Item 2. Management’s Discussion and Analysis of Financial Statements and Results of Operations
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our management’s beliefs and assumptions and on information currently available to them. For this purpose any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including statements about our revenue, spending, cash flow, products, new customer acquisitions, trends, actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “may,” “hope,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “project,” “intend,” “budget,” “plan,” “forecast,” “predict,” “could,” “should,” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risk and uncertainty, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industry in which we and our customers participate; cost reduction efforts by our existing and prospective customers; competition within our industry, including competition from much larger competitors; business combinations; legislative requirements or changes which could render our services less competitive or obsolete; our failure to successfully develop new services, and/or products or to anticipate current or prospective customers’ needs; our ability to retain existing customers and to attract new customers; price increases; employee limitations; and delays, reductions, or cancellations of contracts we have previously entered.
Forward-looking statements are predictions and not guarantees of future performance or events. Forward-looking statements are based on current industry, financial and economic information, which we have assessed but which, by its nature, is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of their dates and should not be relied upon. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise (other than pursuant to reporting obligations imposed on registrants pursuant to the Exchange Act) to reflect subsequent events or circumstances.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
Throughout this quarterly report on Form 10-Q, unless the context indicates otherwise, the terms, “we,” “us,” “our” or “the Company” refer to Pacific Health Care Organization, Inc., (“PHCO”) and our wholly-owned subsidiaries Medex Healthcare, Inc. (“Medex”), Industrial Resolutions Coalition, Inc. (“IRC”), Medex Managed Care, Inc. (“MMC”), Medex Medical Management, Inc. (“MMM”) and Medex Legal Support, Inc. (“MLS”).
Overview
We are workers’ compensation cost containment specialists. Our business objective is to deliver value to our clients that reduces their workers’ compensation related medical claims expense in a manner that will assure that injured employees receive high quality healthcare that allows them to recover from injury and return to gainful employment without undue delay. According to studies conducted by auditing bodies on behalf of the California Division of Workers’ Compensation, (“DWC”) the two most significant cost drivers for workers’ compensation are claims frequency and medical treatment costs.
Our core service focuses on the reduction of medical treatment costs by enabling our client/employers to share the control over the medical treatment process. This control is obtained by participation in one of our medical treatment networks. We hold several valuable government-issued licenses to operate medical treatment networks. Through Medex we hold two of the total of nine licenses issued by the State of California to establish and manage a Health Care Organization (“HCO”) within the state of California. We also hold approvals issued by the State of California to act as a Medical Provider Network (“MPN”). Our HCO and MPN programs provide our client/employers with provider networks within which the client/employer has some ability to direct the administration of the claim. This is designed to decrease the incidence of fraudulent claims and disability awards and ensure injured employees receive the necessary back-to-work rehabilitation and training they need. We also offer a Nurse Case Management program that keeps medical treatment claims progressing to a resolution and assures treatment plans are aligned from a medical perspective. Nurse oversight is a collaborative process that assesses plans, implements, coordinates, monitors and evaluates the options and services required to meet an injured worker’s health needs.
Our clients include self-administered employers, insurers, third party administrators, municipalities and others. Our principal clients are located in the State of California where the high cost of workers’ compensation insurance is a critical problem for employers. Our networks have contracted with approximately 3,900 individual medical providers and clinics, as well as hospitals, pharmacies, rehabilitation centers and other ancillary services enabling our networks to provide comprehensive medical services throughout California. Our provider networks are composed of experts in treating worker injuries.
Beyond the core services we provide to facilitate client/employers involvement in employee medical treatment claims administration and patient treatment options, we also provide to our HCO and MPN clients a number of claims-related services that bring efficiencies to claim processing and management that further reduce the overall burden of workers’ compensation claims resolution. These services include various back office type functions that assure cost efficiency and accuracy in claim processing, claim reimbursement and claim dispute resolution.
