The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
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, 2017 and 2016.
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, 2017 and 2016
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,
|
|
|
|
2017
|
|
|
2016
|
|
Basic Earnings per share:
|
|
|
|
|
|
|
Income (numerator)
|
|
$
|
964,405
|
|
|
$
|
566,748
|
|
Shares (denominator)
|
|
|
800,000
|
|
|
|
800,000
|
|
Per share amount
|
|
$
|
1.21
|
|
|
$
|
0.71
|
|
Fully Diluted Earnings per share:
|
|
|
|
|
|
|
|
|
Income (numerator)
|
|
$
|
964,405
|
|
|
$
|
566,748
|
|
Shares (denominator)
|
|
|
886,000
|
|
|
|
801,000
|
|
Per share amount
|
|
$
|
1.09
|
|
|
$
|
0.71
|
|
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.
|
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
The carrying amounts reported in the balance sheets for 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.
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, 2017, and 2016, 1,000 shares of the Series A preferred stock were outstanding.
The Company also has voting common stock of 50,000,000 shares authorized at December 31, 2017 and 2016, 800,000 shares issued and outstanding and 800,000 shares issued and 800,000 outstanding net of treasury shares, respectively. The Company purchased no shares of treasury stock at cost during fiscal 2017 and 2016, respectively. During 2016, the Company retired 8,269 shares of treasury stock. As of December 31, 2017, and 2016, the Company paid dividends of $0 and $2,062, respectively. As of December 31, 2017, and 2016, the Company accrued and recorded dividend payables on the balance sheet of $56,923 and $56,923, 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.
Share 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 its consolidated statements of operations based on their fair value.
The Company calculates share-based compensation using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of subjective assumptions including the expected stock price volatility. For the years ended December 31, 2017 and 2016, the Company recorded $0 and $49,499, respectively, in share-based employee compensation. This compensation cost is included in the salaries and wages expense in the accompanying consolidated statements of operations.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
N.
Trade Receivables
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 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 2017 and 2016, the Company’s bad debt reserve of $60,150 and $64,150, 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, 2017 and 2016, are as follows:
|
|
12/31/17
|
|
|
12/31/16
|
|
Customer A
|
|
|
2
|
%
|
|
|
14
|
%
|
Customer B
|
|
|
13
|
%
|
|
|
7
|
%
|
Customer C
|
|
|
5
|
%
|
|
|
14
|
%
|
Customer D
|
|
|
35
|
%
|
|
|
7
|
%
|
O.
Significant Customers
The Company provides services to insurers, third party administrators, self-administered employers, municipalities and other industries. The Company can 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.
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, 2017.
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 May 2014, ASU 2014-09 was issued related to revenue from contracts with customers. The ASU was further amended in August 2015, March 2016, April 2016, and May 2016 by ASU 2015-14, 2016-08, 2016-10 and 2016- 12. The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition.
In August 2015, the effective date was deferred to reporting periods, including interim periods, beginning after December 31, 2017, and will be applied retrospectively. Early adoption is not permitted. The Company has completed its assessment of the impact of the new revenue standard on its financial position and believes the new standard will not have a material impact. ASU 2014-09 provides presentation and disclosure requirements which are more detailed than under current GAAP.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
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.
In August 2016, ASC guidance was issued to amend the classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance is effective for the Company’s fiscal year and interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating this guidance and the impact 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.
NOTE 4 – FIXED ASSETS
The Company capitalizes the purchase of equipment and fixtures for major purchases more than $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, 2017 and 2016.
