Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
NOTE 1 – CORPORATE HISTORY
Pacific Health Care Organization, Inc. (the “Company”) is a specialty workers’ compensation managed care company providing a range of services principally to California employers and claims administrators. The Company was incorporated under the laws of the state of Utah in April 1970, under the name Clear Air, Inc. The Company changed its name to Pacific Health Care Organization, Inc., in January 2001. In February 2001, the Company acquired Medex Healthcare, Inc. (“Medex”), a California corporation organized in March 1994, in a share for share exchange. Medex is a wholly-owned subsidiary of the Company. 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, the Company 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 nurse 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.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
A.
Basis of Accounting
The Company used the accrual method of accounting in accordance with accounting principles generally accepted in the United States for the periods ended December 31, 2016 and 2015.
B.
Revenue Recognition
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 Services, Review Services and 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 aside fees, lien service fees, workers’ compensation carve-outs, flat rate fees or hourly fees depending on the agreement with the client. Such revenue is recognized at the end of each month for which services are performed.
Management reviews each agreement in accordance with the provisions of revenue recognition topic ASC 605. Such agreements may consist of bundled managed care which included various units of accounting such as network solutions and patient management which includes 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 its 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.
C.
Cash Equivalents
The Company considers all short term, highly liquid investments that are readily convertible, within three months, to known amounts as cash equivalents. As of the date of these consolidated financial statements, the Company has no cash equivalents.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
D.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risks consist of cash and cash equivalents. The Company places its cash and cash equivalents at well-known, quality financial institutions. At times, such cash and investments may be in excess of the FDIC insurance limit.
E.
Earnings (Per Share of Common Stock)
The computation of earnings per share of common stock is based on the weighted average number of shares outstanding at the date of the consolidated financial statements.
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Basic Earnings per share:
|
|
|
|
|
|
|
Income (numerator)
|
|
$
|
566,748
|
|
|
$
|
1,677,224
|
|
Shares (denominator)
|
|
|
800,000
|
|
|
|
800,000
|
|
Per share amount
|
|
$
|
0.71
|
|
|
$
|
2.10
|
|
Fully Diluted Earnings per share:
|
|
|
|
|
|
|
|
|
Income (numerator)
|
|
$
|
566,748
|
|
|
$
|
1,677,224
|
|
Shares (denominator)
|
|
|
800,000
|
|
|
|
800,000
|
|
Per share amount
|
|
$
|
0.71
|
|
|
$
|
2.10
|
|
F.
Depreciation
The cost of property and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements is depreciated over the lesser of the length of the lease of the related assets or the estimated lives of the assets. Depreciation is computed on the straight line method which is five years for computer equipment, office equipment, and furniture and fixtures, respectively.
G.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates include the values assigned to the allowance for doubtful accounts and accruals for income taxes.
H.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
I.
Fair Value of Financial Instruments
The Company applies ASC 820, “Fair Value Measurements
.
”
This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
•
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
•
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
•
|
Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
|
The carrying amounts reported in the balance sheets for the cash and cash equivalents, receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
J.
General and Administrative Expenses
General and administrative expenses include fees for office space and supplies, dues and subscriptions, IT and internet expenses, postage and delivery expenses, rent equipment, equipment repairs, license and permits, telephone, compensated absences, miscellaneous expense, auto expense, travel expenses and entertainment costs.
K.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are provided based on the difference between the financial statements and tax basis of assets and liabilities measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.
L.
Capital Structure
The Company has two classes of stock. The Articles of Incorporation of the Company, as amended, authorize 5,000,000 shares of $0.001 par value preferred stock, which may be issued in one or more series, with designation, rights and privileges of such preferred stock to be set by the Board of Directors of the Company from time to time. On November 21, 2016, the Board of Directors of the Company approved a Certificate of Designation of Rights, Privileges and Preferences of Series A Preferred Stock and authorized the Company’s officers to file such with the Utah Division of Corporations and Commercial Code to create the Series A Preferred Stock. The Series A Preferred Stock has a par value of $0.001 and consists of 10,000 shares. The holders of Series A Preferred Stock are entitled to vote with the Common Stock holders on all matters brought for approval of the Common Stock holders. In connection with any such matter, each outstanding share of Series A Preferred Stock is entitled to 20,000 votes of Common Stock of the Company. In the event of a liquidation, dissolution or winding up of the Company, the Series A Preferred Stock shall rank in parity with the Company’s Common Stock. Holders of Series A Preferred Stock are entitled to receive dividends, when, as and if declared by the Board of Directors. The Series A Preferred Stock shall rank in parity with the Company’s Common Stock as to any dividends. As of December 31, 2016 and 2015, 1,000 and zero shares of the Series A Preferred Stock were outstanding, respectively.
The Company also has voting common stock of 50,000,000 shares authorized at December 31, 2016 and 2015, 802,424 shares issued and 800,000 outstanding and 802,424 issued and 800,000 outstanding net of treasury shares, respectively. The Company purchased no shares and 6,241 shares of treasury stock at cost in during fiscal 2016 and 2015, respectively. During 2016, the Company retired 8,269 shares of treasury stock. As of December 31, 2016 and 2015, the Company paid dividends of $2,062 and $933,605, respectively. As of December 31, 2016 and 2015, the Company accrued and recorded dividend payables on the balance sheet of $56,923 and $58,985, respectively. No dividends were paid prior to 2015.
Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price. When treasury stock is re-issued at a higher price than its cost, the difference is recorded as a component of additional paid-in capital to the extent that there are gains to offset the losses. If there are no treasury stock gains in additional paid-in capital, the losses are recorded as a component of accumulated deficit.
