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/employer’s 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
September
30, 201
8
and 201
7
The following represents selected components of our consolidated results of operations, for the three-month periods ended September 30, 2018 and 2017, respectively, together with changes from period-to-period:
|
|
For three months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HCO fees
|
|
$
|
372,664
|
|
|
$
|
377,923
|
|
|
$
|
(5,259
|
)
|
|
|
-1
|
%
|
MPN fees
|
|
|
128,113
|
|
|
|
142,257
|
|
|
|
(14,144
|
)
|
|
|
-10
|
%
|
NCM fees
|
|
|
624,655
|
|
|
|
582,544
|
|
|
|
42,111
|
|
|
|
7
|
%
|
UR fees
|
|
|
327,744
|
|
|
|
277,886
|
|
|
|
49,858
|
|
|
|
18
|
%
|
MBR fees
|
|
|
140,084
|
|
|
|
147,094
|
|
|
|
(7,010
|
)
|
|
|
-5
|
%
|
Other
|
|
|
83,049
|
|
|
|
73,203
|
|
|
|
9,846
|
|
|
|
13
|
%
|
Total revenues
|
|
|
1,676,309
|
|
|
|
1,600,907
|
|
|
|
75,402
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,412
|
|
|
|
19,462
|
|
|
|
(2,050
|
)
|
|
|
-11
|
%
|
Bad debt provision
|
|
|
-
|
|
|
|
15,750
|
|
|
|
(15,750
|
)
|
|
|
-100
|
%
|
Consulting fees
|
|
|
91,619
|
|
|
|
90,079
|
|
|
|
1,540
|
|
|
|
2
|
%
|
Salaries and wages
|
|
|
644,407
|
|
|
|
547,963
|
|
|
|
96,444
|
|
|
|
18
|
%
|
Professional fees
|
|
|
91,080
|
|
|
|
109,064
|
|
|
|
(17,984
|
)
|
|
|
-16
|
%
|
Insurance
|
|
|
73,042
|
|
|
|
79,489
|
|
|
|
(6,447
|
)
|
|
|
-8
|
%
|
Outsource service fees
|
|
|
92,122
|
|
|
|
146,287
|
|
|
|
(54,165
|
)
|
|
|
-37
|
%
|
Data maintenance
|
|
|
16,661
|
|
|
|
12,160
|
|
|
|
4,501
|
|
|
|
37
|
%
|
General and administrative
|
|
|
209,156
|
|
|
|
162,164
|
|
|
|
46,992
|
|
|
|
29
|
%
|
Total expenses
|
|
|
1,235,499
|
|
|
|
1,182,418
|
|
|
|
53,081
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
440,810
|
|
|
|
418,489
|
|
|
|
22,321
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
440,810
|
|
|
|
418,489
|
|
|
|
22,321
|
|
|
|
5
|
%
|
Income tax provision
|
|
|
123,734
|
|
|
|
174,560
|
|
|
|
(50,826
|
)
|
|
|
-29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
317,076
|
|
|
$
|
243,929
|
|
|
$
|
73,147
|
|
|
|
30
|
%
|
Revenue
Total revenues during the three-month period ended September 30, 2018, increased 5% to $1,676,309 compared to $1,600,907 during the three-month period ended September 30, 2017.
During the third quarter 2018, nurse case management, utilization review, and other fees increased 7%, 18%, and 13% respectively, while MPN, HCO, and medical bill review decreased by 10%, 1% and 5%, 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 three-month periods ended September 30, 2018 and 2017, HCO fee revenues were $372,664 and $377,923, respectively. The 1% decrease in HCO revenue was primarily attributable to the loss of a customer at the end of our first quarter of 2018.
MPN fees
MPN fee revenue for the three-month periods ended September 30, 2018 and 2017, were $128,113 and $142,257, respectively, a decrease of 10%, due to the loss of one customer at the beginning of our fourth quarter of 2017 and one customer at the end of our first quarter of 2018.
NCM fees
During the three months ended September 30, 2018 and 2017, nurse case management revenue was $624,655 and $582,544, respectively. The increase in nurse case management revenue of $42,111 was primarily from a new customer and the hiring of additional nurse case managers to handle more claims.
UR fees
During the three-month periods ended September 30, 2018 and 2017, utilization review revenue was $327,744 and $277,886, respectively. The increase of $49,858 in the 2018 period was primarily attributable to the increase in utilization review referrals from existing customers and the addition of two new customers.
