 2018, total revenues of $1,600,907$1,583,309 was 11%3% higher when compared to the same period in 2016.2017. This increase in total revenues was partially offset bywith a 4% increasedecrease in total expenses resultingof 11% resulted in a 38%46% increase in income from operations compared to the three months ended September 30, 2016.March 31, 2017. Correspondingly, we realized net income of $243,929$399,681 for the three-month period ended September 30, 2017, also a 38%March 31, 2018, an 80% increase compared to the three-month period ended September 30, 2016.March 31, 2017.
Comparison of nine months ended September 30, 2017 and 2016
The following represents selected components of our consolidated results of operations, for the nine-month periods ended September 30, 2017 and 2016, respectively, together with changes from period-to-period:
| | For nine months ended September 30, | | | | | | | |
| | 2017 | | | 2016 | | | Amount Change | | | % Change | |
Revenues: | | | | | | | | | | | | |
HCO fees | | $ | 1,041,328 | | | $ | 965,768 | | | $ | 75,560 | | | | 8 | % |
MPN fees | | | 427,228 | | | | 436,893 | | | | (9,665 | ) | | | (2 | %) |
NCM fees | | | 1,824,121 | | | | 1,176,447 | | | | 647,674 | | | | 55 | % |
UR fees | | | 788,229 | | | | 596,205 | | | | 192,024 | | | | 32 | % |
MBR fees | | | 481,352 | | | | 517,893 | | | | (36,541 | ) | | | (7 | %) |
Other | | | 255,542 | | | | 309,260 | | | | (53,718 | ) | | | (17 | %) |
Total revenues | | | 4,817,800 | | | | 4,002,466 | | | | 815,334 | | | | 20 | % |
| | | | | | | | | | | | | | | | |
Expense: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 58,859 | | | | 63,247 | | | | (4,388 | ) | | | (7 | %) |
Bad debt provision | | | 30,500 | | | | 13,500 | | | | 17,000 | | | | 126 | % |
Consulting fees | | | 246,073 | | | | 265,296 | | | | (19,223 | ) | | | (7 | %) |
Salaries and wages | | | 1,734,321 | | | | 1,717,148 | | | | 17,173 | | | | 1 | % |
Professional fees | | | 308,295 | | | | 224,368 | | | | 83,927 | | | | 37 | % |
Insurance | | | 257,495 | | | | 243,307 | | | | 14,188 | | | | 6 | % |
Outsource service fees | | | 404,538 | | | | 288,225 | | | | 116,313 | | | | 40 | % |
Data maintenance | | | 71,261 | | | | 113,175 | | | | (41,914 | ) | | | (37 | %) |
General and administrative | | | 495,474 | | | | 475,230 | | | | 20,244 | | | | 4 | % |
Total expenses | | | 3,606,816 | | | | 3,403,496 | | | | 203,320 | | | | 6 | % |
| | | | | | | | | | | | | | | | |
Income from operations | | | 1,210,984 | | | | 598,970 | | | | 612,014 | | | | 102 | % |
| | | | | | | | | | | | | | | | |
Income before taxes | | | 1,210,984 | | | | 598,970 | | | | 612,014 | | | | 102 | % |
Income tax provision | | | 504,318 | | | | 249,529 | | | | 254,789 | | | | 102 | % |
| | | | | | | | | | | | | | | | |
Net income | | $ | 706,666 | | | $ | 349,441 | | | $ | 357,225 | | | | 102 | % |
Revenue
Total revenues during the nine-month period ended September 30, 2017, increased 20% to 4,817,800 compared to $4,002,466 during the nine-month period ended September 30, 2016.
During the first nine-months of 2017, HCO, nurse case management, and utilization review, increased 8%, 55% and 32% respectively, while MPN, MBR and other fees decreased by 2%, 7%, and 17%, respectively. Other revenues consisted of revenues derived primarily from network claims repricing services, lien representation services, legal support services, workers’ compensation carve out revenues and Medicare set aside revenues.
