UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549   

FORM 10-Q

Commission File Number 000-50009

(949) 721-8272

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 August 15, 2018,14, 2019, 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

TABLE OF CONTENTS

PART I.   FINANCIAL INFORMATION

Item 1. Financial Information 

Pacific Health Care Organization, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

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

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

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

PacificPacific Health Care Organization, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

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

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 20182019

(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, 2017.2018.  Operating results for the six months ended June 30, 2018,2019, are not necessarily indicative of the results to be expected for the year ending December 31, 2018.2019.

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 Company follows the FASB issued ASU 2014-09,guidance of Accounting Standards Codification (ASC) 606, “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 atcreates 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 Companywhich includes (i) identifyidentifying the contract with the customer, (ii) identifyidentifying the performance obligations in the contract, (iii) determinedetermining the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocateallocating the transaction price to the respective performance obligations in the contract, and (v) recognizerecognizing 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.

In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured. Revenues are generated as services are provided to the customer based on the sales price agreed and collected. The Company recognizes revenue as the time is worked or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred.

The Company derives its revenue from the sale of managed care, bill review, utilization review and nursemedical 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.

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2018

(Unaudited)

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.

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2019

(Unaudited)

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.  At June 30, 20182019 and December 31, 2017,2018, bad debt reserves of $25,150$28,442 and $60,150,$28,442, respectively, was a general reserve for certain balances over 90 days past due and for accounts that are potentially uncollectible.

The percentages of the amounts due from major customers to total accounts receivable as of June 30, 20182019 and December 31, 2017,2018, are as follows:

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 provide utilization review, (“UR”), medical bill review (“MBR”) and nursemedical case management (“NCM”) services outside the state of California. 

During the period ended June 30, 20182019 and 2017,2018, 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:

Leases - Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets of $681,910, lease liabilities for operating leases of $681,910, and a zero cumulative-effect adjustment to accumulated deficit. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (“short-term leases”). Lease expense is recognized on a straight-line basis over the lease term. See Note 2 for further information regarding the impact of the adoption of ASC 842 on the Company’s financial statements.

NOTE 2- OPERATING LEASES

In July 2015, the Company 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 the Company’s principal executive offices, as well as, the principal offices of our operating subsidiaries. In March 2017, the Company entered a 39-month operating lease for an office copy machine with scanner with monthly payment at $1,723, commencing in April 2017.

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2019

(Unaudited)

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.

The components of lease expense and supplemental cash flow information related to leases for the period are as follows:

The supplemental balance sheet information related to leases for the period is as follows:

Maturities of the Company’s lease liabilities are as follows:

Lease expenses were $68,153 and $70,223 during the three months ended June 30, 2019 and 2018, respectively and $154,820 and $159,419 during the six months ended June 30, 2019 and 2018, respectively

NOTE 23 - SUBSEQUENT EVENTS

In accordance with ASC 855-10 Company management reviewed all material events through the date of issuance and there are no material subsequent events to report.

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 risk 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”) and Pacific Medical Holding Company, Inc. (“PMHC”).

Overview

We incorporated under the laws of the state of Utah in April 1970, under the name Clear Air, Inc. We changed our name to Pacific Health Care Organization, Inc., in January 2001. In February 2001, we acquired Medex Healthcare, Inc. (“Medex”), a California corporation organized in March 1994, in a share for share exchange. Medex is in the business of managing and administering both Health Care Organizations (“HCOs”) and Managed Provider Networks (“MPNs”) in the state of California. In August 2001, we formed Industrial Resolutions Coalition, Inc. (“IRC”), a California corporation, as a wholly-owned subsidiary of PHCO. IRC oversees and manages the Company’s Workers’ Compensation Carve-Outs services. In June 2010, we acquired Medex Legal Support, Inc. (“MLS”), a Nevada corporation incorporated in September 2009. MLS offers lien representation services and Medicare Set-Aside (“MSA”) services. In February 2012, we incorporated Medex Medical Management, Inc., (“MMM”) in the state of Nevada, as a wholly owned subsidiary of the Company. MMM is responsible for overseeing and managing medical case management services. In March 2011, we incorporated Medex Managed Care, Inc. (“MMC”) in the state of Nevada, as a wholly owned subsidiary of the Company. MMC oversees and manages the Company’s utilization review and managed bill review services. In October 2018, we incorporated Pacific Medical Holding Company, Inc. (“PMHC”) to act as a holding company for future potential acquisitions.

