UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From ________ to _________ |
Commission File Number 000-50009
PACIFIC HEALTH CARE ORGANIZATION, INC. | |
(Exact name of registrant as specified in its charter) | |
Utah | 87-0285238 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer I.D. No.) |
1201 Dove Street, Suite 300 | |
Newport Beach, California | 92660 |
(Address of principal executive offices) | (Zip Code) |
(949) 721-8272
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large“large accelerated filer,,” “accelerated filer”“accelerated filer”, “smaller“smaller reporting company”company” and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer (Do not check if a smaller reporting company) ☐ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
As of MayNovember 14, 2018, the registrant had 3,200,000 shares of common stock, par value $0.001, issued and outstanding.
PACIFIC HEALTH CARE ORGANIZATION, INC.
FORM 10-Q
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PART I — FINANCIAL INFORMATION | ||
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PART II — OTHER INFORMATION | ||
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PART I. FINANCIAL INFORMATION
Pacific Health Care Organization, Inc.
(Unaudited)
| ASSETS | ||||||||
| March 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Current Assets | ||||||||
| Cash | $ | 6,705,681 | $ | 5,815,071 | ||||
| Accounts receivable, net of allowance of $60,150 and $60,150 | 663,323 | 1,041,242 | ||||||
| Deferred tax assets | 43,670 | 43,670 | ||||||
| Prepaid expenses | 170,657 | 166,782 | ||||||
| Total current assets | 7,583,331 | 7,066,765 | ||||||
| Property and Equipment, net | ||||||||
| Computer equipment | 366,616 | 363,627 | ||||||
| Furniture and fixtures | 209,778 | 209,779 | ||||||
| Office equipment | 15,595 | 15,595 | ||||||
| Total property and equipment | 591,989 | 589,001 | ||||||
| Less: accumulated depreciation and amortization | (438,368 | ) | (422,024 | ) | ||||
| Net property and equipment | 153,621 | 166,977 | ||||||
| Other assets | 26,788 | 26,788 | ||||||
| Total assets | $ | 7,763,740 | $ | 7,260,530 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 23,913 | $ | 71,138 | ||||
| Accrued expenses | 250,793 | 255,205 | ||||||
| Income tax payable | 237,691 | 81,715 | ||||||
| Dividends payable | 56,923 | 56,923 | ||||||
| Unearned revenue | 38,689 | 38,357 | ||||||
| Deferred rent expense | 34,072 | 35,214 | ||||||
| Total current liabilities | 642,081 | 538,552 | ||||||
| Total Liabilities | 642,081 | 538,552 | ||||||
| Commitments and Contingencies | - | - | ||||||
| Shareholder’s Equity | ||||||||
Preferred stock; 5,000,000 shares authorized at $0.001 par value of which 10,000 shares designated as Series A preferred and 4,000 shares issued and outstanding at March 31, 2018 and December 31, 2017. | 4 | 4 | ||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 3,200,000 shares issued and outstanding | 3,200 | 3,200 | ||||||
| Additional paid-in capital | 1,237,348 | 1,237,348 | ||||||
| Deferred stock compensation | (811,679 | ) | (811,679 | ) | ||||
| Retained earnings | 6,692,786 | 6,293,105 | ||||||
| Total stockholders’ equity | 7,121,659 | 6,721,978 | ||||||
| Total liabilities and stockholders’ equity | $ | 7,763,740 | $ | 7,260,530 | ||||
ASSETS | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
Current Assets | ||||||||
Cash | $ | 6,846,162 | $ | 5,815,071 | ||||
Accounts receivable, net of allowance of $25,150 and $60,150 | 985,737 | 1,041,242 | ||||||
Deferred tax asset | 43,670 | 43,670 | ||||||
Prepaid income tax | 20,692 | - | ||||||
Prepaid expenses | 190,123 | 166,782 | ||||||
Total current assets | 8,086,384 | 7,066,765 | ||||||
Property and Equipment, net | ||||||||
Computer equipment | 393,904 | 363,627 | ||||||
Furniture and fixtures | 215,959 | 209,779 | ||||||
Office equipment | 9,556 | 15,595 | ||||||
Total property and equipment | 619,419 | 589,001 | ||||||
Less: accumulated depreciation and amortization | (472,223 | ) | (422,024 | ) | ||||
Net property and equipment | 147,196 | 166,977 | ||||||
Other assets | 26,788 | 26,788 | ||||||
Total Assets | $ | 8,260,368 | $ | 7,260,530 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 39,857 | $ | 71,138 | ||||
Accrued expenses | 349,549 | 255,205 | ||||||
Credit card payable | 1,647 | - | ||||||
Income tax payable | - | 81,715 | ||||||
Deferred rent expense | 28,767 | 35,214 | ||||||
Dividend payable | 37,000 | 56,923 | ||||||
Unearned revenue | 39,659 | 38,357 | ||||||
Total current liabilities | 496,479 | 538,552 | ||||||
Total Liabilities | 496,479 | 538,552 | ||||||
Commitments and Contingencies | - | - | ||||||
Stockholders’ Equity | ||||||||
Preferred stock, 5,000,000 shares authorized at $0.001 par value of which 10,000 shares designated as Series A preferred and 4,000 shares issued and outstanding at September 30, 2018 and December 31, 2017 | 4 | 4 | ||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 3,200,000 shares issued and outstanding at September 30, 2018 and December 31, 2017 | 3,200 | 3,200 | ||||||
Additional paid-in capital | 425,669 | 1,237,348 | ||||||
Deferred stock compensation | - | (811,679 | ) | |||||
Retained earnings | 7,335,016 | 6,293,105 | ||||||
Total stockholders’ equity | 7,763,889 | 6,721,978 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 8,260,368 | $ | 7,260,530 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Pacific Health Care Organization, Inc.