HCO fees
During the nine-month periods ended September30, 2017 and 2016, HCO fee revenues were $1,041,328 and $965,768 respectively. The 8% increase in HCO revenue was primarily attributable to the addition of one major customer in January 2017, partially offset by lower revenues from several existing HCO customers when compared to the same period in 2016
MPN fees
MPN fee revenue for the nine-month periods ended September 30, 2017 and 2016, was $427,228 and $436,893 respectively, a decrease of 2%, resulting from lower revenues from one existing customer.
NCM fees
During the nine-months ended September 30, 2017 and 2016, nurse case management revenue was $1,824,121 and $1,176,447, respectively. The increase in nurse case management revenue of $647,674 was primarily the result of adding new customers during the third and fourth quarters of 2016, and increases in revenues from existing customers. As a result of losing a significant customer in October 2017, we do not expect nurse case management revenue to increase at the rate realized during the nine months ended September 30, 2017, for the remainder of fiscal 2017.
UR fees
During the nine-month periods ended September 30, 2017 and 2016, utilization review revenue was $788,229 and $596,205, respectively. The increase of $192,024 in the 2017 period was attributable to adding new clients in the third and fourth quarters of fiscal 2016. Utilization review can provide a safeguard against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, etc. Through our skilled staff and automated review system, we are able to deliver utilization review services that cut overhead costs for the self-insured clients, insurance companies and the public entities we service.
MBR fees
During the nine-month period ended September 30, 2017, medical bill review revenue decreased $36,541 to $481,352 when compared to the same period a year earlier. This 7% decrease was mainly caused by processing fewer hospital claims from existing customers. Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. Such services include, but are not limited to, coding review and re-bundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. These services can result in significant network savings.
Other
Other fees consist of revenue derived from network access and claims repricing, lien representation, legal support services, Medicare set aside and worker’s compensation carve-outs services. Other fee revenue for nine-month periods ended September 30, 2017 and 2016, was $255,542 and $309,260, respectively. The decrease of $53,718 was mainly the result of decreased network access fees from one customer having realized lower savings from using our PPO network. We expect this downward trend for this customer to continue for the remainder of 2017.
Expenses
Total expenses for the nine-months ended September 30, 2017 and 2016, were $3,606,816 and $3,403,496, respectively. The increase of $203,320 was the result of increases in bad debt, salaries and wages, professional fees, insurance, outsource service fees, and general and administrative expense, partially offset by decreases in depreciation and amortization, consulting fees and data maintenance expense.
Depreciation and Amortization
During the nine-month period ended September 30, 2017, we recorded depreciation and amortization expense of $58,859 compared to $63,247 during the comparable 2016 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the fourth quarter of 2016.
Bad Debt
During the nine-month period ended September 30, 2017, bad debt provision increased by $17,000 compared to the nine-month period ended September 30, 2016. This increase was primarily the result of additional provisions required for one potential uncollectable account.
Consulting Fees
During the nine-months ended September 30, 2017, consulting fees decreased to $246,073 from $265,296, when compared the nine months ended September 30, 2016. This 7% decrease was mainly the result of a reduction in fees paid to two consultants commencing in June 2016 and converting a consultant to an employee in March 2016.
Salaries and Wages
During the nine-month period ended September 30, 2017, salaries and wages increased 1% to $1,734,321 compared to $1,717,148 during the same period in 2016. This increase was primarily the result of additional staffing in nurse case management and higher levels of commissions, partially offset by salary reductions of 10% by several senior executives in June 2016.
Professional Fees
For the nine-months ended September 30, 2017, we incurred professional fees of $308,295 compared to $224,368 during the nine months ended September 30, 2016. The $83,927 increase in professional fees was primarily the result of higher professional fees paid for nurse case management services resulting from increased numbers of cases processed.
Insurance
During the nine-month period ended September 30, 2017, we incurred insurance expenses of $257,495, a 6% increase over the same nine-month period in 2016. The increase in insurance expense was primarily attributed to higher workers’ compensation premiums for our employees and directors’ and officers’ insurance premiums during the nine months period ended September 30, 2017 compared to the same period in 2016. We do not expect current insurance fees to increase significantly over the remaining months of 2017.