M.
Stock Based Compensation
The Company has adopted the fair value method of accounting for stock-based employee compensation in accordance with statement of ASC Topic 718, “Compensation – Stock Compensation” which requires that equity-based payments (to the extent they are compensatory) be recognized in our consolidated statements of operations based on their fair value.
N.
Trade Receivables
The Company in the normal course of business 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.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
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 ratings 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. The Company evaluates the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy. At fiscal year-end 2016 and 2015, the Company’s bad debt reserve of $64,150 and $55,000, respectively as 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 December 31, 2016 and 2015, are as follows:
|
|
12/31/16
|
|
|
12/31/15
|
|
Customer A
|
|
|
14
|
%
|
|
|
13
|
%
|
Customer B
|
|
|
7
|
%
|
|
|
11
|
%
|
Customer C
|
|
|
14
|
%
|
|
|
8
|
%
|
Customer D
|
|
|
7
|
%
|
|
|
18
|
%
|
O.
Significant Customers
The Company provides services to insurers, third party administrators, self-administered employers, municipalities and other industries. The Company is able to provide a full range of services to virtually any size employer in the state of California. The Company is also able to provide UR, MBR and NCM services both inside and outside the state of California.
During the fourth quarter 2015, the Company’s largest customer, notified the Company it would be terminating the services provided by the Company in December 2015. The customer cited changing business needs in its termination letter as the reason for termination. The Company was providing UR, NCM, MPN and network access fee services to this customer. The Company anticipates the loss of this customer will significantly impact its profitability and liquidity until such time as the Company is able to replace the revenues generated from the customer. During the twelve-month period ended December 31, 2016 compared to 2015 the Company recorded no revenue from this former client, compared to $2,564,042 in 2015.
During the second fiscal quarter 2015, one of the Company’s significant MBR customer ceased using the Company’s MBR services following the customer’s acquisition by a third party and the decision to take its MBR business in-house. During 2016 the Company recorded no revenue from sales to this former customer, compared to $330,429 in 2015.
P.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications have had no effect on the financial position, operations or cash flows for the period ended December 31, 2016.
Q.
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.
NOTE 3 – RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606). The amendments in this ASU defer the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the effect of the adoption of ASU 2014-09.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) intended to improve financial reporting around leasing transactions. The ASU will require organizations that lease assets - referred to as "lessees"- to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. For public companies, the standard is effective for fiscal years beginning after December 15, 2018 and interim periods therein. Earlier adoption is permitted for any annual or interim period for which consolidated financial statements have not yet been issued. The Company is currently evaluating the potential impact that the adoption of ASU No. 2016-02 may have on its financial statements.
The Company has reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial statements.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
NOTE 4 – FIXED ASSETS
The Company capitalizes the purchase of equipment and fixtures for major purchases in excess of $1,000 per item. Capitalized amounts are depreciated over the useful life of the assets using the straight line method of depreciation which is five years for computer equipment, office equipment, and furniture and fixtures. Scheduled below are the assets, costs and accumulated depreciation at December 31, 2016 and 2015.
|
|
Cost
|
|
|
Accumulated Depreciation
and Amortization
|
|
Assets
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2016(1)
|
|
|
December 31, 2015
|
|
Computer equipment
|
|
$
|
349,955
|
|
|
$
|
308,266
|
|
|
$
|
224,143
|
|
|
$
|
172,073
|
|
Furniture and fixtures
|
|
|
206,785
|
|
|
|
206,784
|
|
|
|
107,838
|
|
|
|
76,632
|
|
Office equipment
|
|
|
15,595
|
|
|
|
14,800
|
|
|
|
14,314
|
|
|
|
12,889
|
|
Totals
|
|
$
|
572,335
|
|
|
$
|
529,850
|
|
|
$
|
346,295
|
|
|
$
|
261,594
|
|
|
(1)
|
Depreciation expense for the years ended December 31, 2016 and 2015, totaled $84,700 and $69,254, respectively.
|
NOTE 5 – INCOME TAXES
The Company accounts for corporate income taxes in accordance with FASB ASC 740-10 “Income Taxes.” FASB ASC 740-10 requires an asset and liability approach for financial accounting and reporting for income tax purposes.
The tax provision for the years ended December 31, 2016 and 2015, consisted of the following:
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
286,985
|
|
|
$
|
846,096
|
|
State
|
|
|
91,960
|
|
|
|
256,927
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
29,776
|
|
|
|
35,439
|
|
State
|
|
|
(6,141
|
)
|
|
|
6,323
|
|
Total tax provision
|
|
$
|
402,580
|
|
|
$
|
1,144,785
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances at December 31, 2016 and December 31, 2015, are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Federal
|
|
$
|
(69,125
|
)
|
|
$
|
(81,902
|
)
|
State
|
|
|
(19,779
|
)
|
|
|
(23,434
|
)
|
Reserve for bad debts
|
|
|
|
|
|
|
|
|
Federal
|
|
|
18,303
|
|
|
|
16,133
|
|
State
|
|
|
5,263
|
|
|
|
4,642
|
|
State tax deductions
|
|
|
28,416
|
|
|
|
79,647
|
|
Compensated absences accrual
|
|
|
|
|
|
|
|
|
Federal
|
|
|
37,774
|
|
|
|
31,265
|
|
State
|
|
|
10,808
|
|
|
|
8,945
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
11,660
|
|
|
$
|
35,296
|
|
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
The reconciliation of income tax computed at statutory rates of income tax benefits is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expense at federal statutory rate of 34%
|
|
$
|
329,572
|
|
|
$
|
959,483
|
|
State tax effects
|
|
|
56,447
|
|
|
|
173,745
|
|
Non-deductible expenses
|
|
|
11,528
|
|
|
|
16,889
|
|
Effects of rate change
|
|
|
0
|
|
|
|
0
|
|
Other items
|
|
|
5,033
|
|
|
|
(5,332
|
)
|
Income tax provision
|
|
$
|
402,580
|
|
|
$
|
1,144,785
|
|
The Financial Accounting Standards Board (FASB) has issued ASC 740-10 (Prior authoritative literature: Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48)).” ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with prior literature FASB Statement No. 109, Accounting for Income Taxes. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by ASC 740-10.