(Unaudited)
For three months ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenues: | ||||||||
| HCO fees | $ | 399,442 | $ | 302,569 | ||||
| MPN fees | 134,644 | 138,281 | ||||||
| NCM fees | 582,569 | 587,236 | ||||||
| UR fees | 287,021 | 237,045 | ||||||
| MBR fees | 114,039 | 156,778 | ||||||
| Other | 65,594 | 119,347 | ||||||
| Total revenues | 1,583,309 | 1,541,256 | ||||||
| Expenses: | ||||||||
| Depreciation | 16,344 | 19,827 | ||||||
| Bad debt provision | - | (3,250 | ) | |||||
| Consulting fees | 78,814 | 77,260 | ||||||
| Salaries and wages | 491,478 | 588,657 | ||||||
| Professional fees | 77,470 | 82,084 | ||||||
| Insurance | 67,029 | 87,275 | ||||||
| Outsource service fees | 95,881 | 112,748 | ||||||
| Data maintenance | 32,431 | 34,619 | ||||||
| General and administrative | 168,205 | 161,388 | ||||||
| Total expenses | 1,027,652 | 1,160,608 | ||||||
| Income from operations | 555,657 | 380,648 | ||||||
| Other expense | - | - | ||||||
| Total other expense | - | - | ||||||
| Income before taxes | 555,657 | 380,648 | ||||||
| Income tax provision | (155,976 | ) | (158,391 | ) | ||||
| Net income | $ | 399,681 | $ | 222,257 | ||||
| Basic earnings per share: | ||||||||
| Earnings per share amount | $ | 0.12 | $ | 0.07 | ||||
| Basic common shares outstanding | 3,200,000 | 3,200,000 | ||||||
| Fully diluted earnings per share: | ||||||||
| Earnings per share amount | $ | 0.11 | $ | 0.07 | ||||
| Fully diluted common shares outstanding | 3,544,000 | 3,204,000 | ||||||
For three months ended September 30, | For nine months ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | ||||||||||||||||
HCO fees | $ | 372,664 | $ | 377,923 | $ | 1,132,371 | $ | 1,041,328 | ||||||||
MPN fees | 128,113 | 142,257 | 393,390 | 427,228 | ||||||||||||
UR fees | 327,744 | 277,886 | 914,262 | 788,229 | ||||||||||||
MBR fees | 140,084 | 147,094 | 380,293 | 481,352 | ||||||||||||
NCM fees | 624,655 | 582,544 | 1,822,826 | 1,824,121 | ||||||||||||
Other | 83,049 | 73,203 | 277,993 | 255,542 | ||||||||||||
Total revenues | 1,676,309 | 1,600,907 | 4,921,135 | 4,817,800 | ||||||||||||
Expenses | ||||||||||||||||
Depreciation and amortization | 17,412 | 19,462 | 50,199 | 58,859 | ||||||||||||
Bad debt provision | - | 15,750 | (35,000 | ) | 30,500 | |||||||||||
Consulting fees | 91,619 | 90,079 | 255,882 | 246,073 | ||||||||||||
Salaries and wages | 644,407 | 547,963 | 1,763,235 | 1,734,321 | ||||||||||||
Professional fees | 91,080 | 109,064 | 246,293 | 308,295 | ||||||||||||
Insurance | 73,042 | 79,489 | 213,242 | 257,495 | ||||||||||||
Outsource service fees | 92,122 | 146,287 | 351,962 | 404,538 | ||||||||||||
Data maintenance | 16,661 | 12,160 | 65,890 | 71,261 | ||||||||||||
General and administrative | 209,156 | 162,164 | 560,928 | 495,474 | ||||||||||||
Total expenses | 1,235,499 | 1,182,418 | 3,472,631 | 3,606,816 | ||||||||||||
Income from operations | 440,810 | 418,489 | 1,448,504 | 1,210,984 | ||||||||||||
Income before taxes | 440,810 | 418,489 | 1,448,504 | 1,210,984 | ||||||||||||
Income tax provision | 123,734 | 174,560 | 406,593 | 504,318 | ||||||||||||
Net income | $ | 317,076 | $ | 243,929 | $ | 1,041,911 | $ | 706,666 | ||||||||
Basic and fully diluted earnings per share: | ||||||||||||||||
Earnings per share amount | $ | 0.10 | $ | .08 | $ | 0.33 | $ | 0.22 | ||||||||
Weighted average common shares outstanding | 3,204,000 | 3,204,000 | 3,204,000 | 3,204,000 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Pacific Health Care Organization, Inc.