Business of the Company

We are workers’ compensation cost containment specialists.specialists providing a range of services principally to California employers and claims administrators.  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 networksWe have contracted with approximately 3,900 individualprocessed 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.bill reviews in 25 states. Our provider networks are composed of experts in treating worker injuries.

Beyond the core services we provide to facilitate client/employers involvement in employee medical treatment claims administration and patient treatment options, we also provide to our HCO and MPN clients a 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 June 30, 20182019 and 20172018

The following represents selected components of our consolidated results of operations, for the three-month periods ended June 30, 20182019 and 2017,2018, respectively, together with changes from period-to-period:

Revenue

Total revenues during the three-month periods ended June 30, 2019 and 2018 and 2017 was nearly flat decreasing approximately 1%increased 9% to $1,661,517$1,815,319 from $1,675,637.$1,661,517.

During the second quarter 2018,2019, HCO and medical case management fees increased 11% and 30%, respectively, while MPN, utilization review, medical bill review and other fees increased 10% and 105%, respectively, while MPN, medical bill review and nurse case management fees decreased by 11%3%, 29%4%, 1%, and 6%41%, respectively. HCO fees decreased by less than 1%. 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 feesFees

During the three-month periods ended June 30, 20182019 and 2017,2018, HCO fee revenues were $400,840 and $360,265, and $360,836, respectively. We expectThe increase was due to current customers enrolling additional employees into the HCO fee revenuesprogram partially offset by decreases in claim administration fees due to increase over the remaining months of fiscal 2018 as a result of increased HCO employee enrollment from existing customers, which we anticipate will lead to increased claims administration fees.fewer reported injuries. The HCOMedex Health Care Organization (HCO) program utilizes an exclusive, specializespecialized network of medical providers experienced in workers’ compensation. It also gives the employer the right to direct medical care to a network physician for a work-related injury for up to 180-days of medical treatment. The ability to direct care during the early stage of a claim ensures the injured worker gets quality care in a timely manner.

 MPN feesFees

MPN fee revenue for the three-month periods ended June 30, 2019 and 2018, were $127,113 and 2017, were $130,633, and $146,690, respectively, a decrease of 11%3%, resultingdue to a decrease in claims administration fees as a result of fewer customer reported claims, partially offset by an increase in program administration fees from lower revenues from one existing customer.customers. The Medex Medical Provider Network (MPN) program is comprised of an exclusive, specialized network of medical providers experienced in workers’ compensation. This network was created to provide quality medical treatment for injured workers in a timely manner and provide medical reports.

UR feesUtilization Review

During the three-month periods ended June 30, 20182019 and 2017,2018, utilization review revenue was $299,497$286,555 and $273,298,$299,497, respectively.  The increasedecrease of $26,199$12,942 in the 20182019 period was primarily attributable to increaseda decrease in the volume of utilization reviews from two major customers.current customers coupled with the loss of a customer. 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 tocan deliver utilization review services that cut overhead costs for the self-insured clients, insurance companies and the public entities we service. 

MBR feesMedical Bill Review

During the three-month period ended June 30, 2018,2019, medical bill review revenue decreased $51,310 to $126,1701% by $1,090, when compared to the same period a year earlier.  ThisThe decrease was mainly caused by decreased reviewsdue to a decrease in the number of both hospital and non-hospital bills from existing customers when compared to the same period a year earlier. 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 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. 