The Company follows the interpretations of the FASB, which establish a single model to address accounting for uncertain tax positions. The interpretations clarify the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements and also provide guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company takes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon effective settlement. The Company re-evaluates its income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision. Interest and penalties on unrecognized tax benefits are classified as income tax expense.
The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations in the provision for income taxes. As of December 31, 2016, the Company had no accrued interest or penalties. The years 2014, 2015 and 2016 are still open for examination by the Internal Revenue Service.
NOTE 6 – CONTRACTUAL COMMITMENTS
In August 2012, the Company entered into a capital lease arrangement whereby it leased office server equipment for $38,380. The asset was recorded on the balance sheet under office equipment under capital lease and the liability incurred under the lease was recorded as current and noncurrent obligations under capital lease. The lease arrangement was for a term of 36 months at level operating rents with a capital interest rate of 7.5%. The term of this capital lease arrangement expired in July 2015.
In October 2013, the Company entered into a 36 month lease for an office copy machine with monthly payments at $160.93. In December 2013, the Company leased two document scanners with monthly lease payments of $206.93 each for 36 months.
In July 2015, the Company entered into a new 79 month office lease that commenced on September 28, 2015. The lease provides for approximately 9,439 square feet of office space. This office space serves as the principal executive offices of the Company, as well as, the principal offices of the Company’s operating subsidiaries, Medex, IRC, MLS, MMM and MMC.
In August 2012, the Company entered into a capital lease arrangement whereby we leased office server equipment for $38,380. The asset was recorded on the balance sheet under office equipment under capital lease and the liability incurred under the lease was recorded as current and noncurrent obligations under capital lease. The lease arrangement was for a term of 36 months at level rents with capital interest rate at 7.5%. The term of this capital lease arrangement expired in July 2015.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
Following is the base annual rent payment schedule for the Company’s office lease:
Rent Period
|
|
Annual Rent Payment
|
|
Jan. 1 to Dec. 31, 2017
|
|
|
228,329
|
|
Jan. 1 to Dec. 31, 2018
|
|
|
257,874
|
|
Jan. 1 to Dec. 31, 2019
|
|
|
244,942
|
|
Jan. 1 to Dec. 31, 2020
|
|
|
275,996
|
|
Jan. 1 to Dec. 31, 2021
|
|
|
261,932
|
|
Jan. 1 to Mar. 31, 2022
|
|
|
97,411
|
|
Total
|
|
$
|
1,366,484
|
|
Rent expense for office space for the years ended December 31, 2016 and December 31, 2015, was $240,492 and $166,285, respectively.
NOTE 7 – ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
45,943
|
|
|
$
|
-
|
|
Compensated absences
|
|
|
131,645
|
|
|
|
100,856
|
|
Legal fees
|
|
|
2,500
|
|
|
|
27,984
|
|
Accounting fees
|
|
|
38,222
|
|
|
|
19,550
|
|
Loss on settlement
|
|
|
-
|
|
|
|
42,300
|
|
Sales commissions
|
|
|
34,790
|
|
|
|
18,836
|
|
Bonus
|
|
|
492
|
|
|
|
3,492
|
|
Other
|
|
|
(225
|
)
|
|
|
(874
|
)
|
Total
|
|
$
|
253,367
|
|
|
$
|
212,144
|
|
NOTE 8 – EQUITY INCENTIVE AWARDS
2002 Stock Option Plan
In August 2002, the Company adopted the PHCO 2002 Stock Option Plan (the “2002 Plan”). The 2002 Plan provides for the grant of options to officers, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant. Options are exercisable six months after the grant date and expire five years from the grant date. The 2002 Plan calls for a total of 50,000 shares to be held for grant. Options to purchase 4,250 common shares were granted in August 2002. Options to purchase 938 common shares were exercised; the balance of the outstanding options expired unexercised in August 2007. No securities were awarded under the 2002 Plan in 2016 or 2015. The 2002 Plan will remain effective until such time as no further awards may be granted and all awards granted under the 2002 Plan are no longer outstanding unless earlier terminated by the Company’s board of directors.
2005 Stock Option Plan
In November 2005, at the annual meeting of stockholders of the Company, the Company and its shareholders adopted the Pacific Health Care Organization, Inc., 2005 Stock Option Plan (the “2005 Plan”). The 2005 Plan provides for the grant of Company securities, including options, warrants and restricted stock to officers, directors, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant. Options are exercisable six months after the grant date and expire five years from the grant date. The 2005 Plan permits the granting of up to 50,000 common shares of the Company. The 2005 Plan will remain effective until such time as no further awards may be granted and all awards granted under the 2005 Plan are no longer outstanding unless earlier terminated by the Company’s board of directors. Notwithstanding the foregoing, the Company may no longer make awards of “incentive stock options”, as that term is used in Section 422 of the Internal Revenue Code, under the 2005 Plan.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
On December 31, 2015, under the 2005 Plan, and pursuant to an effective S-8 registration statement filed with the Commission on December 28, 2015, the Company made restricted stock grants of 5,928 shares of its common stock to ten employees, including 750 shares to Tom Kubota, the Company’s President, chief executive officer and a greater than 5% shareholder of the Company, 750 shares to Fred Odaka, the Company’s chief financial officer and 750 share to Donald Balzano, a Company consultant and greater than 5% shareholder of the Company. The grants vested one year from the date of grant and were subject to forfeiture should the recipient terminate his employment or its consulting agreement with the Company prior to vesting. The restricted stock grants were valued at $8.35 per share, the closing price of the Company’s common stock on the December 31, 2015, grant date.