(Unaudited)
Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 399,681 | $ | 222,257 | ||||
| Adjustments to reconcile net income to net cash: | ||||||||
| Increase in depreciation and amortization | 16,344 | 19,827 | ||||||
| Changes in operating assets and liabilities | ||||||||
| (Decrease) in bad debt provision | - | (3,250 | ) | |||||
| Decrease (increase) in accounts receivable | 377,919 | (286,412 | ) | |||||
| (Increase) in prepaid expenses | (3,875 | ) | (5,692 | ) | ||||
| (Decrease) in accounts payable | (47,225 | ) | (53,418 | ) | ||||
| (Decrease) increase in deferred rent expense | (1,142 | ) | 469 | |||||
| (Decrease) increase in accrued expenses | (4,412 | ) | 35,854 | |||||
| Increase in income tax payable | 155,976 | 158,391 | ||||||
| Increase (decrease) in unearned revenue | 332 | (932 | ) | |||||
| Net cash provided in operating activities | 893,598 | 87,094 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of furniture and office equipment | (2,988 | ) | (5,754 | ) | ||||
| Net cash used in investing activities | (2,988 | ) | (5,754 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net cash used in financing activities | - | - | ||||||
| Increase in cash | 890,610 | 81,340 | ||||||
| Cash at beginning of period | 5,815,071 | 5,005,617 | ||||||
| Cash at end of period | $ | 6,705,681 | $ | 5,086,957 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes paid | $ | - | $ | - | ||||
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,041,911 | $ | 706,666 | ||||
Adjustments to reconcile net income to net cash from operations: | ||||||||
Depreciation and amortization | 50,199 | 58,859 | ||||||
(Decrease) in bad debt provision | (35,000 | ) | (4,000 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in accounts receivable | 90,505 | (132,139 | ) | |||||
(Increase) in prepaid expenses | (23,341 | ) | (6,088 | ) | ||||
(Increase) in prepaid income tax | (20,692 | ) | - | |||||
(Decrease) in accounts payable | (31,281 | ) | (38,370 | ) | ||||
(Decrease) increase in deferred rent expense | (6,447 | ) | 21,873 | |||||
Increase in accrued expenses | 94,344 | 25,536 | ||||||
Increase in credit card payable | 1,647 | - | ||||||
(Decrease) in income tax payable | (81,715 | ) | (10,111 | ) | ||||
Increase (decrease) in unearned revenue | 1,302 | (985 | ) | |||||
Net cash provided from operating activities | 1,081,432 | 621,241 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of computer equipment, furniture and office equipment | (30,418 | ) | (13,446 | ) | ||||
Net cash used in investing activities | (30,418 | ) | (13,446 | ) | ||||
Cash flows from financing activities: | ||||||||
Issuance of cash dividend | (19,923 | ) | - | |||||
Net cash used in financing activities | (19,923 | ) | - | |||||
Increase in cash | 1,031,091 | 607,795 | ||||||
Cash at beginning of period | 5,815,071 | 5,005,617 | ||||||
Cash at end of period | $ | 6,846,162 | $ | 5,613,412 | ||||
Supplemental cash flow information | ||||||||
Cash paid for: | ||||||||
Interest | $ | - | $ | - | ||||
Net income taxes paid | $ | 558,999 | $ | 514,429 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Pacific Health Care Organization, Inc.
For the ThreeNine Months Ended March 31,September 30, 2018
(Unaudited)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”) and in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in consolidated financial statements have been condensed or omitted in accordance with GAAP rules and regulations. The information furnished in these interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the condensed consolidated financial statements and the revenues recognized and expenses incurred during the reporting period. These estimates and assumptions affect the Company’s recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. The reasonableness of these estimates and assumptions is evaluated continually based on a combination of historical information and other information that comes to the Company’s attention that may vary its outlook for the future. While management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its annual report on Form 10-K for the year ended December 31, 2017. Operating results for the threenine months ended March 31,September 30, 2018, are not necessarily indicative of the results to be expected for the year ending December 31, 2018.
Principles of Consolidation
— The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.Basis of Accounting
— The Company uses the accrual method of accounting.Revenue Recognition
— In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Either a retrospective or cumulative effect transition method, referred to as the modified retrospective method, is permitted. The Company adopted Topic 606 on January 1, 2018, using the modified retrospective method. The adoption of Topic 606 had no material impact on the Company’s interim financial statements.The core principle underlying Topic 606 is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue.
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2018
(Unaudited)
The Company derives its revenue from the sale of managed care, bill review, utilization review and nurse case management services. These services are billed individually as separate components to our customers. These fees include monthly administration fees, claim network fees, legal support fees, Medicare-set-asideMedicare set-aside fees, lien service fees, workers’ compensation carve-outs, flat rate fees or hourly fees depending on the agreement with the client.
The Company enters into arrangements for bundled managed care which includes various units of accounting such as network solutions and patient management, including managed care. Such elements are considered separate units of accounting due to each element having value to the customer on a stand-alone basis and are billed separately. The selling price for each unit of accounting is determined using the contract price. When the Company’s customers purchase several products the pricing of the products sold is generally the same as if the products were sold on an individual basis. Revenue is recognized as the work is performed in accordance with the Company’s customer contracts. Based upon the nature of the Company’s products, bundled managed care elements are generally delivered in the same accounting period. The Company recognizes revenue for patient management services ratably over the life of the customer contract. Based upon prior experience in managed care, the Company estimates the deferral amount from when the customer’s claim is received to when the customer contract expires. Advance payments from subscribers and billings made in advance are recorded on the balance sheet as deferred revenue.