Outsource Service Fees
Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review, Medicare set aside services, nurse case management services, and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services. We incurred $404,538 and $288,225 in outsource service fees during the nine-month periods ended September 2017 and 2016, respectively. The increase of $116,313 was primarily the result of increases in outsource services required for utilization review, Medicare set aside fees and field case management fees. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review and certain nurse case management services we provide in the future.
Data Maintenance
During the nine-month period ended September 30, 2017 and 2016, data maintenance fees were $71,261 and $113,175, respectively. The decrease of $41,914 was primarily the result of recording notification fees associated with the addition of a major HCO customer in the first quarter 2016, with a lower level of notification fees recorded for this same customer during the nine-month period ended September 30, 2017.
General and Administrative
During the nine-month period ended September 30, 2017, general and administrative expenses increased 4% to $495,474 when compared to the nine-month period ended September 30, 2016. This increase of $20,244 was primarily attributable to increases in dues and subscriptions, employment agency fees, IT enhancement, license and permits, telephone expense, rent expense, travel and entertainment expense and miscellaneous expense, partially offset by decreases in charitable contributions, auto expense, postage expense, office supplies and paid time off expense. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2017.
Income from Operations
As a result of the 20% increase in total revenue during the nine-month period ended September 30, 2017, which was partially offset by the 6% increase in total expenses, our income from operations before taxes increased to $1,210,984, a 102% increase compared to the same period in 2016.
Income Tax Provision
Because we realized income before taxes of $1,210,984 and $598,970 during the nine-month periods ended September 30, 2017 and 2016, respectively, we realized a $254,789 or 102%, increase in our income tax provision.
Net Income
During the nine-month period ended September 30, 2017, total revenues of $4,817,800 was 20% higher when compared to the same period in 2016. This increase in total revenues was partially offset by a 6% increase in total expenses, resulting in a 102% increase in income from operations. Correspondingly, we realized net income of $706,666 for the nine-month period ended September 30, 2017, also a 102% increase compared to the nine-month period ended September 30, 2016.
Liquidity and Capital Resources
As of September 30, 2017,March 31, 2018, we had cash on hand of $5,613,412$6,705,681 compared to $5,005,617$5,815,071 at December 31, 2016.2017. The $607,795$890,610 increase was primarily the result of net cash provided by our operating activities, partially offset by cash used in investing activities. Net cash provided by our operating activities was the result of realizing net income coupled with increases in accumulated depreciation accrued expenses, and deferred rent expense,amortization, income tax payable and unearned revenue and decreases in accounts receivable and partially offset by increases in prepaid expense and decreases in our bad debt, prepaid expense,accrued expenses, accounts payable income tax payable, unearned revenues and increases in our accounts receivable.deferred rent. We used $13,446$2,988 in investing activities for purchases of computers, furniture and equipment. Barring a significant downturn in the economy or the loss of major customers, we believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses over the next twelve months.
We currently have planned certain capital expenditures during fiscal 20172018, to support potential new customers’ software requirements.expand our IT capabilities. We do not expectbelieve we have adequate capital on hand to cover these software expenditures to be material. Weand do not anticipate this will require us to seek outside sources of funding.
We do, however, from timecontinue to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We are taking stepsalso looking to look atexpand our business into the insurance industry during 2018, but have not identified any suitable merger or acquisition candidates to vertically grow our Company. In October 2017, we announced that we had retained a west-coast based investment banking firm to assist us in identifying potential merger and acquisition opportunities, as well as, to explore sources of institutional source of financing. We have not found any suitable candidateor opportunities at the current time. We could use cash or stock of our Company or some combination of both in anyanticipate an expansion or acquisition. An expansion or acquisition of this sort may require greater capital resources than we currently possess. Should we need additional capital resources, we most likely wouldcould seek to obtain such through equitydebt and/or debtequity financing. ThereWe do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining equity or debt financing when needed on favorable terms, or at all. We could also use shares of our capital stock as consideration for a business acquisition transaction.