NOTE 9 – LITIGATION
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in such matters may arise from time to time that may harm the Company’s business. To the knowledge of management, there is no material litigation or governmental agency proceeding pending or threatened against the Company or any of its subsidiaries. Further, the Company is not aware of any material proceeding to which any director, member of senior management or owner of record or beneficially of more than five percent of any class of voting securities of the Company or any of its subsidiaries, or any associate of any of them is a party adverse to or has a material interest adverse to the Company or any of its subsidiaries.
NOTE 10 – BENEFITS AND OTHER COMPENSATION
The Company offers a 401(k) profit sharing plan for employees who meet the eligibility requirements. Pursuant to the plan, we may make discretionary matching contributions and/or discretionary profit sharing contributions to the plan. All such contributions must comply with federal pension laws, non-discrimination requirements and the terms of the plan. In determining whether to make a discretionary contribution, the board of directors would evaluate current and future prospects and management’s desire to reward and retain employees and attract new employees. To date, the Company has never made matching contributions and/or discretionary profit sharing contributions to any plan.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth our executive officers and directors, their ages, and all offices and positions they hold with the Company as of March 16, 2017. There is no agreement or understanding between the Company or any other person and any director or executive officer pursuant to which he or she was selected as a director or executive officer.
Name
|
|
Age
|
|
Positions with the Company
|
|
Director Since
|
|
Executive Officer Since
|
|
|
|
|
|
|
|
|
|
Tom Kubota
|
|
77
|
|
Chief Executive Officer, President and Chairman of the Board of Directors
|
|
Sept. 2000
|
|
Sept. 2000
|
|
|
|
|
|
|
|
|
|
Fred Odaka
|
|
80
|
|
Chief Financial Officer and Secretary
|
|
|
|
Aug. 2008
|
|
|
|
|
|
|
|
|
|
David Wang
|
|
54
|
|
Director
|
|
Nov. 2007
|
|
|
|
|
|
|
|
|
|
|
|
Stacy Hadley
|
|
49
|
|
Director
|
|
Nov. 2016
|
|
|
|
|
|
|
|
|
|
|
|
Gunter Soraperra
|
|
56
|
|
Director
|
|
Nov. 2016
|
|
|
Tom Kubota
. Since 2000, Mr. Kubota has been primarily engaged in the operations of PHCO and running his consulting firm Nanko Investments, Inc. Mr. Kubota also has over thirty years of experience in the investment banking, securities and corporate finance field. He held the position of Vice President at Drexel Burnham Lambert; at Stem, Frank, Meyer and Fox; and at Cantor Fitzgerald. Mr. Kubota is the president of Nanko Investments, Inc., which specializes in capital formation services for high technology and natural resources companies. He has expertise in counseling emerging public companies and has previously served as a director of both private and public companies. Mr. Kubota is not currently, nor has he in the past five years been, a nominee or director of any other SEC registrant. In concluding that Mr. Kubota was an appropriate candidate to serve on the Company’s board of directors, the board considered his experience as the Company’s president and chief executive officer, his many years of investment banking and corporate finance experience and his prior management experience.
Fred Odaka
. Mr. Odaka joined PHCO as CFO in August 2008. He has held senior level management positions in corporate finance for over 30 years and has served as CFO for private and public companies. Prior to joining PHCO, from 1998 to May 2008, Mr. Odaka was CFO of Rx for Africa, Inc. (“RXAF”), f/k/a Diamond Entertainment Corporation (“DMEC”) – OTCBB. At the time, RXAF owned and operated a large pharmaceutical plant in Addis Ababa, Ethiopia. Prior to the merger, DMEC marketed and sold DVD titles to the home video market primarily through mass merchandisers and department stores. For four years, Mr. Odaka was a Financial Consultant and Analyst for Kibel, Green Inc., a leading West Coast business advisory and financial service firm specializing in corporate re-structure and crisis intervention. Mr. Odaka was also a co-founder of Rexon Inc., a manufacturer of computers and computer peripheral equipment and from 1978 to 1984 held the position of Vice President/CFO and was instrumental in taking the company public. Mr. Odaka also served as Controller of the computer division of Perkin-Elmer, a NYSE traded company. Mr. Odaka received his Bachelor of Science degree in Finance from Fresno State College, Fresno, California.
David Wang
.
Mr. Wang has served as a managing member of Reef Capital Management, LLC since late 2013. He is responsible for managing a fund that was created to generate long-term cash flow to investors by investing primarily in drilling and development of oil projects. Prior to joining Reef Capital Management, Mr. Wang co-founded and
began
serving
as the President of Aces Fuel Technology in Santa Monica, California
in
2005. Aces Fuel Technology specialize
d
in marketing and selling a fuel and oil catalyst. Mr. Wang
was
responsible for overseeing day-to-day operations. Mr. Wang earned a BS in Computer Science/ Mathematics from the University of California, Los Angeles (UCLA) in 1985. He earned an MBA degree
with an emphasis
in Financial and Entrepreneurial Studies from the Anderson School at UCLA in 2000. Mr. Wang is not currently, nor has he in the past five years been, a nominee or director of any other SEC registrant. In concluding that Mr. Wang was an appropriate candidate to serve on the Company's board of directors, the board considered his education background, his experience in entrepreneurial business enterprises and his favorable history of attracting venture capital funds through his established contacts in the investment banking community.