Accounts Receivables and Bad Debt Allowance
– In the normal course of business the Company extends credit to its customers on a short-term basis. Although the credit risk associated with these customers is minimal, the Company routinely reviews its accounts receivable balances and makes provisions for doubtful accounts. The Company ages its receivables by date of invoice. Management reviews bad debt reserves quarterly and reserves specific accounts as warranted or sets up a general reserve based on amounts over 90 days past due. When an account is deemed uncollectible, the Company charges off the receivable against the bad debt reserve. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes. In order to assess the collectability of these receivables, the Company performs ongoing credit evaluations of its customers’ financial condition. Through these evaluations, the Company may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit rating or bankruptcy. The allowance for doubtful accounts is based on the best information available to the Company and is reevaluated and adjusted as additional information is received. We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy. AtThe percentages of the amounts due from major customers to total accounts receivable as of March 31,September 30, 2018 and December 31, 2017, are as follows:
| 3/31/2018 | 12/31/2017 | |||||||
| Customer A | 27 | % | 35 | % | ||||
| Customer B | 0 | % | 13 | % | ||||
| Customer C | 11 | % | 5 | % | ||||
9/30/2018 | 12/31/2017 | |||||||
Customer A | 28 | % | 35 | % | ||||
Customer B | 12 | % | 13 | % | ||||
Customer C | 11 | % | 5 | % | ||||
Significant Customers -
We provide services to insurers, third party administrators, self-administered employers, municipalities and other industries. We are able to provide our full range of services to virtually any size employer in the state of California. We are also able to provideDuring the period ended March 31,September 30, 2018 and 2017, we had twothree customers that accounted for more than 10% of our total sales. The following table sets forth details regarding the percentage of total sales attributable to our significant customers in the past two years:
9/30/2018 | 9/30/2017 | |||||||
Customer A | 28 | % | 20 | % | ||||
Customer B | 12 | % | 13 | % | ||||
Customer C | 11 | % | 11 | % | ||||
| 3/31/2018 | 3/31/2017 | |||||||
| Customer A | 32 | % | 18 | % | ||||
| Customer B | 11 | % | 7 | % | ||||
| Customer C | 6 | % | 13 | % | ||||
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2018
(Unaudited)
NOTE 2 - SUBSEQUENT EVENTS
In accordance with ASC 855-10 Company management reviewed all material events through the date of issuance and other than disclosed in this Note 2 there are no material subsequent events to report.
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 risksrisk 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
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/employers’employer’s involvement in employee medical treatment claims administration and patient treatment options, we also provide to our HCO and MPN clients severala number of 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.
Results of Operations
Comparison of the three months ended September 30, 2018 and 2017
The following represents selected components of our consolidated results of operations, for the three-month periodperiods ended March 31,September 30, 2018 and 2017, respectively, together with changes from period-to-period:
For three months ended September 30, | ||||||||||||||||
2018 | 2017 | Amount Change | % Change | |||||||||||||
Revenues: | ||||||||||||||||
HCO fees | $ | 372,664 | $ | 377,923 | $ | (5,259 | ) | -1 | % | |||||||
MPN fees | 128,113 | 142,257 | (14,144 | ) | -10 | % | ||||||||||
NCM fees | 624,655 | 582,544 | 42,111 | 7 | % | |||||||||||
UR fees | 327,744 | 277,886 | 49,858 | 18 | % | |||||||||||
MBR fees | 140,084 | 147,094 | (7,010 | ) | -5 | % | ||||||||||
Other | 83,049 | 73,203 | 9,846 | 13 | % | |||||||||||
Total revenues | 1,676,309 | 1,600,907 | 75,402 | 5 | % | |||||||||||
Expense: | ||||||||||||||||
Depreciation and amortization | 17,412 | 19,462 | (2,050 | ) | -11 | % | ||||||||||
Bad debt provision | - | 15,750 | (15,750 | ) | -100 | % | ||||||||||
Consulting fees | 91,619 | 90,079 | 1,540 | 2 | % | |||||||||||
Salaries and wages | 644,407 | 547,963 | 96,444 | 18 | % | |||||||||||
Professional fees | 91,080 | 109,064 | (17,984 | ) | -16 | % | ||||||||||
Insurance | 73,042 | 79,489 | (6,447 | ) | -8 | % | ||||||||||
Outsource service fees | 92,122 | 146,287 | (54,165 | ) | -37 | % | ||||||||||
Data maintenance | 16,661 | 12,160 | 4,501 | 37 | % | |||||||||||
General and administrative | 209,156 | 162,164 | 46,992 | 29 | % | |||||||||||
Total expenses | 1,235,499 | 1,182,418 | 53,081 | 4 | % | |||||||||||
Income from operations | 440,810 | 418,489 | 22,321 | 5 | % | |||||||||||
Income before taxes | 440,810 | 418,489 | 22,321 | 5 | % | |||||||||||
Income tax provision | 123,734 | 174,560 | (50,826 | ) | -29 | % | ||||||||||
Net income | $ | 317,076 | $ | 243,929 | $ | 73,147 | 30 | % | ||||||||
| For three months ended March 31, | ||||||||||||||||
| 2018 | 2017 | Amount Change | % Change | |||||||||||||
| Revenues: | ||||||||||||||||
| HCO fees | $ | 399,442 | $ | 302,569 | $ | 96,873 | 32 | % | ||||||||
| MPN fees | 134,644 | 138,281 | (3,637 | ) | (3 | %) | ||||||||||
| NCM fees | 582,569 | 587,236 | (4,667 | ) | (1 | %) | ||||||||||
| UR fees | 287,021 | 237,045 | 49,976 | 21 | % | |||||||||||
| MBR fees | 114,039 | 156,778 | (42,739 | ) | (27 | %) | ||||||||||
| Other | 65,594 | 119,347 | (53,753 | ) | (45 | %) | ||||||||||
| Total revenues | 1,583,309 | 1,541,256 | 42,053 | 3 | % | |||||||||||
| Expense: | ||||||||||||||||
| Depreciation | 16,344 | 19,827 | (3,483 | ) | (18 | %) | ||||||||||
| Bad debt provision | - | (3,250 | ) | 3,250 | 100 | % | ||||||||||
| Consulting fees | 78,814 | 77,260 | 1,554 | 2 | % | |||||||||||
| Salaries and wages | 491,478 | 588,657 | (97,179 | ) | (17 | %) | ||||||||||
| Professional fees | 77,470 | 82,084 | (4,614 | ) | (6 | %) | ||||||||||
| Insurance | 67,029 | 87,275 | (20,246 | ) | (23 | %) | ||||||||||
| Outsource service fees | 95,881 | 112,748 | (16,867 | ) | (15 | %) | ||||||||||
| Data maintenance | 32,431 | 34,619 | (21,188 | ) | (6 | %) | ||||||||||
| General and administrative | 168,205 | 161,388 | 6,817 | 4 | % | |||||||||||
| Total expenses | 1,027,652 | 1,160,608 | (132,956 | ) | (11 | %) | ||||||||||
| Income from operations | 555,657 | 380,648 | 175,009 | 46 | % | |||||||||||
| Income before taxes | 555,657 | 380,648 | 175,009 | 46 | % | |||||||||||
| Income tax provision | 155,976 | 158,391 | (2,415 | ) | (2 | %) | ||||||||||
| Net income | $ | 399,681 | $ | 222,257 | $ | 177,424 | 80 | % | ||||||||
Revenue
Total revenues during the three-month period ended March 31,September 30, 2018, increased 3%5% to $1,583,309$1,676,309 compared to $1,541,256$1,600,907 during the three-month period ended March 31,September 30, 2017.