NCM feesMedical Case Management

During the three-month periods ended June 30, 2019 and 2018, and 2017, nursemedical case management revenue was $615,602$799,349 and $654,341,$615,602, respectively.  The decreaseincrease in nursemedical case management revenue of $38,739$183,747 was primarily the result of a net decrease inseveral clients assigning more claims to our medical case managers, which required the hiring of additional nurses to manage them. Medical case management activity duekeeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective. Medical 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. Medical case managers act as a liaison between the injured worker, claims adjuster, medical providers and attorneys to achieve optimal results for injured workers and employer/clients. The addition of several nurses keeps our ratio of claims per nurse at a level to ensure timely and appropriate medical care is given to the loss of several nurse case managers during the first quarter of 2018. injured worker and facilitates a faster claim closure for our customers.

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 June 30, 2019 and 2018, were $76,382 and 2017, were $129,350 and $62,992 respectively. The increasedecrease in other fees of $66,358$52,968 was the result of increasesa customer’s decrease in utilizing our provider network, thus reducing the revenue from network access fees and due to a client catching up on a backlog of Medicare set-aside services partially offset by lower carve-out fees realized by IRC.claims.

Expenses

Total expenses for the three months ended June 30, 2019 and 2018, were $1,469,561 and 2017, were $1,209,480, and $1,263,790, respectively.  The decreaseincrease of $54,310$260,081 was the result of decreasesincreases in depreciation bad debt provision,and amortization, salaries and wages, professional fees, insurance, and data maintenance, general and administrative expenses, which were partially offset by increasesdecreases in consulting fees, salariesbad debt and wages, outsource service fees and general and administrative expenses.fees.

Depreciation and Amortization

During the three-month period ended June 30, 2018,2019, we recorded depreciation and amortization expense of $16,443$17,989 compared to $19,570$16,443 during the comparable 20172018 period.  The decreaseincrease in depreciation and amortization was primarily attributable to the purchasing of new fixed assets and certain fixed assets being fully depreciated during the three months ended June 30, 2017.2019.

Bad Debt

During the three-month period ended June 30, 2018,2019, bad debt provision decreased by $53,000$35,0000 compared to the three-month period ended June 30, 2017.  This2018.  The decrease was primarily the result of various delinquent customers making payments which resolved their uncollectible status.

Consulting Fees

During the three months ended June 30, 2018,2019, consulting fees increaseddecreased to $85,449$70,007 from $78,734$85,449 during the three months ended June 30, 2017.  This increase2018.  The decrease of $6,715$15,442 was the primarily result of the termination of a net increase of hiring new consultantsconsultant, partially offset by terminating other existing consultants.hiring a consultant to assist with our insurance acquisition search.

Salaries and Wages

During the three-month period ended June 30, 2018,2019, salaries and wages increased 5% to $627,350$154,486 compared to $597,701 during the same period in 2017.2018.  This increase was primarily the result of hiring additional employees, reversal of a 10% pay cut for certain employees and executives, and salary increases in the June 2018 quarter for employees in our nurse case management, utilization review, and HCO & MPN departments.other employees.

Professional Fees

For the three months ended June 30, 2018,2019, we incurred professional fees of $77,743$101,251 compared to $117,147$77,743 during the three months ended June 30, 2017.2018.  The $39,404 decreaseincrease in professional fees was primarily the result of loweran increase in accounting, and legal expenses and lower nursemedical case management fees resulting from decreased case management activity.fees.

Insurance

During the three-month period ended June 30, 2018,2019, we incurred insurance expenses of $73,171,$86,922, a 19% decreaseincrease over the same three-month period in 2017.2018. The decreaseincrease in insurance expense was primarily attributed to reduced workers’ compensationthe additional medical insurance costs for new employees and director and officers’increasing medical insurance premiums for the three-month period 20182019 compared to 2017. The lower costs were partially the resultsame period 2018.

Outsource Service Fees

Outsource service fees consist of costs incurred by our subsidiaries in outsourcing some functions of 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 $163,959$136,671 and $145,503$163,959 in outsource service fees during the three-month periods ended June 20182019 and 2017,2018, respectively.  The increasedecrease of $18,456$27,288 was primarily due to the resultloss of increases in outsource services required fora utilization review customer in the second quarter, fewer Medicare set-aside servicesclaims due to a customer catching up on a backlog of claims, and nursehigher utilization of our internal nurses on field case management.management claims. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review and certain nursemedical case management services we provide in the future.  