Results of Operations
Comparison of the three months ended June 30, 201
8
and 201
7
The following represents selected components of our consolidated results of operations, for the three-month periods ended June 30, 2018 and 2017, respectively, together with changes from period-to-period:
|
|
For three months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HCO fees
|
|
$
|
360,265
|
|
|
$
|
360,836
|
|
|
$
|
(571
|
)
|
|
|
0
|
%
|
MPN fees
|
|
|
130,633
|
|
|
|
146,690
|
|
|
|
(16,057
|
)
|
|
|
(11
|
)%
|
UR fees
|
|
|
299,497
|
|
|
|
273,298
|
|
|
|
26,199
|
|
|
|
10
|
%
|
MBR fees
|
|
|
126,170
|
|
|
|
177,480
|
|
|
|
(51,310
|
)
|
|
|
(29
|
)%
|
NCM fees
|
|
|
615,602
|
|
|
|
654,341
|
|
|
|
(38,739
|
)
|
|
|
(6
|
)%
|
Other
|
|
|
129,350
|
|
|
|
62,992
|
|
|
|
66,358
|
|
|
|
105
|
%
|
Total revenues
|
|
|
1,661,517
|
|
|
|
1,675,637
|
|
|
|
(14,120
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16,443
|
|
|
|
19,570
|
|
|
|
(3,127
|
)
|
|
|
(16
|
)%
|
Bad debt provision
|
|
|
(35,000
|
)
|
|
|
18,000
|
|
|
|
(53,000
|
)
|
|
|
(294
|
)%
|
Consulting fees
|
|
|
85,449
|
|
|
|
78,734
|
|
|
|
6,715
|
|
|
|
9
|
%
|
Salaries and wages
|
|
|
627,350
|
|
|
|
597,701
|
|
|
|
29,649
|
|
|
|
5
|
%
|
Professional fees
|
|
|
77,743
|
|
|
|
117,147
|
|
|
|
(39,404
|
)
|
|
|
(34
|
)%
|
Insurance
|
|
|
73,171
|
|
|
|
90,731
|
|
|
|
(17,560
|
)
|
|
|
(19
|
)%
|
Outsource service fees
|
|
|
163,959
|
|
|
|
145,503
|
|
|
|
18,456
|
|
|
|
13
|
%
|
Data maintenance
|
|
|
16,798
|
|
|
|
24,482
|
|
|
|
(7,684
|
)
|
|
|
(31
|
)%
|
General and administrative
|
|
|
183,567
|
|
|
|
171,922
|
|
|
|
11,645
|
|
|
|
7
|
%
|
Total expenses
|
|
|
1,209,480
|
|
|
|
1,263,790
|
|
|
|
(54,310
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
452,037
|
|
|
|
411,847
|
|
|
|
40,190
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
452,037
|
|
|
|
411,847
|
|
|
|
40,190
|
|
|
|
10
|
%
|
Income tax provision
|
|
|
126,883
|
|
|
|
171,367
|
|
|
|
(44,484
|
)
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
325,154
|
|
|
$
|
240,480
|
|
|
$
|
84,674
|
|
|
|
35
|
%
|
Revenue
Total revenues during the three-month periods ended June 30, 2018 and 2017 was nearly flat decreasing approximately 1% to $1,661,517 from $1,675,637.
During the second quarter 2018, utilization review and other fees increased 10% and 105%, respectively, while MPN, medical bill review and nurse case management fees decreased by 11%, 29% and 6%, respectively. HCO fees decreased by less than 1%. Other revenues consisted of revenues derived primarily from network claims repricing services, lien representation services, legal support services, workers’ compensation carve-out revenues and Medicare set-aside revenues.