During the firstthird quarter 2018, HCOnurse case management, utilization review, and URother fees increased 32%7%, 18%, and 21%,13% respectively, while MPN, MBR, NCMHCO, and other revenuemedical bill review decreased by 3%, 27%10%, 1% and 45%5%, 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 March 31,September 30, 2018 and 2017, HCO fee revenues were $399,442$372,664 and $302,569$377,923, respectively. The 32%1% decrease in HCO revenue was primarily attributable to the loss of a customer at the end of our first quarter of 2018.
MPN fees
MPN fee revenue for the three-month periods ended September 30, 2018 and 2017, were $128,113 and $142,257, respectively, a decrease of 10%, due to the loss of one customer at the beginning of our fourth quarter of 2017 and one customer at the end of our first quarter of 2018.
NCM fees
During the three months ended September 30, 2018 and 2017, nurse case management revenue was $624,655 and $582,544, respectively. The increase in nurse case management revenue of $42,111 was primarily from a new customer and the hiring of additional nurse case managers to handle more claims.
UR fees
During the three-month periods ended September 30, 2018 and 2017, utilization review revenue was $327,744 and $277,886, respectively. The increase of $49,858 in the 2018 period was primarily attributable to the increase in utilization review referrals from existing customers and the addition of two new customers.
MBR fees
During the three-month period ended September 30, 2018, medical bill review revenue decreased $7,010 to $140,084 when compared to the same period a year earlier. This decrease was mainly caused by processing fewer hospital bills from existing customers. We believe this decrease in hospital bill reviews is principally the result of the implementation of hospital fee schedules. Many of our existing customers have elected to pay the fee schedule, as opposed to having us review their hospital bills. 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. Our medical bill review 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 workers’ compensation carve-out services. Other fee revenue for three-month periods ended September 30, 2018 and 2017, were $83,049 and $73,203, respectively. The increase of $9,846 was the result of current clients referring more Medicare set-asides to be processed. We recorded no carve-out, lien representation, or legal support services during the three-month period ended September 30, 2018.
Expenses
Total expenses for the three months ended September 30, 2018 and 2017, were $1,235,499 and $1,182,418, respectively. The increase of $53,081 was the result of increases in consulting fees, salaries and wages, data maintenance expense, and general and administrative expense partially offset by decreases in depreciation and amortization, bad debt provision, professional fees, insurance and outsource service fees.
Depreciation and Amortization
During the three-month period ended September 30, 2018, we recorded depreciation and amortization expense of $17,412 compared to $19,462 during the comparable 2017 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the three-months ended September 30, 2018.
Bad Debt Provision
During the three-month period ended September 30, 2018, bad debt provision decreased to $0 from $15,750 during the three-month period ended September 30, 2017. This decrease was primarily the result of clients paying certain invoices that were outstanding over 90 days during fiscal 2018.
Consulting Fees
During the three months ended September 30, 2018, consulting fees increased to $91,619 from $90,079 during the three months ended September 30, 2017. This increase was primarily the result of a net increase in consulting fees resulting from hiring a new consultant. This expense was partially offset by the termination of another consultant.
Salaries and Wages
During the three-month period ended September 30, 2018, salaries and wages increased 18% to $644,407 compared to $547,963 during the same period in 2017. The increase in salaries and wages of $96,444 was primarily the result of hiring a Director of Healthcare and other employees for various departments.
Professional Fees
For the three months ended September 30, 2018, we incurred professional fees of $91,080 compared to $109,064 during the three months ended September 30, 2017. The $17,984 decrease in professional fees was primarily the decrease in medical consultant fees partially offset by a net increase in other professional fees.
Insurance
During the three-month period ended September 30, 2018, we incurred insurance expenses of $73,042, an 8% decrease over the same three-month period in 2017. This decrease in insurance expense was primarily attributable to lower group health insurance premiums when compared to the same period in 2017 because we had fewer employees in the 2018 period. We do not expect current insurance fees to increase significantly over the remaining months of 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 field case management fees and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services. We incurred $92,122 and $146,287 in outsource service fees during the three-month periods ended September 30, 2018 and 2017, respectively. The decrease of $54,165 was primarily the result of decreases in outsource services required for utilization review, medical bill review and nurse case management. 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 periods ended September 30, 2018 and 2017, data maintenance fees were $16,661 and $12,160, respectively. The increase of $4,501 was primarily the result of higher levels of customer notification fees realized for new and existing customers during the three-month period ended September 30, 2018 when compared to the same period in 2017. Data maintenance fees tend to fluctuate from month to month depending on when new customers are enrolled, when the annual renewal of existing customer notification is due, and how many new employees our customers enroll in our HCO or MPN program.
General and Administrative
During the three-month period ended September 30, 2018, general and administrative expenses increased 29% to $209,156 when compared to the three-month period ended September 30, 2017. This increase of $46,992 was primarily attributable to increases in auto expense, dues and subscriptions, licenses and permits, parking, rent-expense equipment, rent expense, and transfer agent fees partially offset by decreases in IT enhancement, postage and delivery, and travel and entertainment. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2018.