Data Maintenance

During the three-month periods ended June 30, 20182019 and 2017,2018, data maintenance fees were $16,798$57,319 and $24,482$16,798 respectively. The decreaseincrease of $7,684$40,521 was primarily the result of recording lower levelsa larger volume of notification fees associated with a customer’sHCO annual renewalrenotification renewals during the three-month period ended June 30, 20182019 when compared to the same period in 2017.2018. A portion of this change was due to our recognition of annual HCO renotification fees for a particular customer in the second quarter 2019, compared to the first quarter 2018.

General and Administrative

During the three-month period ended June 30, 2018,2019, general and administrative expenses increased 7%19% to $183,567$217,566 when compared to the three-month period ended June 30, 2017.2018. This increase of $11,645$33,999 was primarily attributable to increases in charitable contributions, travel, vacation expense, postage expense, parking, licenses and permits, IT enhancement, licenses & permits, travel expense,enhancements, dues and subscriptions, and miscellaneous expense, partially offset by decreases in office supplies, charitable contributions, postage expense, auto expense, dues and subscriptions, and paid time off expenses. 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 $14,120 decrease$153,802 increase in total revenue during the three-month period ended June 30, 2018,2019, and the $54,310 decrease$260,081 increase in total expenses during the same period, our income from operations increased $40,190,decreased $106,279, or 10%24%, during the three-month period ended June 30, 2018,2019, when compared to the same period in 2017.2018. 

Income Tax Provision

We realized a $44,484,$29,829, or 26%24%, decrease in our income tax provision during the three-month period ended June 30, 2018,2019, compared to the three-month period ended June 30, 2017.2018. This decrease in income tax expense was primarily due to a decrease in the effective tax rate for the quarter ended June 30, 2018,2019, as a result of the impact of the Tax Cuts and Jobs Act.Act and lower income from operations.

Net Income

During the three-month period ended June 30, 2018,2019, we realized a 22% increase in total expenses which was only partially offset by a 9% increase in total revenues of $1,661,517 was 1% lowerand a 24% decrease in our provision for income tax when compared to the same period in 2017.  During the 2018 period, total expenses decreased 4% and our provision for income tax decreased 26%.2018. As a result, we realized an $84,674,a net decrease of $76,450, or 35%24%, increase in net income during the three-month period ended June 30, 20182019 compared to the three-month period ended June 30, 2017.2018.

Comparison of six months ended June 30, 20182019 and 20172018

The following represents selected components of our consolidated results of operations, for the six-month periods ended June 30, 20182019 and 2017,2018, respectively, together with changes from period-to-period:

Revenue

Total revenues during the six-month period ended June 30, 2018,2019, increased 1%11% to $3,244,826$3,598,757 compared to $3,216,893$3,244,826 during the six-month period ended June 30, 2017.2018.

During the first six months of 2018,2019, HCO fees, medical bill review and medical case management increased 2%, 8% and 32% respectively, while MPN, utilization review, and other fee increased 15%, 15% and 7% respectively, while MPN, MBR, and NCMfees decreased by 7%5%, 28%1%, and 4%20%, 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 feesFees

During the six-month periods ended June 30, 20182019 and 2017,2018, HCO fee revenues were $759,707$771,182 and $663,405$759,707 respectively. The 15%2% increase in HCO revenue was primarily the result of higher HCO revenue during our first fiscal quarter 2018, which was attributable to increases in HCO employee enrollment resulting in increased claim activities from existing customers and the addition of a new customer employee enrollment in 2017.2019, partially offset by the loss of a customer and fewer reported claims, resulting in a decrease in claim network fees.

MPN feesFees

MPN fee revenue for the six-month periods ended June 30, 2019 and 2018, was $250,978 and 2017, was $265,277 and $284,971 respectively, a decrease of 7%5%, resulting from onefewer reported customer phasing out its business through bankruptcy.claims due to a decrease in claims administration fees as a result of fewer customer reported claims, partially offset by an increase in program administration fees from existing customers.