HCO fees
During the three-month periods ended June 30, 2018 and 2017, HCO fee revenues were $360,265 and $360,836, respectively. We expect HCO fee revenues to increase over the remaining months of fiscal 2018 as a result of increased HCO employee enrollment from existing customers, which we anticipate will lead to increased claims administration fees. The HCO program utilizes an exclusive, specialize network of medical providers experienced in workers’ compensation. It also gives the employer the right to direct medical care to a network physician for a work-related injury for up to 180-days of medical treatment. The ability to direct care during the early stage of a claim ensures the injured worker gets quality care in a timely manner.
MPN fees
MPN fee revenue for the three-month periods ended June 30, 2018 and 2017, were $130,633 and $146,690, respectively, a decrease of 11%, resulting from lower revenues from one existing customer. The Medex Medical Provider Network (MPN) program is comprised of an exclusive, specialized network of medical providers experienced in workers’ compensation. This network was created to provide quality medical treatment for injured workers in a timely manner and provide medical reports.
UR fees
During the three-month periods ended June 30, 2018 and 2017, utilization review revenue was $299,497 and $273,298, respectively. The increase of $26,199 in the 2018 period was primarily attributable to increased utilization reviews from two major customers. Utilization review can provide a safeguard against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, etc. Through our skilled staff and automated review system, we are able to deliver utilization review services that cut overhead costs for the self-insured clients, insurance companies and the public entities we service.
MBR fees
During the three-month period ended June 30, 2018, medical bill review revenue decreased $51,310 to $126,170 when compared to the same period a year earlier. This decrease was mainly caused by decreased reviews of hospital bills from existing customers when compared to the same period a year earlier. We believe this decrease in hospital bill reviews is principally the result of the implementation of hospital fee schedules. Many of our existing customers have elected to pay the fee schedule, as opposed to having us review their hospital bills. Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. Such services include, but are not limited to, coding review and rebundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. These services can result in significant network savings.
NCM fees
During the three-month periods ended June 30, 2018 and 2017, nurse case management revenue was $615,602 and $654,341, respectively. The decrease in nurse case management revenue of $38,739 was primarily the result of a net decrease in case management activity due to the loss of several nurse case managers during the first quarter of 2018.
Other
Other fees consist of revenue derived from network access and claims repricing, lien representation, legal support services, Medicare set-aside and workers’ compensation carve-out services. Other fee revenue for three-month periods ended June 30, 2018 and 2017, were $129,350 and $62,992 respectively. The increase in other fees of $66,358 was the result of increases in network access fees and Medicare set-aside services partially offset by lower carve-out fees realized by IRC.
Expenses
Total expenses for the three months ended June 30, 2018 and 2017, were $1,209,480 and $1,263,790, respectively. The decrease of $54,310 was the result of decreases in depreciation, bad debt provision, professional fees, insurance and data maintenance which were partially offset by increases in consulting fees, salaries and wages, outsource service fees and general and administrative expenses.
Depreciation and Amortization
During the three-month period ended June 30, 2018, we recorded depreciation and amortization expense of $16,443 compared to $19,570 during the comparable 2017 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the three months ended June 30, 2017.
Bad Debt
During the three-month period ended June 30, 2018, bad debt provision decreased by $53,000 compared to the three-month period ended June 30, 2017. This decrease was primarily the result of various delinquent customers making payments which resolved their uncollectible status.
Consulting Fees
During the three months ended June 30, 2018, consulting fees increased to $85,449 from $78,734 during the three months ended June 30, 2017. This increase of $6,715 was the primarily result of a net increase of hiring new consultants partially offset by terminating other existing consultants.
Salaries and Wages
During the three-month period ended June 30, 2018, salaries and wages increased 5% to $627,350 compared to $597,701 during the same period in 2017. This increase was primarily the result of salary increases in the June 2018 quarter for employees in our nurse case management, utilization review, and HCO & MPN departments.
Professional Fees
For the three months ended June 30, 2018, we incurred professional fees of $77,743 compared to $117,147 during the three months ended June 30, 2017. The $39,404 decrease in professional fees was primarily the result of lower accounting and legal expenses and lower nurse case management fees resulting from decreased case management activity.
