Income from Operations
As a result of the 34% increase in total revenue during the three-month period ended June 30, 2017, which was partially offset by the 13% increase in total expenses during the same period, our income from operations increased by 216% during the three-month period ended June 30, 2017, when compared to the same period in 2016.
Income Tax Provision
Because we realized income before taxes of $411,847 and $130,128 during the three-month periods ended June 30, 2017 and 2016, respectively, we realized a $117,221, or 216%, increase in our income tax provision.
Net Income
During the three-month period ended June 30, 2017, total revenues of $1,675,637 was 34% higher when compared to the same period in 2016. This increase in total revenues was partially offset by a 13% increase in total expenses, resulting in a 216% increase in income from operations compared to the three months ended June 30, 2016. Correspondingly, we realized net income of $240,480 for the three-month period ended June 30, 2017, also a 216% increase compared to the three-month period ended June 30, 2016.
Comparison of six months ended June 30, 2017 and 2016
The following represents selected components of our consolidated results of operations, for the six-month periods ended June 30, 2017 and 2016, respectively, together with changes from period-to-period:
|
|
For six months ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
HCO fees
|
|
$
|
663,405
|
|
|
$
|
688,817
|
|
|
$
|
(25,412
|
)
|
|
|
(4
|
%)
|
MPN fees
|
|
|
284,971
|
|
|
|
290,057
|
|
|
|
(5,086
|
)
|
|
|
(2
|
%)
|
NCM fees
|
|
|
1,241,577
|
|
|
|
677,329
|
|
|
|
564,248
|
|
|
|
83
|
%
|
UR fees
|
|
|
510,343
|
|
|
|
375,029
|
|
|
|
135,314
|
|
|
|
36
|
%
|
MBR fees
|
|
|
334,258
|
|
|
|
330,064
|
|
|
|
4,194
|
|
|
|
1
|
%
|
Other
|
|
|
182,339
|
|
|
|
197,574
|
|
|
|
(15,235
|
)
|
|
|
(8
|
%)
|
Total revenues
|
|
|
3,216,893
|
|
|
|
2,558,870
|
|
|
|
658,023
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
39,397
|
|
|
|
42,322
|
|
|
|
(2,925
|
)
|
|
|
(7
|
%)
|
Bad debt provision
|
|
|
14,750
|
|
|
|
9,000
|
|
|
|
5,750
|
|
|
|
64
|
%
|
Consulting fees
|
|
|
155,994
|
|
|
|
190,068
|
|
|
|
(34,074
|
)
|
|
|
(18
|
%)
|
Salaries and wages
|
|
|
1,186,358
|
|
|
|
1,143,048
|
|
|
|
43,310
|
|
|
|
4
|
%
|
Professional fees
|
|
|
199,231
|
|
|
|
142,263
|
|
|
|
56,968
|
|
|
|
40
|
%
|
Insurance
|
|
|
178,006
|
|
|
|
161,855
|
|
|
|
16,151
|
|
|
|
10
|
%
|
Outsource service fees
|
|
|
258,251
|
|
|
|
175,208
|
|
|
|
83,043
|
|
|
|
47
|
%
|
Data maintenance
|
|
|
59,101
|
|
|
|
83,015
|
|
|
|
(23,914
|
)
|
|
|
(29
|
%)
|
General and administrative
|
|
|
333,310
|
|
|
|
317,336
|
|
|
|
15,974
|
|
|
|
5
|
%
|
Total expenses
|
|
|
2,424,398
|
|
|
|
2,264,115
|
|
|
|
160,283
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
792,495
|
|
|
|
294,755
|
|
|
|
497,740
|
|
|
|
169
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
792,495
|
|
|
|
294,755
|
|
|
|
497,740
|
|
|
|
169
|
%
|
Income tax provision
|
|
|
329,758
|
|
|
|
122,647
|
|
|
|
207,111
|
|
|
|
169
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
462,737
|
|
|
$
|
172,108
|
|
|
$
|
290,629
|
|
|
|
169
|
%
|
Revenue
Total revenues during the six-month period ended June 30, 2017, increased 26% to 3,216,893 compared to $2,558,870 during the six-month period ended June 30, 2016.
During the first six-months of 2017, nurse case management, utilization review, and medical bill review increased 83%, 36% and 1% respectively, while HCO, MPN and other fees decreased by 4%, 2%, and 8%, respectively. Other revenues consisted of revenues derived primarily from network claims repricing services, lien representation services, legal support services, workers’ compensation carve out revenues and Medicare set aside revenues.
HCO fees
During the six-month periods ended June 30, 2017 and 2016, HCO fee revenues were $663,405 and $688,817 respectively. The 4% decrease in HCO revenue was primarily attributable to lower revenues derived from initial notification and mailing fees from a new HCO customer in the six-month period ended June 30, 2017 of $25,734 compared to $84,453 in the same period in 2016, partially offset from revenues derived from a new customer starting in the first quarter of 2017 and slight increases from existing customers.
MPN fees
MPN fee revenue for the six-month periods ended June 30, 2017 and 2016, was $284,971 and $290,057 respectively, a decrease of 2%, resulting from lower revenues from one existing customer.