UR feesUtilization Review

During the six-month periods ended June 30, 20182019 and 2017,2018, utilization review revenue was $586,518$579,238 and $510,343,$586,518, respectively.  The increasedecrease of $76,1751% in the 20182019 period was primarily attributable to increaseddecreased utilization reviews from two major customers. the loss of a customer partially offset by the addition of a new customer in the second quarter in 2019.

MBR feesMedical Bill Review

During the six-month period ended June 30, 2018,2019, medical bill review revenue decreased $94,049 to $240,209increased by $19,868 when compared to the same period a year earlier. This 28% decrease8% increase was mainly caused by processing fewerdue to a net increase during the six months ended June 30, 2019 in the volume of hospital claimsand non-hospital bills processed from existing customers and the termination of three customersdue to more reported injuries, despite a reduction in medical bills processed during the second half of 2017. We believe the 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. three months ended June 30, 2019.

NCM feesMedical Case Management

During the six months ended June 30, 2019 and 2018, and 2017, nursemedical case management revenue was $1,198,171$1,580,963 and $1,241,577,$1,198,171, respectively.  The decreaseincrease in nursemedical case management revenue of $43,40632% was primarily the result of a net decrease inseveral clients assigning more claims to our medical case management activity duringmanagers, which required the first quarterhiring of 2018 when comparedadditional nurses to the same period in 2017.manage them. We expect nursemedical case management revenue to increase at a moderate rate during the remainder of fiscal 2018.2019.

Other

Other fee revenue for six-month periods ended June 30, 2019 and 2018, were $156,319 and 2017, were $194,944, and $182,339, respectively. The increasedecrease of $12,605$38,625 was mainlyprimarily the result of increased Medicare set-aside services partially offset by lowa customer’s decrease in utilizing our provider network, thus reducing the revenue from network access fees and carve-out fees.due to a client catching up on a backlog of Medicare set-aside claims.

Expenses

Total expenses for the six months ended June 30, 2019 and 2018, were $2,815,677 and 2017, were $2,237,132, and $2,424,398, respectively. The decreaseincrease of $187,266$578,545 was the result of decreasesincreases in depreciation and amortization, bad debt provision, salaries and wages, professional fees, insurance, and data maintenance, which were partially offset by increases in consulting fees, outsource service fees, and general and administrative expense.expense, which were partially offset by decreases in consulting fees and decreases in bad debt provisions.

Depreciation and Amortization

During the six-month period ended June 30, 2018,2019, we recorded depreciation and amortization expense of $32,787$36,873 compared to $39,397$32,787 during the comparable 20172018 period.  The decreaseincrease in depreciation and amortization was primarily attributable to certainthe addition of new fixed assets partially offset by other fixed assets being fully depreciated during the second half of 2017.2019.

Bad Debt

During the six-month period ended June 30, 2018,2019, bad debt provision decreased by $49,750$35,000 compared to the six-month period ended June 30, 2017.2018.  This decrease was primarily the result of various delinquent customers making payments which resolved their uncollectible status.

Consulting Fees

During the six months ended June 30, 2018,2019, consulting fees increaseddecreased to $164,263$149,642 from $155,994$164,263 during the six months ended June 30, 2017.2018.  This increasedecrease of $8,269$14,621 was the primarily result of the termination of a net increase of hiring new consultantsconsultant, partially offset by terminating other existing consultants.hiring a consultant to assist with our insurance acquisition search.

Salaries and Wages

During the six-month period ended June 30, 2018,2019, salaries and wages decreased 6%increased 37% to $1,118,828$1,535,541 compared to $1,186,358$1,118,828 during the same period in 2017.2018.  This decreaseincrease was primarily the result of hiring additional employees, reversal of a fewer10% pay cut for certain employees in the second quarter of 2018 in our HCO, MPN, and utilization review departments partially offset byexecutives, and salary increases for employees during the six-month period ended June 30, 2018.other employees.