Insurance
During the three-month period ended June 30, 2018, we incurred insurance expenses of $73,171, a 19% decrease over the same three-month period in 2017. The decrease in insurance expense was primarily attributed to reduced workers’ compensation and director and officers’ insurance premiums for the three-month period 2018 compared to 2017. The lower costs were partially the result of us having no open claims in the current year and insurance companies in California lowering their base workers’ compensation rates.
Outsource Service Fees
Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review, Medicare set-aside services and field case management fees and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services. We incurred $163,959 and $145,503 in outsource service fees during the three-month periods ended June 2018 and 2017, respectively. The increase of $18,456 was primarily the result of increases in outsource services required for utilization review, Medicare set-aside services and nurse case management. We anticipate our outsource service fees will continue to move in correspondence with the level of utilization review, medical bill review and certain nurse case management services we provide in the future.
Data Maintenance
During the three-month periods ended June 30, 2018 and 2017, data maintenance fees were $16,798 and $24,482 respectively. The decrease of $7,684 was primarily the result of recording lower levels of notification fees associated with a customer’s annual renewal during the three-month period ended June 30, 2018 when compared to the same period in 2017.
General and Administrative
During the three-month period ended June 30, 2018, general and administrative expenses increased 7% to $183,567 when compared to the three-month period ended June 30, 2017. This increase of $11,645 was primarily attributable to increases in IT enhancement, licenses & permits, travel expense, and miscellaneous expense, partially offset by decreases in office supplies, charitable contributions, postage expense, auto expense, dues and subscriptions, and paid time off expenses. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2018.
Income from Operations
As a result of the $14,120 decrease in total revenue during the three-month period ended June 30, 2018, and the $54,310 decrease in total expenses during the same period, our income from operations increased $40,190, or 10%, during the three-month period ended June 30, 2018, when compared to the same period in 2017.
Income Tax Provision
We realized a $44,484, or 26%, decrease in our income tax provision during the three-month period ended June 30, 2018, compared to the three-month period ended June 30, 2017. This decrease in income tax expense was primarily due to a decrease in the effective tax rate for the quarter ended June 30, 2018, as a result of the impact of the Tax Cuts and Jobs Act.
Net Income
During the three-month period ended June 30, 2018, total revenues of $1,661,517 was 1% lower when compared to the same period in 2017. During the 2018 period, total expenses decreased 4% and our provision for income tax decreased 26%. As a result, we realized an $84,674, or 35%, increase in net income during the three-month period ended June 30, 2018 compared to the three-month period ended June 30, 2017.
Comparison of six months ended June 30, 201
8
and 201
7
The following represents selected components of our consolidated results of operations, for the six-month periods ended June 30, 2018 and 2017, respectively, together with changes from period-to-period:
|
|
For six months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HCO fees
|
|
$
|
759,707
|
|
|
$
|
663,405
|
|
|
$
|
96,302
|
|
|
|
15
|
%
|
MPN fees
|
|
|
265,277
|
|
|
|
284,971
|
|
|
|
(19,694
|
)
|
|
|
(7
|
)%
|
UR fees
|
|
|
586,518
|
|
|
|
510,343
|
|
|
|
76,175
|
|
|
|
15
|
%
|
MBR fees
|
|
|
240,209
|
|
|
|
334,258
|
|
|
|
(94,049
|
)
|
|
|
(28
|
)%
|
NCM fees
|