CashCash Flow
During the ninethree months ended September 30, 2017,March 31, 2018, cash was primarily used to fund operations. We had a net increase in cash of $607,795$890,610 during the ninethree months ended September 30,March 31, 2018, compared to a net increase of $81,340 during the three months ended March 31, 2017. See below for additional information.
| For the nine months ended September | | | For the three months ended March 31, | |
| 2017 (unaudited) | | 2016 (unaudited) | | | 2018 (unaudited) | | | 2017 (unaudited) | |
| | | | | | | | | | |
Net cash provided from operating activities | | $ | 621,241 | | | $ | 1,049,690 | | |
Net cash provided by operating activities | | | $ | 893,598 | | | $ | 87,094 | |
Net cash used in investing activities | | | (13,446 | ) | | | (33,556 | ) | | | (2,988 | ) | | | (5,754 | ) |
Net cash used in financing activities | | | - | | | | (2,063 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Net increase in cash | | $ | 607,795 | | | $ | 1,014,071 | | | $ | 890,610 | | | $ | 81,340 | |
During the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, net cash provided by operating activities was $621,241$893,598 and $1,049,690,$87,094, respectively. As discussed herein, we realized net income of $706,666$399,681 during the ninethree months ended September 30, 2017,March 31, 2018, compared to net income of $349,441$222,257 during the ninethree months ended September 30, 2016. March 31, 2017. The increase of $806,504 in cash flow from operating activities was primarily the result of increases in net income, accumulated depreciation and amortization, income tax payable, unearned revenue, and decreases in accounts receivable, partially offset by increases in prepaid expense and decreases in accounts payable, accrued expenses, and deferred rent expense.
Net cash used in investing activities was $13,446$2,988 and $33,556$5,754 during the nine-monththree-month periods ended September 30,March 31, 2018 and 2017, and 2016, respectively. During the nine-month periods ended September 30, 2017 and 2016, netNet cash used in investing activities was used to purchase computer equipment,lower by $2,766 during the three-month period ended March 31, 2018, because of lower expenditures for computers, furniture, and office equipment.
Net cash used in financing activities during the nine-month periods ended September 30, 2017 and 2016 was $0 and $2,063, respectively, resulting from lower cash dividends paid.
Summary of Material Contractual Commitments
The following is a summary of our material contractual commitments as of September 30, 2017.March 31, 2018.
| Payments Due By Period | | | Payments Due By Period | |
| 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: | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Leases – Equipment(1) | | $ | 56,857 | | | $ | 20,675 | | | $ | 36,182 | | | $ | - | | | $ | - | | | $ | 46,519 | | | $ | 20,675 | | | $ | 25,844 | | | $ | - | | | $ | - | |
Office Leases(2) | | $ | 1,177,515 | | | | 255,608 | | | | 775,791 | | | | 146,116 | | | | - | | | $ | 1,031,400 | | | | 255,608 | | | | 775,792 | | | | - | | | | - | |
Total Operating Leases | | $ | 1,234,372 | | | $ | 276,283 | | | $ | 811,973 | | | $ | 146,116 | | | $ | - | | | $ | 1,077,919 | | | $ | 276,283 | | | $ | 801,636 | | | $ | - | | | $ | - | |
(1) | In March 2017, we entered a 39-month operating lease for an office copy machine with scanner with monthly payment at $1,723, commencing in April 2017. |
(2) | In July 2015, we entered a 79-month lease to lease approximately 9,439 square feet of office space that commenced in September 2015. This office space serves as our principal executive offices, as well as, the principal offices of our operating subsidiaries. |
Off-Balance Sheet Financing Arrangements
As of March 31, 2018, we had no off-balance sheet financing arrangements.
Inflation
We experience pricing pressures in the form of competitive prices. We are also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits and facility leases. However, we generally do not believe these impacts are material to our revenues or net income.