Professional Fees

For the six months ended June 30, 2018,2019, we incurred professional fees of $155,213$179,216 compared to $199,231$155,213 during the six months ended June 30, 2017.2018.  The $44,018 decrease$24,003 increase in professional fees was primarily the result of lowerincreases in accounting, and legal expenses, and lower nursemedical case management fees resulting from decreasedincreased case management activity.

Insurance

During the six-month period ended June 30, 2018,2019, we incurred insurance expenses of $140,200,$160,305, a 21% decrease14% increase over the same six-month period in 2017.2018.  The decreaseincrease in insurance expense was primarily attributed to lower workers’ compensationthe costs of medical insurance for new employees and director and officer’sincreases in medical insurance premiums for the six-month period of 2018 compared to 2017. The lower costs were partially the result of us having no open claims in the current year and insurance companies in California lowering their base workers’ compensation rates.existing employees.

Outsource Service Fees

We incurred $259,840$261,480 and $258,251$259,840 in outsource service fees during the six-month periods ended June 20182019 and 2017,2018, respectively.  The increase of $1,589$1,640 was primarily the result of increases in outsource services required for medical bill review during the quarter ended March 31, 2019 partially offset by decreases in utilization review and field medical case management fees.fees during the quarter ended June 30, 2019, primarily due to the loss of a utilization review customer, fewer Medicare set-aside claims due to a client catching up on a backlog of claims and higher utilization of our internal nurses on field medical management claims.  We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review and certain nursemedical case management services we provide in the future.  

Data Maintenance

During the six-month periods ended June 30, 20182019 and 2017,2018, data maintenance fees were $49,229$67,619 and $59,101$49,229 respectively. The decreaseincrease of $9,872$18,390 was primarily the result of recording lower levelsan increase in the number of notification fees associatedemployees enrolled in the HCO program with a customer’s annual renewalexisting customers during the six-month period ended June 30, 20182019 when compared to the same period in 2017.2018.

General and Administrative

During the six-month period ended June 30, 2018,2019, general and administrative expenses increased 6%21% to $351,772$425,001 when compared to the six-month period ended June 30, 2017.2018.  This increase of $18,462$73,229 was primarily attributable to increases in advertising, auto expense, bank charges, dues and subscriptions, employment agency fees,equipment expense, IT enhancement, licenses and permits, rental equipment shareholders expense,rental, office rent, and other miscellaneous general administrative expense, partially offset by lower levels of IT enhancement, travelshareholders expense, employment agency fees and entertainment expense. telephone expenses.

We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2018.2019 primarily to improve our IT technology to include the enhancement of our IT security.

Income from Operations

Total revenue during the six-month period ended June 30, 2018,2019, increased $27,933by $353,931 to $3,244,826 when$3,598,757 compared to $3,216,893$3,244,826 in the same period in 2017.2018. Our total expenses decreasedincreased by $187,266$578,545 during the six months ended June 30, 2018,2019, resulting in a decrease in income from operations of $1,007,694$224,614 compared to $792,495 during the six months ended June 30, 2017.2018.  This resulted in a $215,199, or 27%, increase22% decrease in income from operations duringwhen compared to the 2018 period.same period in 2018.

Income Tax Provision

We realized a $46,899decrease of $63,046 or 14%22%, decrease in our income tax provision during the six-month period ended June 30, 20182019 compared to the six-month period ended June 30, 2017.2018. This decrease in income tax expense was primarily due to a decrease in the effective tax rate for the quarter ended June 30, 2018,2019, as a result of the impact of the Tax Cuts and Jobs Act.Act together with, lower income before taxes during the six-month period ended June 30, 2019 when compared to same period in 2018.

Net Income

During the six-month period ended June 30, 2018,2019, total revenues of $3,244,826$3,598,757 increased 11% and our provision for income tax was 1% higher when compared tolower by 22%. These changes only partially offset the same period26% increase in 2017.  In addition,total expenses. As a result, we realized an 8%a $161,658, or 22% decrease in total expenses and a 14% reduction in income tax provision, which resulted in a $262,098, or 57% increase in net income during the six months ended June 30, 20182019 when compared to the six months endedsix-month period June 30, 2017.2018.