|
|
1,198,171
|
|
|
|
1,241,577
|
|
|
|
(43,406
|
)
|
|
|
(4
|
)%
|
Other
|
|
|
194,944
|
|
|
|
182,339
|
|
|
|
12,605
|
|
|
|
7
|
%
|
Total revenues
|
|
|
3,244,826
|
|
|
|
3,216,893
|
|
|
|
27,933
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
32,787
|
|
|
|
39,397
|
|
|
|
(6,610
|
)
|
|
|
(17
|
)%
|
Bad debt provision
|
|
|
(35,000
|
)
|
|
|
14,750
|
|
|
|
(49,750
|
)
|
|
|
(337
|
)%
|
Consulting fees
|
|
|
164,263
|
|
|
|
155,994
|
|
|
|
8,269
|
|
|
|
5
|
%
|
Salaries and wages
|
|
|
1,118,828
|
|
|
|
1,186,358
|
|
|
|
(67,530
|
)
|
|
|
(6
|
)%
|
Professional fees
|
|
|
155,213
|
|
|
|
199,231
|
|
|
|
(44,018
|
)
|
|
|
(22
|
)%
|
Insurance
|
|
|
140,200
|
|
|
|
178,006
|
|
|
|
(37,806
|
)
|
|
|
(21
|
)%
|
Outsource service fees
|
|
|
259,840
|
|
|
|
258,251
|
|
|
|
1,589
|
|
|
|
1
|
%
|
Data maintenance
|
|
|
49,229
|
|
|
|
59,101
|
|
|
|
(9,872
|
)
|
|
|
(16
|
)%
|
General and administrative
|
|
|
351,772
|
|
|
|
333,310
|
|
|
|
18,462
|
|
|
|
6
|
%
|
Total expenses
|
|
|
2,237,132
|
|
|
|
2,424,398
|
|
|
|
(187,226
|
)
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,007,694
|
|
|
|
792,495
|
|
|
|
215,199
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
1,007,694
|
|
|
|
792,495
|
|
|
|
215,199
|
|
|
|
27
|
%
|
Income tax provision
|
|
|
282,859
|
|
|
|
329,758
|
|
|
|
(46,899
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
724,835
|
|
|
$
|
462,737
|
|
|
$
|
262,098
|
|
|
|
57
|
%
|
Revenue
Total revenues during the six-month period ended June 30, 2018, increased 1% to $3,244,826 compared to $3,216,893 during the six-month period ended June 30, 2017.
During the first six months of 2018, HCO, utilization review, and other fee increased 15%, 15% and 7% respectively, while MPN, MBR, and NCM decreased by 7%, 28%, and 4%, 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, 2018 and 2017, HCO fee revenues were $759,707 and $663,405 respectively. The 15% increase in HCO revenue was primarily the result of higher HCO revenue during our first fiscal quarter 2018, which was attributable to increases in HCO employee enrollment, resulting in increased claim activities from existing customers and the addition of a new customer in 2017.
MPN fees
MPN fee revenue for the six-month periods ended June 30, 2018 and 2017, was $265,277 and $284,971 respectively, a decrease of 7%, resulting from one customer phasing out its business through bankruptcy.
UR fees
During the six-month periods ended June 30, 2018 and 2017, utilization review revenue was $586,518 and $510,343, respectively. The increase of $76,175 in the 2018 period was primarily attributable to increased utilization reviews from two major customers.
MBR fees
During the six-month period ended June 30, 2018, medical bill review revenue decreased $94,049 to $240,209 when compared to the same period a year earlier. This 28% decrease was mainly caused by processing fewer hospital claims from existing customers and the termination of three customers during the second half of 2017. We believe the decrease in hospital bill reviews is principally the result of the implementation of hospital fee schedules. Many of our existing customers have elected to pay the fee schedule, as opposed to having us review their hospital bills.
NCM fees
During the six months ended June 30, 2018 and 2017, nurse case management revenue was $1,198,171 and $1,241,577, respectively. The decrease in nurse case management revenue of $43,406 was primarily the result of a net decrease in case management activity during the first quarter of 2018 when compared to the same period in 2017. We expect nurse case management revenue to increase at a moderate rate during the remainder of fiscal 2018.
Other
Other fee revenue for six-month periods ended June 30, 2018 and 2017, were $194,944 and $182,339, respectively. The increase of $12,605 was mainly the result of increased Medicare set-aside services partially offset by low network access fees and carve-out fees.