Stacy Hadley.
Mrs. Hadley has over 20 years of accounting and audit experience. She has been employed with Now CFO, a provider of outsourced accounting and financial solutions, since September 2015. Mrs. Hadley is currently a Partner at CFO Now. She is currently responsible for overseeing the operations of company’s Houston, Texas office and is serving as the Chief Financial Officer for a midstream construction company with $100 million in revenue. From November 2014 to September 2015, Mrs. Hadley was employed by Harman International as a Compliance and Financial Consultant where, among other things, she oversaw compliance reporting of four business units and divisional shared services, worked with finance directors to implement and document internal control testing, and documented procedures to ensure adherence with company policies and internal controls. From December 2012 to November 2014, Mrs. Hadley served as the Controller for Dalbo Holdings where she was responsible for general ledger accounting, analyzing and reconciling accounts and records for service lines, verifying revenues, expenses and other accounting functions. From 2008 through November 2012, Mrs. Hadley worked for Morrill & Associates, CPAs, where she gained progressive audit experience auditing public and privately held companies. Mrs. Hadley received licensure as a Certified Public Accountant in July 2014. Mrs. Hadley received a Bachelor’s of Science Degree in Accounting and a Master’s Degree in Accounting from Weber State University, Utah in 2010 and 2012, respectively. During the past five years Mrs. Hadley has not served, and she does not currently serve, as a director of any other SEC registrant or any registered investment company. The board of directors considered Mrs. Hadley’s years of accounting and auditing experience both with accounting firms, and in-house with a number of different employers, as well as her educational background and her CPA licensure in concluding that she is qualified to serve on the Company’s board of directors.
Gunter Soraperra.
Mr. Soraperra has served as the Chief Executive Officer of Traunkristall Design since 2000. Traunkristall specializes in the design, production, and sale of high-end hand-made crystal products and has business activities in more than 25 countries. Among other things, Mr. Soraperra is responsible for setting strategy and direction, allocation of capital, and overseeing sales and marketing at Traunkristall. Mr. Soraperra received a Master of Business Administration degree from the University of Graz, Austria in 1990. Over the past fifteen years Mr. Soraperra has also served as a Senior Vice President of a private Swiss investment group responsible for coordinating international activities, financing and mergers and acquisitions. He has also served on the advisory boards of various international companies. In the past five years Mr. Soraperra has not served, and he does not currently serve, as a director of any other SEC registrant or any registered investment company. In concluding that Mr. Soraperra was qualified to serve on the Company’s board of directors, the board considered Mr. Soraperra’s years of strategy, management, finance and operational experience.
Family Relationships
There are no family relations among any of our executive officers and directors.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our directors and executive officers, and any persons who own more than 10% of a registered class of our equity securities, to file with the Commission reports of beneficial ownership and changes in beneficial ownership. These persons are required by Commission regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on our review of the copies of such reports furnished to us or written representations that no other reports were required during the fiscal year ended December 31, 2016, we believe that, with the exception of a Form 3 that was filed several days late by our director Stacy Hadley due to difficulties obtaining Edgar ID codes, all reports required to be filed under Section 16(a) were filed on a timely basis.
Code of Ethics
Our board of directors has adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or to persons performing similar functions. The code of ethics is designed to deter wrongdoing and to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (ii) full, fair, accurate, timely and understandable disclosure in reports and documents we file with, or submit to, the Commission and in other public communications we make, (iii) compliance with applicable governmental laws, rules and regulations, (iv) prompt internal reporting of violations of the code, and (v) accountability for adherence to the code. We will provide a copy of our code of ethics, without charge, to any person upon receipt of written request for such delivered to our corporate headquarters. All such requests should be sent care of Pacific Health Care Organization, Inc., Attn: Corporate Secretary, 1201 Dove Street, Suite 300, Newport Beach, California 92660. A copy of our code of ethics has been posted on our website and may be viewed at www.pacifichealthcareorganization.com. If we make any substantive amendments to, or grant any waivers from, the code of ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8-K.
Committees of the Board of Directors
The OTCQB does not require us to have a separately-designated standing audit committee, a compensation committee or a nominating and corporate governance committee. Our board of directors has determined that it is in the Company’s best interest to have the full board fulfill the functions that would be performed by these committees.
While we do not currently have a standing audit committee, our board of directors believes that were it to establish an audit committee, Mrs. Hadley would qualify as an “audit committee financial expert” under the rules adopted by the Commission pursuant to the Sarbanes-Oxley Act of 2002.
Procedures for Security Holders to Nominate Candidate to the Board of Directors
There have been no material changes to the procedures by which shareholders may recommend nominees to our board of directors since March 30, 2012, the date we last provided information with regard to our director nomination process.
ITEM 11. EXECUTIVE COMPENSATION
The table below summarizes compensation paid to or earned by our named executive officers (“NEOs”) for the fiscal years ended December 31, 2016 and 2015. No other executive officer of the Company had total compensation of $100,000 or more in 2016.