NCM fees
During the six months ended June 30, 2017 and 2016, nurse case management revenue was $1,241,577 and $677,329, respectively. The increase in nurse case management revenue of $564,248 was primarily the result of adding new customers during the third and fourth quarters of 2016, and increases in revenues from existing customers. We expect nurse case management revenue to increase at more moderate rates during the remainder of fiscal 2017.
UR fees
During the six-month periods ended June 30, 2017 and 2016, utilization review revenue was $510,343 and $375,029, respectively. The increase of $135,314 in the 2017 period was attributable to adding new clients in the third and fourth quarters of fiscal 2016. Utilization review can provide a safeguard against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, etc. Through our skilled staff and automated review system, we are able to deliver utilization review services that cut overhead costs for the self-insured clients, insurance companies and the public entities we service.
MBR fees
During the six-month period ended June 30, 2017, medical bill review revenue increased $4,194 to $334,258 when compared to the same period a year earlier. This 1% increase was mainly caused by processing increased hospital claims from existing customers. Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. Such services include, but are not limited to, coding review and rebundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. These services can result in significant network savings.
Other
Other fees consist of revenue derived from network access and claims repricing, lien representation, legal support services, Medicare set aside and worker’s compensation carve-outs services. Other fee revenue for six-month periods ended June 30, 2017 and 2016, was $182,339 and $197,574, respectively. The decrease of $15,235 was mainly the result of decreased network access fees from one customer having lower savings realized from using our PPO network. We expect this downward trend for this customer to continue for the remainder of 2017.
Expenses
Total expenses for the six months ended June 30, 2017 and 2016, were $2,424,398 and $2,264,115, respectively. The increase of $160,283 was the result of increases in salaries and wages, professional fees, insurance, outsource service fees, general and administrative expense and bad debt, partially offset by decreases in depreciation, consulting fees and data maintenance expense.
Depreciation and Amortization
During the six-month period ended June 30, 2017, we recorded depreciation and amortization expense of $39,397 compared to $42,322 during the comparable 2016 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the fourth quarter of 2016.
Bad Debt
During the six-month period ended June 30, 2017, bad debt provision increased by $5,750 compared to the six-month period ended June 30, 2017. This increase of $5,750 was primarily the result of additional provisions required for one potential uncollectable account.
Consulting Fees
During the six months ended June 30, 2017, consulting fees decreased to $155,994 from $190,068, during the six months ended June 30, 2016. This decrease was mainly the result of a 10% reduction in fees paid to two consultants commencing in June 2016 and converting a consultant to an employee in March 2016.
Salaries and Wages
During the six-month period ended June 30, 2017, salaries and wages increased 4% to $1,186,358 compared to $1,143,048 during the same period in 2016. This increase was primarily the result of additional staffing in nurse case management and higher levels of commissions partially offset by salary reductions of 10% by several senior executives in June 2016.
Professional Fees
For the six months ended June 30, 2017, we incurred professional fees of $199,231, compared to $142,263 during the six months ended June 30, 2016. The $56,968 increase in professional fees was primarily the result of higher professional fees paid for nurse case management services resulting from increased numbers of cases processed.
Insurance
During the six-month period ended June 30, 2017, we incurred insurance expenses of $178,006, a 10% increase over the same six-month period in 2016. The increase in insurance expense was primarily attributed to higher workers’ compensation premiums for our employees and directors’ and officers’ insurance premiums during the six months period ended June 30, 2017 compared to 2016. We do not expect current insurance fees to increase significantly over the remaining months of 2017.
Outsource Service Fees
Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review and nurse case management services, and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services. We incurred $258,251 and $175,208 in outsource service fees during the six-month periods ended June 2017 and 2016, respectively. The increase of $83,043 was primarily the result of increases in outsource services required for utilization review and field case management fees. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review and certain nurse case management services we provide in the future.
Data Maintenance
During the six-month period ended June 30, 2017 and 2016, data maintenance fees were $59,101 and $83,015 respectively. The decrease of $23,914 was primarily the result of recording notification fees associated with the addition of a major HCO customer in the first quarter 2016, with a lower level of notification fees recorded for this same customer during the six-month period ended June 30, 2017.
General and Administrative
During the six-month period ended June 30, 2017, general and administrative expenses increased 5% to $333,310 when compared to the six-month period ended June 30, 2016. This increase of $15,974 was primarily attributable to increases in IT enhancement, licenses and permits, office rent, miscellaneous expense, and travel expense, partially offset by decreases in charitable contributions, auto expense, postage expense, office supplies and paid time off expense. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2017.
Income from Operations
As a result of the 26% increase in total revenue during the six-month period ended June 30, 2017, which was partially offset by the 7% increase in total expenses, our income from operations increased to $792,495, a 169% increase compared to the same period in 2016.
Income Tax Provision
Because we realized income before taxes of $792,495 and $294,755 during the six-month periods ended June 30, 2017 and 2016, respectively, we realized a $207,111, or 169%, increase in our income tax provision.