Critical Accounting Policies and Estimates
See Note 1 to our condensed consolidated financial statements included elsewhere in this report.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
This information is not required for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, which are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017,March 31, 2018, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2017,March 31, 2018, that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Management does not believe there have been any material changes to the risk factors listed in Part I, “Item 1A, Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2016.2017. These risk factors should be carefully considered with the information provided elsewhere in this report, which could materially adversely affect our business, financial condition or results of operations.
As disclosed in more detail in Note 2 to the Condensed Consolidated Financial Statements to this Quarterly Report on Form 10-Q, on April 5, 2018, the Forward Split became effective. As a result, the number of authorized shares of our common stock increased from 50,000,000 shares to 200,000,000 shares, our outstanding common stock increased from 800,000 shares to 3,200,000 shares and our outstanding Series A Preferred Stock increased from 1,000 shares to 4,000 shares. The number of shares available for issuance under our 2002 Plan and our 2005 Plan, as well as all awards outstanding under those plans also increased at the same four-shares-for-one-share ratio, and the exercise prices of stock options outstanding at the time of the Forward Split were adjusted to reflect the Forward Split. On April 6, 2018, the date immediately following the effective date of the Forward Split, the 2018 Plan became effective.
On May 14, 2018, we entered into the Cancellation Agreements with certain executive officers, directors and other senior level employees/consultants of the Company, pursuant to which such Optionholders agreed to the surrender and cancellation of certain previously granted stock options to purchase shares of the Company’s common stock pursuant to our 2002 Plan and our 2005 Plan. Under the terms of the Cancellation Agreements, each Optionholder and the Company acknowledged and agreed that the surrender and cancellation of the Cancelled Options was without any expectation on the part of the Optionholder to receive, and without any obligation on our part to pay or grant, any cash, equity awards or other consideration presently or in the future with respect to the Cancelled Options.
The executive officers and directors that entered into Cancellation Agreements and the aggregate number of shares of our common stock underlying the Cancelled Options surrendered by each such officer and/or director are as follows:
| | Cancelled Option Amount | |
Name of Optionholder | | Pre-Forward Split | | | Post-Forward Split | |
Tom Kubota | | | 50,000 | | | | 200,000 | |
Fred Odaka | | | 11,000 | | | | 44,000 | |
Kristina Kubota | | | 1,000 | | | | 4,000 | |
Lauren Kubota | | | 1,000 | | | | 4,000 | |
Two senior level employees/consultants of the Company surrendered Cancelled Options covering a total of 22,000 pre-Forward Split (88,000 post-Forward Split) shares.
The foregoing description of the Cancellation Agreements is qualified by reference to the full text of the Stock Option Cancellation Agreement, the form of which is filed herewith as Exhibit 99.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
Following the surrender and cancellation of the Cancelled Options there were no awards outstanding under the 2002 Plan or the 2005 Plan and pursuant to the provisions of the 2002 Plan and the 2005 Plan, our board of directors terminated the 2002 Plan and the 2005 Plan.
Exhibits. The following exhibits are filed or furnished, as applicable, as part of this report:
| Exhibit Number | | Title of Document |
| | | |
| Exhibit 4.1 | | |
| | | |
| Exhibit 31.1 | | |
| | | |
| Exhibit 31.2 | | |
| | | |
| Exhibit 32.1 | | |
| | | |
| Exhibit 99.1 | | |
| | | |
| Exhibit 101 | | The following materials from Pacific Health Care Organization, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2017,March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Unaudited Condensed Consolidated Financial Statements. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | PACIFIC HEALTH CARE ORGANIZATION, INC. |
| | | |
| | | |
Date: | November 14, 2017May 15, 2018 | /s/ Tom Kubota | |
| | Tom Kubota Chief Executive Officer |
| | | |
Date: | November 14, 2017May 15, 2018 | /s/ Fred Odaka | |
| | Fred Odaka Chief Financial Officer |