Income from Operations
As a result of the 5% increase in total revenue during the three-month period ended September 30, 2018, which was partially offset by the 4% increase in total expenses during the same period, our income from operations increased by 5% during the three-month period ended September 30, 2018, when compared to the same period in 2017.
Income Tax Provision
We realized income before taxes of $440,810 and $418,489 during the three-month periods ended September 30, 2018 and 2017, respectively. However, we realized a $50,826, or 29%, decrease in our income tax provision. The lower provision of income taxes was the result of implementing the lower corporate tax rate at the beginning of fiscal 2018 partially offset by higher income taxes resulting from the increase in income before taxes.
Net Income
During the three-month period ended September 30, 2018, total revenues of $1,676,309 was 5% higher when compared to the same period in 2017. This increase in total revenues was partially offset by a 4% increase in total expenses, resulting in a 5% increase in income from operations compared to the three months ended September 30, 2017. Correspondingly, we realized net income of $317,076 for the three-month period ended September 30, 2018, which reflects a 30% increase compared to the three-month period ended September 30, 2017.
Comparison of nine months ended September 30, 2018 and 2017
The following represents selected components of our consolidated results of operations, for the nine-month periods ended September 30, 2018 and 2017, respectively, together with changes from period-to-period:
For nine months ended September 30, | ||||||||||||||||
2018 | 2017 | Amount Change | % Change | |||||||||||||
Revenues: | ||||||||||||||||
HCO fees | $ | 1,132,371 | $ | 1,041,328 | $ | 91,043 | 9 | % | ||||||||
MPN fees | 393,390 | 427,228 | (33,838 | ) | -8 | % | ||||||||||
NCM fees | 1,822,826 | 1,824,121 | (1,295 | ) | -0 | % | ||||||||||
UR fees | 914,262 | 788,229 | 126,033 | 16 | % | |||||||||||
MBR fees | 380,293 | 481,352 | (101,059 | ) | -21 | % | ||||||||||
Other | 277,993 | 255,542 | 22,451 | 9 | % | |||||||||||
Total revenues | 4,921,135 | 4,817,800 | 103,335 | 2 | % | |||||||||||
Expense: | ||||||||||||||||
Depreciation and amortization | 50,199 | 58,859 | (8,660 | ) | -15 | % | ||||||||||
Bad debt provision | (35,000 | ) | 30,500 | (65,500 | ) | -215 | % | |||||||||
Consulting fees | 255,882 | 246,073 | 9,809 | 4 | % | |||||||||||
Salaries and wages | 1,763,235 | 1,734,321 | 28,914 | 2 | % | |||||||||||
Professional fees | 246,293 | 308,295 | (62,002 | ) | -20 | % | ||||||||||
Insurance | 213,242 | 257,495 | (44,253 | ) | -17 | % | ||||||||||
Outsource service fees | 351,962 | 404,538 | (52,576 | ) | -13 | % | ||||||||||
Data maintenance | 65,890 | 71,261 | (5,371 | ) | -8 | % | ||||||||||
General and administrative | 560,928 | 495,474 | 65,454 | 13 | % | |||||||||||
Total expenses | 3,472,631 | 3,606,816 | (134,185 | ) | -4 | % | ||||||||||
Income from operations | 1,448,504 | 1,210,984 | 237,520 | 20 | % | |||||||||||
Income before taxes | 1,448,504 | 1,210,984 | 237,520 | 20 | % | |||||||||||
Income tax provision | 406,593 | 504,318 | (97,725 | ) | -19 | % | ||||||||||
Net income | $ | 1,041,911 | $ | 706,666 | $ | 335,245 | 47 | % | ||||||||
Revenue
Total revenues during the nine-month period ended September 30, 2018, increased 2% to $4,921,135 compared to $4,817,800 during the nine-month period ended September 30, 2017.
During the first nine-months of 2018, HCO, utilization review, and other revenue increased 9%, 16% and 9% respectively, while MPN and medical bill review decreased by 8% and 21%, respectively. NCM revenue was slightly lower. 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 September 30, 2018 and 2017, HCO fee revenues were $1,132,371 and $1,041,328 respectively. The 9% increase in HCO revenue was primarily attributable to adding two newincreases by one major client, partially offset by lower revenues from several existing HCO customers increased employee enrollment and rate increaseswhen compared to the same period in program administration services.2017.
MPN fee revenue for the three-monthnine-month periods ended March 31,September 30, 2018 and 2017, was $134,644$393,390 and $138,281,$427,228 respectively, a decrease of 3%8%, resulting from one customer phasing out its business through bankruptcy.
NCM fees
During the three monthsnine-months ended March 31,September 30, 2018 and 2017, nurse case management revenue was $582,569$1,822,826 and $587,236,$1,824,121, respectively. The decrease in nurse case management revenue of $4,667$1,295 was primarily the result of losing a net decreasecustomer during our first quarter 2018 which was partially offset by increases in case management activity duringrevenues from existing customers and gaining one new customer. As a result of losing a significant customer in the first quarter 2018, there is no assurance that nurse case management revenue will decrease at the rate realized during the nine months ended September 30, 2018, for the remainder of 2018 when compared to the same period in 2017.