Net Income
During the six-month period ended June 30, 2017, total revenues of $3,216,893 was 26% higher when compared to the same period in 2016. This increase in total revenues was partially offset by a 7% increase in total expenses, resulting in a 169% increase in income from operations. Correspondingly, we realized net income of $462,737 for the six-month period ended June 30, 2017, also a 169% increase compared to the six-month period ended June 30, 2016.
Liquidity and Capital Resources
As of June 30, 2017, we had cash on hand of $5,431,874 compared to $5,005,617 at December 31, 2016. The $426,257 increase was primarily the result of net cash provided by our operating activities, partially offset by cash used in investing activities. Net cash provided by our operating activities was the result of realizing net income with increases in accumulated depreciation, income tax payable and deferred rent expense and decreases in prepaid expenses, partially offset by decreases in our bad debt, accounts payable, accrued expenses, unearned revenues and increases in our accounts receivable. We used $12,692 in investing activities for purchases of computers, furniture and equipment. Barring a significant downturn in the economy or the loss of major customers, we believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses over the next twelve months.
We currently have planned certain capital expenditures during fiscal 2017 to support potential new customers’ software requirements. We do not expect these software expenditures to be material. We do not anticipate this will require us to seek outside sources of funding. We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We are taking steps to look at acquisition candidates to vertically grow our Company. In addition, we are also exploring potential acquisition candidates that are not in the workers’ compensation and health care related industries. We have not found any suitable candidate at the current time. We could use cash or stock of our Company or some combination of both in any such expansion or acquisition. An expansion or acquisition of this sort may require greater capital resources than we possess. Should we need additional capital resources, we most likely would seek to obtain such through debt and/or equity financing. Although we have met with potential investment banking firms, we do not currently possess an institutional source of financing. There is no assurance that we could be successful in obtaining equity or debt financing on favorable terms, or at all.
Ca
sh Flow
During the six months ended June 30, 2017, cash was primarily used to fund operations. We had a net increase in cash of $426,257 during the six months ended June 30, 2017. See below for additional information.
|
|
For the six months ended June
|
|
|
|
2017
(unaudited)
|
|
|
2016
(unaudited)
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
$
|
438,949
|
|
|
$
|
646,347
|
|
Net cash used in investing activities
|
|
|
(12,692
|
)
|
|
|
(12,312
|
)
|
Net cash used in financing activities
|
|
|
-
|
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
426,257
|
|
|
$
|
632,285
|
|
During the six months ended June 30, 2017 and 2016, net cash provided by operating activities was $438,949 and $646,347 respectively. As discussed herein, we realized net income of $462,737 during the six months ended June 30, 2017, compared to net income of $172,108 during the six months ended June 30, 2016. The decrease of $207,398 in cash flow from operating activities was primarily the result of increases in accounts receivable, income tax payable and deferred rent and decreases in bad debt, accounts payable, accrued expenses, unearned revenues and prepaid expense.
Net cash used in investing activities was $12,692 and $12,312 during the six-month periods ended June 30, 2017 and 2016, respectively. During the six-month period ended June 30, 2017 and 2016, net cash used in investing activities was used to purchase computers, furniture and equipment.
Net cash used in financing activities during the six-month period ended 2017 was lower by $1,750 when compared to the same period in 2016, as no cash dividends were paid in 2017.
Summary of Material Contractual Commitments
The following is a summary of our material contractual commitments as of June 30, 2017.
|
|
Payments Due By Period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Operating Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases – Equipment
|
|
$
|
62,025
|
|
|
$
|
20,675
|
|
|
$
|
41,350
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Office Leases
|
|
$
|
1,239,718
|
|
|
|
253,343
|
|
|
|
443,633
|
|
|
|
542,742
|
|
|
|
-
|
|
Total Operating Leases
|
|
$
|
1,301,743
|
|
|
$
|
274,018
|
|
|
$
|
484,983
|
|
|
$
|
542,742
|
|
|
$
|
-
|
|
Item 3. Quantitative and Qualitative Disclosure about Market Risk
This information is not required for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, which are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on the evaluation of our disclosure controls and procedures as of June 30, 2017, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017, that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Management does not believe there have been any material changes to the risk factors listed in Part I, “Item 1A, Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2016. These risk factors should be carefully considered with the information provided elsewhere in this report, which could materially adversely affect our business, financial condition or results of operations.
Exhibits. The following exhibits are filed or furnished, as applicable, as part of this report:
|
Exhibit Number
|
|
Title of Document
|
|
|
|
|
|
Exhibit 31.1
|
|
|
|
|
|
|
|
Exhibit 31.2
|
|
|
|
|
|
|
|
Exhibit 32.1
|
|
|
|
|
|
|
|
Exhibit 101
|
|
The following materials from Pacific Health Care Organization, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Unaudited Condensed Consolidated Financial Statements.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
PACIFIC HEALTH CARE ORGANIZATION, INC.
|
|
|
|
|
|
|
|
|
Date:
|
August 14, 2017
|
/s/ Tom Kubota
|
|
|
|
Tom Kubota
Chief Executive Officer
|
|
|
|
|
Date:
|
August 14, 2017
|
/s/ Fred Odaka
|
|
|
|
Fred Odaka
Chief Financial Officer
|