|
|
Cost
|
|
|
Accumulated Depreciation
and Amortization
|
|
Assets
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
December 31, 2017
(1)
|
|
|
December 31, 2016
|
|
Computer equipment
|
|
$
|
363,627
|
|
|
$
|
349,955
|
|
|
$
|
274,746
|
|
|
$
|
224,143
|
|
Furniture and fixtures
|
|
|
209,779
|
|
|
|
206,785
|
|
|
|
132,816
|
|
|
|
107,838
|
|
Office equipment
|
|
|
15,595
|
|
|
|
15,595
|
|
|
|
14,462
|
|
|
|
14,314
|
|
Totals
|
|
$
|
589,001
|
|
|
$
|
572,335
|
|
|
$
|
422,024
|
|
|
$
|
346,295
|
|
|
(1)
|
Depreciation and amortization expense for the years ended December 31, 2017 and 2016, totaled $75,729 and $84,700, 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, 2017 and 2016, consisted of the following:
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
609,505
|
|
|
$
|
286,985
|
|
State
|
|
|
145,414
|
|
|
|
91,960
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(23,998
|
)
|
|
|
29,776
|
|
State
|
|
|
(8,012
|
)
|
|
|
(6,141
|
)
|
Total tax provision
|
|
$
|
722,909
|
|
|
$
|
402,580
|
|
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
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, 2017 and December 31, 2016, are as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Federal
|
|
$
|
(31,665
|
)
|
|
$
|
(69,125
|
)
|
State
|
|
|
(14,628
|
)
|
|
|
(19,779
|
)
|
Reserve for bad debts
|
|
|
|
|
|
|
|
|
Federal
|
|
|
9,992
|
|
|
|
18,303
|
|
State
|
|
|
4,616
|
|
|
|
5,263
|
|
State tax deductions
|
|
|
30,050
|
|
|
|
28,416
|
|
Compensated absences accrual
|
|
|
|
|
|
|
|
|
Federal
|
|
|
30,989
|
|
|
|
37,775
|
|
State
|
|
|
14,316
|
|
|
|
10,808
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
43,670
|
|
|
$
|
11,661
|
|
The reconciliation of income tax computed at statutory rates of income tax benefits is as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expense at federal statutory rate of 34%
|
|
$
|
573,687
|
|
|
$
|
329,572
|
|
State tax effects
|
|
|
108,585
|
|
|
|
56,447
|
|
Non-deductible expenses
|
|
|
12,795
|
|
|
|
11,528
|
|
Effects of rate change
|
|
|
24,194
|
|
|
|
0
|
|
Other items
|
|
|
3,648
|
|
|
|
5,033
|
|
Income tax provision
|
|
$
|
722,909
|
|
|
$
|
402,580
|
|
The substantial reduction in our future effective federal tax rate was primarily a result of recently signed into law Tax Cuts and Jobs Act (the “New Tax Law”), which will reduce our statutory tax rate from 34.0% to 21.0%. This decrease in future tax rate resulted in our recognition of $24,194 in deferred tax expense due to the revaluation of our DTA.
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 establishes 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.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
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, 2017, the Company had no accrued interest or penalties. The years 2015, 2016 and 2017 are still open for examination by the Internal Revenue Service.
NOTE 6 – CONTRACTUAL COMMITMENTS
In April 2017, we entered a 39-month operating lease for an office copy machine with monthly payments at $1,723.
In July 2015, the Company entered 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.
Following is the base annual rent payment schedule for the Company’s office lease:
Rent Period
|
|
Annual Rent Payment
|
|
Jan. 1 to Dec. 31, 2018
|
|
|
253,343
|
|
Jan. 1 to Dec. 31, 2019
|
|
|
240,411
|
|
Jan. 1 to Dec. 31, 2020
|
|
|
271,466
|
|
Jan. 1 to Dec. 31, 2021
|
|
|
257,024
|
|
Jan. 1 to Mar. 31, 2022
|
|
|
71,359
|
|
Total
|
|
$
|
1,093,603
|
|
Rent expense for office space for the years ended December 31, 2017 and December 31, 2016, was $227,627 and $240,492, respectively.
NOTE 7 – ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
43,262
|
|
|
$
|
45,943
|
|
Compensated absences
|
|
|
157,286
|
|
|
|
131,645
|
|
Legal fees
|
|
|
500
|
|
|
|
2,500
|
|
Accounting fees
|
|
|
36,584
|
|
|
|
38,222
|
|
Loss on settlement
|
|
|
-
|
|
|
|
-
|
|
Sales commissions
|
|
|
17,169
|
|
|
|
34,790
|
|
Bonus
|
|
|
-
|
|
|
|
492
|
|
Other
|
|
|
404
|
|
|
|
(225
|
)
|
Total
|
|
$
|
255,205
|
|
|
$
|
253,367
|
|
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
NOTE 8 – EQUITY INCENTIVE AWARDS
2002 Stock Option Plan
The PHCO 2002 Stock Option 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. 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
The Pacific Health Care Organization, Inc., 2005 Stock Option 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.
2018 Equity Incentive Plan
As disclosed in the Definitive Information on Schedule 14C (the “Information Statement”) which the Company filed with the Commission on March 6, 2018 and mailed to its shareholders on or before March 14, 2018, on February 8, 2018, the Company’s board of directors approved and adopted the Pacific Health Care Organization, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). On February 21, Mr. Kubota, the holder of approximately 60.8% of the Company’s issued and outstanding common stock, and 100% of its issued and outstanding Series A preferred stock,
which votes together with its common stock as a single class on all matters submitted to a vote of the holders of its common stock delivered a written consent approving and adopting the 2018 Plan. The Plan provides that it will become effective on the date immediately following the effective date of the forward split of our outstanding common stock. The forward split is currently scheduled to occur on April 5, 2018. Barring any delay in the effective date of the forward split, the 2018 Plan will become effective on April 6, 2018.