Expenses
Total expenses for the six months ended June 30, 2018 and 2017, were $2,237,132 and $2,424,398, respectively. The decrease of $187,266 was the result of decreases in depreciation and amortization, bad debt provision, salaries and wages, professional fees, insurance, and data maintenance, which were partially offset by increases in consulting fees, outsource service fees, and general and administrative expense.
Depreciation and Amortization
During the six-month period ended June 30, 2018, we recorded depreciation and amortization expense of $32,787 compared to $39,397 during the comparable 2017 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the second half of 2017.
Bad Debt
During the six-month period ended June 30, 2018, bad debt provision decreased by $49,750 compared to the six-month period ended June 30, 2017. This decrease was primarily the result of various delinquent customers making payments which resolved their uncollectible status.
Consulting Fees
During the six months ended June 30, 2018, consulting fees increased to $164,263 from $155,994 during the six months ended June 30, 2017. This increase of $8,269 was the primarily result of a net increase of hiring new consultants partially offset by terminating other existing consultants.
Salaries and Wages
During the six-month period ended June 30, 2018, salaries and wages decreased 6% to $1,118,828 compared to $1,186,358 during the same period in 2017. This decrease was primarily the result of a fewer employees in the second quarter of 2018 in our HCO, MPN, and utilization review departments partially offset by salary increases for employees during the six-month period ended June 30, 2018.
Professional Fees
For the six months ended June 30, 2018, we incurred professional fees of $155,213 compared to $199,231 during the six months ended June 30, 2017. The $44,018 decrease in professional fees was primarily the result of lower accounting and legal expenses and lower nurse case management fees resulting from decreased case management activity.
Insurance
During the six-month period ended June 30, 2018, we incurred insurance expenses of $140,200, a 21% decrease over the same six-month period in 2017. The decrease in insurance expense was primarily attributed to lower workers’ compensation and director and officer’s insurance premiums for the six-month period of 2018 compared to 2017. The lower costs were partially the result of us having no open claims in the current year and insurance companies in California lowering their base workers’ compensation rates.
Outsource Service Fees
We incurred $259,840 and $258,251 in outsource service fees during the six-month periods ended June 2018 and 2017, respectively. The increase of $1,589 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 periods ended June 30, 2018 and 2017, data maintenance fees were $49,229 and $59,101 respectively. The decrease of $9,872 was primarily the result of recording lower levels of notification fees associated with a customer’s annual renewal during the six-month period ended June 30, 2018 when compared to the same period in 2017.
General and Administrative
During the six-month period ended June 30, 2018, general and administrative expenses increased 6% to $351,772 when compared to the six-month period ended June 30, 2017. This increase of $18,462 was primarily attributable to increases in advertising, auto expense, dues and subscriptions, employment agency fees, licenses and permits, rental equipment, shareholders expense, office rent, and other miscellaneous general administrative expense, partially offset by lower levels of IT enhancement, travel and entertainment expense. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2018.
Income from Operations
Total revenue during the six-month period ended June 30, 2018, increased $27,933 to $3,244,826 when compared to $3,216,893 in the same period in 2017. Our total expenses decreased by $187,266 during the six months ended June 30, 2018, resulting in income from operations of $1,007,694 compared to $792,495 during the six months ended June 30, 2017. This resulted in a $215,199, or 27%, increase in income from operations during the 2018 period.
Income Tax Provision
We realized a $46,899 or 14%, decrease in our income tax provision during the six-month period ended June 30, 2018 compared to the six-month period ended June 30, 2017. This decrease in income tax expense was primarily due to a decrease in the effective tax rate for the quarter ended June 30, 2018, as a result of the impact of the Tax Cuts and Jobs Act.
Net Income
During the six-month period ended June 30, 2018, total revenues of $3,244,826 was 1% higher when compared to the same period in 2017. In addition, we realized an 8% decrease in total expenses and a 14% reduction in income tax provision, which resulted in a $262,098, or 57% increase in net income during the six months ended June 30, 2018 compared to the six months ended June 30, 2017.