Summary Compensation Table
Name and
Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock Awards(1)
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Tom Kubota
|
|
2016
|
|
|
178,814
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
16,777
|
(3)
|
|
|
195,591
|
|
Chief Executive Officer,
|
|
2015
|
|
|
193,536
|
|
|
|
938
|
|
|
|
6,263
|
|
|
|
59,774
|
(4)
|
|
|
260,511
|
|
President and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fred Odaka
|
|
2016
|
|
|
102,572
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
10,832
|
(5)
|
|
|
113,404
|
|
Chief Financial Officer
|
|
2015
|
|
|
116,126
|
|
|
|
938
|
|
|
|
6,263
|
|
|
|
23,962
|
(6)
|
|
|
147,289
|
|
(1)
For details regarding the assumptions made in the valuation of stock awards, please see “
Valuation of Restricted Stock Grants
” below.
(2)
Reflects annual base salary reduction of 10% effective April 2016.
(3)
Reflects health insurance premiums, auto expenses, and director’s fees of $4,181, $7,796, and $4,800, respectively.
(4)
Reflects health insurance premiums, auto expenses, payment of accrued time off and director’s fees of $4,692, $8,372, $43,110 and $3,600, respectively.
(5)
Reflects health insurance premiums and fees for attending board meetings of $6,032, and $4,800, respectively.
(6)
Reflects health insurance premiums, payment of accrued time off and fees for attending board meetings of $5,922, $14,440 and $3,600, respectively.
Narrative Disclosure to Summary Compensation Table
Employment Agreements
We have a written employment agreement with Mr. Odaka. We do not have a written employment agreement with Mr. Kubota. Each of our NEOs is employed/retained on an at-will basis and each can terminate their employment arrangement with the Company at any time, with or without cause. Likewise, we can terminate their employment at any time, with or without cause.
Base Salary
Base salary is used to recognize the experience, skills, knowledge and responsibilities required of our NEOs. The base salary for each NEO is typically set at the time the individual is hired based on the factors discussed in the preceding sentence and the negotiation process between us and the NEO. We also take into consideration the individual’s past performance, experience and expertise we need and local market and labor conditions. Changes to base salary, if any, are determined based on several factors, including evaluation of performance, anticipated financial performance of the Company, economic condition and local market and labor conditions. During the fourth quarter 2014, the board of directors awarded 12% base salary increases to each of our NEO’s, which became effective January 1, 2015. As a result, Mr. Kubota’s annual base salary for 2015 increased to approximately $193,500 and Mr. Odaka’s annual base salary increased to approximately $116,100. In April 2016, Mr. Kubota and Mr. Odaka agreed to temporarily reduce their annual base salaries by 10%. As of the date of this report, the reduction of 10% still remains in force. In addition, the board has not extended annual base salary increases to Mr. Kubota or Mr. Odaka for 2017, although the board could determine to do so at any time in its sole discretion.
Non-Equity Incentive Compensation
From time to time we may make cash awards to our employees, including the NEOs. Such awards may be designed to incentivize employees over a specified period of time pursuant to pre-established, performance-based criteria, the accomplishment of which is substantially uncertain at the time the criteria are established. In the event this type of cash award is made, it would be reflected in the “
Summary Compensation Table
” under a separate column entitled “
Nonequity Incentive Plan Compensation
.” The criteria for earning non-equity incentive bonuses may be based on corporate financial performance measures that would be developed by our board of directors at the time such non-equity incentive plan is established. Our board has discretion to determine the applicable performance measures and the appropriate weighting of such measures at the time it establishes any non-equity incentive plan. Our board of directors did not establish a non-equity incentive compensation plan during the fiscal years ended December 31, 2016 or 2015, and no non-equity incentive compensation was awarded during these years.
Bonuses
We may also make cash awards to employees that are not part of any pre-established, performance-based criteria. Awards of this type are completely discretionary and subjectively determined by our board of directors at the time they are awarded. Such awards are reported in the “
Summary Compensation Table
” in the column entitled “
Bonus
.”
On December 3, 2015, our board of directors, in recognition of service rendered to the Company, awarded a total of $7,410 in bonuses to nine employees and one consultant. Included in these bonuses were bonuses awarded to Mr. Kubota and Mr. Odaka for $938 each. These cash bonuses were completely discretionary and were not based on any pre-established criteria. The board of directors was under no contractual or other obligation to award cash bonuses.
Equity Incentive Compensation
Our equity incentive award program is the primary vehicle for offering long-term incentives to our employees. From time to time, we may also make equity incentive awards to our NEOs, employees, and consultants in the form of stock options, restricted stock grants or some other form of equity award. Equity incentive awards are reflected in the “
Summary Compensation Table
” under the columns entitled “
Stock Awards
” and “
Option Awards
”
as appropriate
.
For information regarding equity incentive compensation awarded to our NEOs in the past two fiscal years, see “
Valuation of Restricted Stock Grants
” below.
Our board of directors has no obligation to make award equity compensation. That does not mean the board of directors may not, as it deems appropriate, award equity incentive compensation when it deems such to be appropriate in the future.
Valuation of Restricted Stock Grants
On December 31, 2015, we awarded restricted stock grants to ten employees and consultants, including our NEOs, under the Pacific Health Care Organization, Inc. 2005 Stock Option Plan (the “2005 Plan”). The total number of restricted shares of common stock granted was 5,928 shares. The grants vested one year from the date of grant and were subject to forfeiture should the NEO terminate his employment prior to vesting. The restricted stock grants were valued at $8.35 per share, the closing price of our common stock on the December 31, 2015 grant date. Mr. Kubota and Mr. Odaka were each awarded a restricted stock grant of 750 shares of our common stock. These restricted stock grants vested to Mr. Kubota and Mr. Odaka when the vesting period expired in December 2016.