The 2018 Plan permits the granting of 2,000,000 shares of common stock. Because the 2018 Plan does not become effective until after the forward split, the forward split will not change the number of shares available for grant under the 2018 Plan. The 2018 Plan provides for grants of equity incentive compensation to our employees and consultants and such other individuals as we reasonably expect to become employees or consultants. The 2018 Plan allows for awards of incentive stock options, non-qualified stock options, stock appreciation rights, restricted awards, and other equity-based awards. The Plan will terminate automatically on the tenth anniversary of the date it becomes effective. No awards or grants have been awarded or granted under the 2018 Plan.
Restricted Stock Awards
On December 31, 2015, under the 2005 Plan, the Company made awarded restricted stock grants of 5,928 shares of its common stock to ten employees. 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.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
During the years ended December 31, 2017 and 2016, no restricted stock grants were awarded. During the year ended December 31, 2017, no restricted stock grants vested, and no compensation expense related to restricted stock awards was recognized. During the year ended December 31, 2016, 5,928 shares of restricted stock awards vested. The compensation expense related to these restricted stock awards was $49,499 during the year ended December 31, 2016. The following table summarizes activity for the Company’s restricted stock grants outstanding during the years ended December 31, 2017 and 2016:
|
|
Number of
Shares
|
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Outstanding as of December 31, 2015
|
|
|
5,928
|
|
|
$
|
8.35
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
5,928
|
|
|
$
|
8.35
|
|
Award forfeited/canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Award forfeited/canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
Stock Options
On August 17, 2017, the Company awarded options to purchase 85,000 of Company common stock, including options to 47,250 shares under the 2002 Plan and options to purchase 39,250 shares under the 2005 Plan to Company employees and consultants. The options have an exercise price of $15.00 per share and are exercisable upon vesting for a period of five years from the date of grant. Vesting of the options is contingent upon continuous employment with the Company or one or more of its subsidiaries until the one-year anniversary of the date of grant, except in the event of death or disability of the option holder. If the option holder’s employment with the Company terminates by reason of death or disability prior to vesting, his or her options will continue to vest as provided in the option grant agreement. There is no acceleration of the exercisability provisions of the options in the event of death or disability of the option holder. No securities were awarded under the 2002 Plan or the 2005 Plan during 2016. The following table summarizes activity for the Company’s stock options outstanding (all of which are non-vested) during the years ended December 31, 2017 and 2016:
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price per
Share
|
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Outstanding at December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
85,000
|
|
|
$
|
15.00
|
|
|
$
|
9.55
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2017
|
|
|
85,000
|
|
|
$
|
15.00
|
|
|
$
|
9.55
|
|
Because none of the outstanding options vest until August 2018, no stock-based compensation in connection with the stock options was recorded in the Company’s results of operations in accordance with ASC 718 for the years ended December 31, 2017 and 2016.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model was calculated using the following assumptions:
|
|
Year ended December 31, 2017
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.76
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
Expected volatility factor
|
|
|
79.58
|
%
|
Expected life of option (years)
|
|
|
5
|
|
The weighted-average fair value of stock options granted during the years ended December 31, 2017 and 2016, was $9.55 and $0, respectively.
The unvested fair value of options outstanding at December 31, 2017 and recorded in deferred compensation is $ 811,679.
The following table summarizes information about the Company’ stock options outstanding at December 31, 2017:
Vested or Expected to Vest
|
|
|
Options Exercisable
|
|
Range of
Exercise Price
|
|
|
Number of
Options
|
|
|
Weighted Average Exercise Price (per Share)
|
|
|
Weighted Average Contractual Life (years)
|
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
(per Share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15.00
|
|
|
|
85,000
|
|
|
$
|
15,00
|
|
|
|
4.63
|
|
|
|
-
|
|
|
$
|
-
|
|
The weighted-average remaining contractual life for options exercisable at December 31, 2017 is 4.63 years.
At December 31, 2017 the Company had an aggregate of 89,822 shares of common stock reserved under the 2002 Plan and the 2005 Plan, including 85,000 shares reserved to cover the exercise of currently outstanding unvested options and 4,822 shares of common stock reserved for granting of additional equity compensation.
The aggregate intrinsic value for fully vested, exercisable options was $0 at both December 31, 2017 and 2016, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2017 and 2016 was $0 for both years as no options were exercised. The actual tax benefit realized from stock option exercises during the years ended December 31, 2017 and 2016 were $0 for both years as no options were exercised in either year.
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.
Pacific Health Care Organization, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
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 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.