UR fees
During the three-monthnine-month periods ended March 31,September 30, 2018 and 2017, utilization review revenue was $287,021$914,262 and $237,045,$788,229, respectively. The increase of $49,976$126,033 in the 2018 period was primarily attributable to increased utilization reviewsvolume from existing customers and the addition of two major customers.new customers in third quarter 2018. 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-monthnine-month period ended March 31,September 30, 2018, medical bill review revenue decreased $42,739$101,059 to $114,039$380,293 when compared to the same period a year earlier. This 21% decrease was mainly caused by terminationsprocessing fewer hospital bills from existing customers. As mentioned above, we believe this decrease in hospital bill reviews is principally the result of threethe implementation of hospital fee schedules. Many of our existing customers during fiscal 2017. Medical bill review involves analyzing medical provider services and equipment billinghave elected to ascertain proper reimbursement. Such services include, but are not limited to, coding review and rebundling, confirming thatpay the services are customary and reasonable, fee schedule, compliance, out-of-network billas opposed to having us 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 workers’ compensation carve-outscarve-out services. Other feefees revenue for three-monthnine-month periods ended March 31,September 30, 2018 and 2017, was $65,594were
$277,993 and $119,347,$255,542, respectively. The decreaseincrease of $53,753$22,451 was primarily the result of lower levels of network access revenuesincreased Medicare set-aside referrals. We did not record any revenue for lien representation, legal support services, and the loss of one major customer.
Expenses
Total expenses for the three monthsnine-months ended March 31,September 30, 2018 and 2017, were $1,027,652$3,472,631 and $1,160,608,$3,606,816, respectively. The decrease of $132,956$134,185 was the result primarily of lowerdecreases in depreciation, bad debt, professional fees, insurance, outsource service fees and data maintenance, partially offset by increases in consulting fees, salaries and wages professional fees, insurance expense and outsource servicegeneral and administrative fees.
Depreciation and Amortization
During the three-monthnine-month period ended
Bad Debt
During the three-monthnine-month period ended March 31,September 30, 2018, we did not record any bad debt provision which resulted in our allowance for bad debt allowance remaining at $60,150 fordecreased by $65,500 compared to the nine-month period ended March 31, 2018 and 2017.
Consulting Fees
During the net terminationnine-months ended September 30, 2018, consulting fees increased to $255,882 from $246,073, when compared the nine months ended September 30, 2017. This 4% increase was mainly the result of six employees from April 2017hiring a consultant to March 2018. We employed 33assist us in our merger and 39 full-time employees asacquisition strategies.
Salaries and Wages
During the nine-month period ended September 30, 2018, salaries and wages increased 2% to $1,763,235 compared to $1,734,321 during the same period in 2017. This increase was primarily the result of March 31,additional staffing in nurse case management, HCO, MPN, and on July 1, 2018, and 2017, respectively.
Professional Fees
For the three monthsnine-months ended March 31,September 30, 2018, we incurred professional fees of $77,470,$246,293 compared to $82,084$308,295 during the threenine months ended March 31,September 30, 2017. The $4,614 decrease of $62,002 in professional fees was mainlyprimarily the result of decreased professionallower fees paid for accounting, legal, and nurse case management services, partially offset by fee increasesincreased fees for medical consulting and other fees related to our medical consultant.
Insurance
During the three-monthnine-month period ended March 31,September 30, 2018, we incurred insurance expenses of $67,029,$213,242, a 23%17% decrease over the same three-monthnine-month period in 2017. The decrease in insurance expense was primarily attributed to lower workersworkers’ compensation premiums for our employees and directorlower directors’ and officer’sofficers’ insurance premiums during the first three months ofnine-month period ended September 30, 2018 compared to the same period in 2017. We do not expect current insurance fees to moderately increase significantly over the remaining months of 2018.
Outsource Service Fees
Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review, andMedicare set-aside services, field nurse case management services, and typically tends to increase and decreasefluctuate in correspondence with increases and decreases in demand for those services.
We incurred $95,881$351,962 and $112,748$404,538 in outsource service fees during the three-monthnine-month periods ended MarchSeptember 2018 and 2017, respectively. The decrease of $16,867$52,576 was primarily the result of decreases in outsource services required for Medicare-set-aside, NCM and MBR, partially offset by increases in UR.field nurse 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 three-monthnine-month period ended March 31,September 30, 2018 and 2017, data maintenance fees were $32,431$65,890 and $34,619,$71,261, respectively. The decrease of $2,188$5,371 was primarily the result of recording lower levels of notification fees associated withlosing a customer’s annual renewalmajor customer, which was partially offset by increases in data maintenance by other existing customers during the three-monthnine-month period ended March 31,September 30, 2018.
General and Administrative
During the nine-month period ended September 30, 2018, general and administrative expense increased 13% to $560,928 when compared to the same period in 2017.
Income from Operations
As a result of the 3%2% increase in total revenue during the three-monthnine-month period ended March 31,September 30, 2018, togethercoupled with an 11%a 4% decrease in total expenses, our income from operations before taxes increased by 46% whento $1,448,504 a 20% increase compared to the same quarterperiod in 2017.
Income Tax Provision
We realized income before taxes of $555,657$1,448,504 and $380,648$1,210,984 during the three-monthnine-month periods ended March 31,September 30, 2018 and 2017, respectively. AsHowever, as a result of Federal and State incomeimplementing the lower corporate tax reductionsrate at the beginning of approximately 13%fiscal 2018 we realized a $2,415,$97,725, or 2%19%, decrease in our income tax provision.
Net Income
During the three-monthnine-month period ended March 31,September 30, 2018, total revenues of $1,583,309$4,921,135 was 3%2% higher when compared to the same period in 2017. This increase in total revenues together with a decrease of 4% in total expenses of 11% resulted in a 46%20% increase in income from operations compared to the three months ended March 31, 2017.operations. Correspondingly, we realized net income of $399,681$1,041,911 for the three-monthnine-month period ended March 31,September 30, 2018, an 80%a 47% increase compared to the three-monthnine-month period ended March 31,September 30, 2017.