Benefits and Other Compensation
We currently provide health care benefits, including medical, vision and dental insurance, subject to certain deductibles and co-payments to its full time employees. We also provide for paid time off (“PTO”), which includes vacation, sick leave and other out-of-the-office time and is accrued and paid in accordance with our PTO policy. We may also provide group life and disability insurance to employees who are eligible to participate in such programs.
The Company offers a 401(k) profit sharing plan for employees who meet the eligibility requirements. Pursuant to the plan, we may make discretionary matching contributions and/or discretionary profit sharing contributions to the plan. All such contributions must comply with federal pension laws, non-discrimination requirements and the terms of the plan. In determining whether to make a discretionary contribution, the board of directors would evaluate current and future prospects and management’s desire to reward and retain employees and attract new employees. To date, we have never made matching contributions and/or discretionary profit sharing contributions to any plan.
Other than the foregoing, we do not offer any retirement or other benefit plans to our employees, including our NEOs, at the present time, however, the board of directors may adopt plans as it deems to be reasonable under the circumstances.
Mr. Kubota and Mr. Odaka are entitled to participate, if eligible under such plans, in any insurance programs we offer to our employees, are eligible for PTO and to participate in such other fringe benefit programs as we may make available to our other employees.
Nonqualified Deferred Compensation
We offer no defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified to any of our employees including our NEOs.
Pension Benefits
We offer no pension or other specified retirement payments or benefits, including but not limited to tax-qualified deferred benefit plans and supplemental executive retirement plans to our NEOs.
Termination and Change in Control
We do not have agreements, plans or arrangements, written or unwritten, with any of our NEOs that would provide for payments or other benefits to any of our NEOs following, or in connection with, the resignation, retirement or other termination of any NEO or change in control of the Company or a change in the responsibilities of any NEO following a change in control of the Company.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
On December 31, 2016, restricted stock grants of 750 shares awarded to each of our NEOs on December 31, 2015, vested. Therefore, as of the end of fiscal 2016, we had no NEOs holding outstanding equity awards.
DIRECTOR COMPENSATION
We offer cash compensation to attract and retain candidates to serve on our board of directors.
Meeting Fees
All directors receive a fee of $1,200 per meeting for each meeting attended either in person or telephonically. Additionally, all directors are paid $1,000 for attendance at the annual meeting of stockholders, plus airfare and hotel expense.
Equity Compensation
We do not currently have a fixed plan for the award of equity compensation to our directors, and we did not award any equity compensation to any of our directors during 2016.
Director Compensation Table
The following table sets forth a summary of the compensation we paid to our directors for services on our board during 2016.
Name
|
|
Fees Earned or Paid in Cash ($)
|
|
|
All Other
Compensation($)
|
|
|
Total
($)
|
|
Tom Kubota
|
|
|
4,800
|
|
|
|
190,791
|
(1)
|
|
|
195,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Wang
|
|
|
4,800
|
|
|
|
-
|
|
|
|
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gunter Soraperra
(2)
|
|
|
1,200
|
|
|
|
-
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stacy Hadley
(2)
|
|
|
1,200
|
|
|
|
-
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Iwanski
(3)
|
|
|
3,600
|
|
|
|
1,000
|
(4)
|
|
|
4,600
|
|
(1)
|
Mr. Kubota is employed as the Company’s chief executive officer and President. For details regarding All Other Compensation paid to Mr. Kubota, please see “
Summary Compensation Table
” above.
|
(2)
|
Mr. Soraperra and Mrs. Hadley were appointed to fill vacancies on the board of directors on November 7, 2016.
|
(3)
|
Mr. Iwanski resigned as a member of the Company’s board of directors on October 5, 2016.
|
(4)
|
Fees paid for consulting services rendered in connection with the evaluation of business development projects during 2016.
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 16, 2017:
·
|
each person known to us to beneficially own more than 5% of our common stock or Series A Preferred Stock;
|
·
|
each of our named executive officers;
|
·
|
each member of our board of directors; and
|
·
|
all of our directors and executive officers as a group.
|
On March 16, 2017, there were 800,000 shares of common stock issued and outstanding and 1,000 shares of Series A Preferred Stock issued and outstanding.
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to such securities. Except as otherwise indicated, the persons or entities listed below have sole voting and investment power with respect to all shares of the Company’s common stock and Series A Preferred Stock beneficially owned by them, except to the extent this power may be shared with a spouse.
Unless otherwise indicated, the address of each person or entity named in the table is 1201 Dove Street, Suite 300, Newport Beach, California 92660.
|
|
Common Stock Beneficially Owned
(1)
|
|
|
Series A Preferred Stock Beneficially Owned
(2)
|
|
Name of Beneficial Owner
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom Kubota
(3)
|
|
|
484,000
|
|
|
|
60.4
|
%
|
|
|
1,000
|
|
|
|
100
|
%
|
Fred Odaka
|
|
|
750
|
|
|
|
*
|
%
|
|
|
--
|
|
|
|
--
|
%
|
Stacy Hadley
|
|
|
--
|
|
|
|
--
|
%
|
|
|
--
|
|
|
|
--
|
%
|
Gunter Soraperra
|
|
|
--
|
|
|
|
--
|
%
|
|
|
--
|
|
|
|
--
|
%
|
David Wang
|
|
|
--
|
|
|
|
--
|
%
|
|
|
--
|
|
|
|
--
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group
(5 persons)
|
|
|
484,750
|
|
|
|
60.5
|
%
|
|
|
1,000
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald P. Balzano
(4)
|
|
|
54,915
|
|
|
|
6.9
|
%
|
|
|
--
|
|
|
|
--
|
%
|
5422 Michelle Drive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Torrance, CA 90503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce and Sarah Everakes
(5)
|
|
|
40,101
|
|
|
|
5.0
|
%
|
|
|
--
|
|
|
|
--
|
%
|
3442 Riverfalls
|
|
|
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Northbrook, IL 60062
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* Less than 1%.