Liquidity and Capital Resources
As of June 30, 2018, we had cash on hand of $6,544,384 compared to $5,815,071 at December 31, 2017. The $729,313 increase was the result of net cash provided by our operating activities, partially offset by cash used in investing activities and financing activities. The increase in cash flow from operating activities was primarily the result of increases in net income and depreciation and a decrease in accounts receivable, partially offset by decreases in bad debt provision, income tax payable, deferred rent expenses, accounts payable and unearned revenues and increases in prepaid expenses. We used $12,191 in investing activities for purchases of computers, furniture and equipment. Cash for financing activities of $18,750 was used to issue cash dividend previously authorized by the Company. Barring a significant downturn in the economy or the loss of major customers, we believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses over the next twelve months.
We currently have planned certain capital expenditures during 2018, to expand our IT capabilities. We believe we have adequate capital on hand to cover these expenditures and do not anticipate this will require us to seek outside sources of funding.
We continue to investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses. We are also looking to expand our business into the insurance industry during 2018, but have not identified any suitable merger or acquisition candidates or opportunities at the current time. We anticipate an expansion or acquisition of this sort may require greater capital resources than we currently possess. Should we need additional capital resources, we could seek to obtain such through debt and/or equity financing. We do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining equity or debt financing when needed on favorable terms, or at all. We could also use shares of our capital stock as consideration for a business acquisition transaction.
Ca
sh Flow
During the six months ended June 30, 2018, cash was primarily used to fund operations. We had a net increase in cash of $729,313 during the six months ended June 30, 2018. See below for additional information.
|
|
For the six months ended June
30,
|
|
|
|
201
8
(unaudited)
|
|
|
201
7
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
$
|
760,254
|
|
|
$
|
438,949
|
|
Net cash used in investing activities
|
|
|
(12,191
|
)
|
|
|
(12,692
|
)
|
Net cash used in financing activities
|
|
|
(18,750
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
729,313
|
|
|
$
|
426,257
|
|
During the six months ended June 30, 2018 and 2017, net cash provided by operating activities was $760,254 and $438,949 respectively. As discussed herein, we realized net income of $724,835 during the six months ended June 30, 2018, compared to net income of $462,737 during the six months ended June 30, 2017. The increase of $321,305 during the six months ended June 30, 2018 compared to June 30, 2017, in cash flow from operating activities was primarily the result of increases in net income and depreciation and decreases in accounts receivable and deferred compensation, partially offset by decreases in bad debt provision, income tax payable, deferred rent expenses, accounts payable and unearned revenues and increases in prepaid expenses.
Net cash used in investing activities was $12,191 and $12,692 during the six-month periods ended June 30, 2018 and 2017, respectively. During the six-month period ended June 30, 2018 and 2017, net cash was used in investing activities to purchase computers, furniture and equipment.
Net cash used in financing activities during the six-month period ended 2018 was higher by $18,750 when compared to the same period in 2017, 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, 2018.
|
|
Payments Due By Period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Operating Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases – Equipment
|
|
$
|
41,350
|
|
|
$
|
20,675
|
|
|
$
|
20,675
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Office Leases
|
|
$
|
967,686
|
|
|
|
235,880
|
|
|
|
731,806
|
|
|
|
-
|
|
|
|
-
|
|
Total Operating Leases
|
|
$
|
1,009,036
|
|
|
$
|
256,555
|
|
|
$
|
752,481
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Off-Balance Sheet Financing Arrangements
As of June 30, 2018, we had no off-balance sheet financing arrangements.
Inflation
We experience pricing pressures in the form of competitive prices. We are also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits and facility leases. However, we generally do not believe these impacts are material to our revenues or net income.
Critical Accounting Policies and Estimates
See Note 1 to our condensed consolidated financial statements included elsewhere in this report.