Liquidity and Capital Resources
As of March 31,September 30, 2018, we had cash on hand of $6,705,681$6,846,162 compared to $5,815,071 at December 31, 2017. The $890,610$1,031,091 increase was primarily the result of net cash provided by our operating activities, partially offset by cash used in investing activities and financing activities. NetThe increase in cash provided by ourflow from operating activities was primarily the result of realizingincreases in net income, coupled with increases in accumulated depreciation and amortization, income tax payablecredit card payables, accrued expenses and unearned revenue and decreasesa decrease in accounts receivable and unearned revenues, partially offset by increases in prepaid expense and decreases in accruedbad debt provision, income tax payable, deferred rent expenses, accounts payable and deferred rent.increases in prepaid expenses and prepaid income tax. We used $2,988$30,418 in investing activities for purchases ofto purchase computers, furniture and equipment. Cash for financing activities of $19,923 was used to issue cash dividends previously authorized by the Company. 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 2018, to expand our IT capabilities. We believe we have adequate capital on hand to cover these expenditures and do not anticipate this will require us to seek outside sources of funding.
We continue to investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We are also looking to expand our business into the insurance industry during 2018, but have not identified anyindustry. We are actively conducting a search to for a suitable merger or acquisition candidates or opportunities atinsurance company to acquire. At the current time. Wetime, there is no assurance we can identify a suitable candidate or negotiate acceptable terms of an acquisition. If we do find a suitable acquisition candidate, we anticipate an expansion or acquisition of this sort maywill require greater capital resources than we currently possess. Should we need additional capital resources, we couldpossess, which would likely require us to seek to obtain such through debt and/or equity financing. We 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. The use of our capital stock either for an equity financing or as consideration for an acquisition could lead to substantial dilution to our existing shareholders.
During the threenine months ended March 31,September 30, 2018, cash was primarily used to fund operations. We had a net increase in cash of $890,610$1,031,091 during the threenine months ended March 31, 2018, compared to a net increase of $81,340 during the three months ended March 31, 2017.September 30, 2018. See below for additional information.
| For the three months ended March 31, | ||||||||
2018 (unaudited) | 2017 (unaudited) | |||||||
| Net cash provided by operating activities | $ | 893,598 | $ | 87,094 | ||||
| Net cash used in investing activities | (2,988 | ) | (5,754 | ) | ||||
| Net cash used in financing activities | - | - | ||||||
| Net increase in cash | $ | 890,610 | $ | 81,340 | ||||
For the nine months ended September | ||||||||
2018 (unaudited) | 2017 (unaudited) | |||||||
Net cash provided from operating activities | $ | 1,081,432 | $ | 621,241 | ||||
Net cash used in investing activities | (30,418 | ) | (13,446 | ) | ||||
Net cash used in financing activities | (19,923 | ) | - | |||||
Net increase in cash | $ | 1,031,091 | $ | 607,795 | ||||
During the threenine months ended March 31,September 30, 2018 and 2017, net cash provided by operating activities was $893,598$1,081,432 and $87,094,$621,241, respectively. As discussed herein, we realized net income of $399,681$1,041,911 during the threenine months ended March 31,September 30, 2018, compared to net income of $222,257$706,666 during the threenine months ended March 31,September 30, 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 $2,988$30,418 and $5,754$13,446 during the three-monthnine-month periods ended March 31,September 30, 2018 and 2017, respectively. NetDuring the nine-month periods ended September 30, 2018 and 2017, net cash used in investing activities was lower by $2,766used to purchase computer equipment, furniture and office equipment.
Net cash used in financing activities during the three-monthnine-month periods ended September 30, 2018 and 2017 was $19,923 and $0, respectively. During the 2018 period ended March 31, 2018, becausecertain shareholders submitted the necessary paperwork to receive payment of lower expenditures for computers, furniture, and equipment.
Summary of Material Contractual Commitments
The following is a summary of our material contractual commitments as of March 31,September 30, 2018.
| Payments Due By Period | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
| Operating Leases: | ||||||||||||||||||||
Operating Leases – Equipment(1) | $ | 46,519 | $ | 20,675 | $ | 25,844 | $ | - | $ | - | ||||||||||
Office Leases(2) | $ | 1,031,400 | 255,608 | 775,792 | - | - | ||||||||||||||
| Total Operating Leases | $ | 1,077,919 | $ | 276,283 | $ | 801,636 | $ | - | $ | - | ||||||||||
Payments Due By Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Operating Leases: | ||||||||||||||||||||
Operating Leases – Equipment | $ | 36,182 | $ | 20,675 | $ | 15,507 | $ | - | $ | - | ||||||||||
Office Leases | $ | 903,973 | 238,146 | 665,827 | - | - | ||||||||||||||
Total Operating Leases | $ | 940,155 | $ | 258,821 | $ | 681,334 | $ | - | $ | - | ||||||||||
Off-Balance Sheet Financing Arrangements
As of March 31,September 30, 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.
This information is not required for smaller reporting companies.
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 SEC’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 March 31,September 30, 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 March 31,September 30, 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, 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.
| 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 | ||||||
Exhibits. The following exhibits are filed or furnished, as applicable, as part of this report:
Exhibit Number | Title of Document | ||
Exhibit 31.1 | |||
Exhibit 31.2 | |||
Exhibit 32.1 | |||
Exhibit 101 | The following materials from Pacific Health Care Organization, Inc.’s Quarterly Report on Form 10-Q for the period ended |
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, 2018 | /s/ Tom Kubota | |
Tom Kubota Chief Executive Officer | |||
Date: | November 14, 2018 | /s/ Fred Odaka | |
Fred Odaka Chief Financial Officer | |||