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(1)
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Includes shares of common stock that may be deemed to be beneficially owned by such persons due to their beneficial ownership of Series A Preferred Stock, which are convertible to common stock on a share-for-share basis at any time at the election of the holder.
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(2)
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Each share of Series A Preferred Stock entitles its holder to vote together with the common stock as a single class on all matters presented to the Company’s common stock holders for their vote. Each outstanding share of Series A Preferred Stock votes as 20,000 shares of common stock. The Series A Preferred Stock ranks in parity with the common stock on a per share basis, not on a per vote basis, as to any dividends, liquidation, dissolution or winding up of the Company.
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(3)
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Mr. Kubota holds the shares in the Tom Kubota Revocable Trust of 2013 (the “Trust”). Mr. Kubota is the sole Trustee of the Trust. As such he may be deemed to have voting and/or investment power over the shares held by the Trust and therefore may be deemed to be the beneficial owner of those shares.
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(4)
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Mr. Balzano is a Company consultant and serves as the president of our wholly-owned subsidiaries Industrial Resolutions Coalition, Inc. and Medex Legal Support, Inc.
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(5)
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Based solely on the Schedule 13G filed by Bruce Everakes on October 2, 2015.
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Equity Compensation Plans
Plan category
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Number of securities to be issued upon exercise of outstanding options, warrants and rights
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Weighted
average exercise price of outstanding options, warrants and rights
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
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(a)
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(b)
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(c)
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Equity compensation plans approved by security holders
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0
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$
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0.00
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89,822
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Equity compensation plans not approved by security holders
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0
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$
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0.00
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-0-
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Total
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0
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$
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0.00
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89,822
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2002 Stock Option Plan
On August 13, 2002, we adopted the Pacific Health Care Organization, Inc. 2002 Stock Option Plan (the “2002 Plan”) which allows for a total of 50,000 shares to be held for grant. Unless terminated by the Board, the 2002 Plan shall continue to remain effective until such time as all shares covered under the 2002 Plan have been granted and all awards granted under the 2002 Plan are no longer outstanding. As of March 16, 2017, 42,750 shares remain available for grant under the 2002 Plan.
2005 Stock Option Plan
On November 18, 2005, our shareholders adopted the Pacific Health Care Organization, Inc., 2005 Stock Option Plan (the “2005 Plan”). The 2005 Plan provides for the grant of Company securities, including options, warrants and restricted stock to officers, directors, consultants and employees to acquire shares of the Company’s common stock at a purchase price equal to or greater than fair market value as of the date of the grant. Options are exercisable six months after the grant date and expire five years from the grant date. The 2005 Plan permits the granting of up to 50,000 common shares of the Company. As of March 16, 2017, 44,072 shares remain available for grant under the 2005 Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as disclosed in Item 11
Executive Compensation
, during fiscal 2016 and 2015, we did not engage in transactions with related persons (as defined by Rule 404 of Regulation S-K
(Instructions to Item 404(a))
that exceeded the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two fiscal years in which any such related person had or will have a direct or indirect material interest.
Director Independence
The board has determined that as of December 31, 2016, Mrs. Hadley, Mr. Soraperra and Mr. Wang would qualify as “independent directors” as that term is defined in the listing standards of the NYSE MKT. Such independence definition includes a series of objective tests, including that the director is not an employee of the company and has not engaged in various types of business dealings with the company. In addition, as further required by the NYSE MKT listing standards, the board of directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees for professional services provided by our independent registered public accounting firm in each of the last two fiscal years, in each of the following categories, were as follows:
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2016
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2015
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Audit
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$
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57,011
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$
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54,530
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Audit related
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-0-
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-0-
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Tax
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-0-
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-0-
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All other
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-0-
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-0-
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Total
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$
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57,011
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$
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54,530
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Audit Fees
. Audit fees were for professional services rendered in connection with the audit of the financial statements included in our Annual Report on Form 10-K and review of the financial statements included in our Quarterly Reports on Form 10-Q and for services normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings or engagements.
Board of Directors Pre-Approval Policies and Procedures
. At its regularly scheduled and special meetings, our board of directors, in lieu of an established audit committee, considers and pre-approves any audit and non-audit services to be performed by our independent registered public accounting firm. The board of directors has the authority to grant pre-approvals of non-audit services.
Our full board of directors is responsible for selection, review and oversight of our independent registered public accounting firm. The board of directors has not, as of the time of filing this Annual Report on Form 10-K with the Commission, adopted policies and procedures for pre-approving audit or permissible non-audit services performed by our independent registered public accounting firm. Instead, the board of directors as a whole has pre-approved all such services, except for services meeting a “de minimus” exception. To qualify for the “de minimus” exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than 5% of the total amount of revenues paid by us to our independent registered public accounting firm during the fiscal year in which the non-audit services are provided; such services were not recognized by us at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the board and approved prior to the completion of the audit by the board or by one or more members of the board to whom authority to grant such approval has been delegated. In the future, our board of directors may approve the services of our independent registered public accounting firm pursuant to pre-approval policies and procedures adopted by the board of directors, or an audit committee if one is standing, provided the policies and procedures are detailed as to the particular service, the board of directors is informed of each service, and such policies and procedures do not include delegation of the board of director’s responsibilities to our management.
The board of directors has determined that the provision of services by Pritchett, Siler & Hardy, P.C., described above are compatible with maintaining their independence as our independent registered public accounting firm.