MBR fees
During the three-month period ended September 30, 2018, medical bill review revenue decreased $7,010 to $140,084 when compared to the same period a year earlier. This decrease was mainly caused by processing fewer hospital bills from existing customers. 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 re-bundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. Our medical bill review 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 workers’ compensation carve-out services. Other fee revenue for three-month periods ended September 30, 2018 and 2017, were $83,049 and $73,203, respectively. The increase of $9,846 was the result of current clients referring more Medicare set-asides to be processed. We recorded no carve-out, lien representation, or legal support services during the three-month period ended September 30, 2018.
Expenses
Total expenses for the three months ended September 30, 2018 and 2017, were $1,235,499 and $1,182,418, respectively. The increase of $53,081 was the result of increases in consulting fees, salaries and wages, data maintenance expense, and general and administrative expense partially offset by decreases in depreciation and amortization, bad debt provision, professional fees, insurance and outsource service fees.
Depreciation and Amortization
During the three-month period ended September 30, 2018, we recorded depreciation and amortization expense of $17,412 compared to $19,462 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 September 30, 2018.
Bad Debt
Provision
During the three-month period ended September 30, 2018, bad debt provision decreased to $0 from $15,750 during the three-month period ended September 30, 2017. This decrease was primarily the result of clients paying certain invoices that were outstanding over 90 days during fiscal 2018.
Consulting Fees
During the three months ended September 30, 2018, consulting fees increased to $91,619 from $90,079 during the three months ended September 30, 2017. This increase was primarily the result of a net increase in consulting fees resulting from hiring a new consultant. This expense was partially offset by the termination of another consultant.
Salaries and Wages
During the three-month period ended September 30, 2018, salaries and wages increased 18% to $644,407 compared to $547,963 during the same period in 2017. The increase in salaries and wages of $96,444 was primarily the result of hiring a Director of Healthcare and other employees for various departments.
Professional Fees
For the three months ended September 30, 2018, we incurred professional fees of $91,080 compared to $109,064 during the three months ended September 30, 2017. The $17,984 decrease in professional fees was primarily the decrease in medical consultant fees partially offset by a net increase in other professional fees.
Insurance
During the three-month period ended September 30, 2018, we incurred insurance expenses of $73,042, an 8% decrease over the same three-month period in 2017. This decrease in insurance expense was primarily attributable to lower group health insurance premiums when compared to the same period in 2017 because we had fewer employees in the 2018 period. We do not expect current insurance fees to increase significantly over the remaining months of 2018.
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 $92,122 and $146,287 in outsource service fees during the three-month periods ended September 30, 2018 and 2017, respectively. The decrease of $54,165 was primarily the result of decreases in outsource services required for utilization review, medical bill review 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 September 30, 2018 and 2017, data maintenance fees were $16,661 and $12,160, respectively. The increase of $4,501 was primarily the result of higher levels of customer notification fees realized for new and existing customers during the three-month period ended September 30, 2018 when compared to the same period in 2017. Data maintenance fees tend to fluctuate from month to month depending on when new customers are enrolled, when the annual renewal of existing customer notification is due, and how many new employees our customers enroll in our HCO or MPN program.
General and Administrative
During the three-month period ended September 30, 2018, general and administrative expenses increased 29% to $209,156 when compared to the three-month period ended September 30, 2017. This increase of $46,992 was primarily attributable to increases in auto expense, dues and subscriptions, licenses and permits, parking, rent-expense equipment, rent expense, and transfer agent fees partially offset by decreases in IT enhancement, postage and delivery, and travel and entertainment. 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 5% increase in total revenue during the three-month period ended September 30, 2018, which was partially offset by the 4% increase in total expenses during the same period, our income from operations increased by 5% during the three-month period ended September 30, 2018, when compared to the same period in 2017.
Income Tax Provision
We realized income before taxes of $440,810 and $418,489 during the three-month periods ended September 30, 2018 and 2017, respectively. However, we realized a $50,826, or 29%, decrease in our income tax provision. The lower provision of income taxes was the result of implementing the lower corporate tax rate at the beginning of fiscal 2018 partially offset by higher income taxes resulting from the increase in income before taxes.
Net Income
During the three-month period ended September 30, 2018, total revenues of $1,676,309 was 5% higher when compared to the same period in 2017. This increase in total revenues was partially offset by a 4% increase in total expenses, resulting in a 5% increase in income from operations compared to the three months ended September 30, 2017. Correspondingly, we realized net income of $317,076 for the three-month period ended September 30, 2018, which reflects a 30% increase compared to the three-month period ended September 30, 2017.
Comparison of nine months ended September 30, 201
8
and 201
7
The following represents selected components of our consolidated results of operations, for the nine-month periods ended September 30, 2018 and 2017, respectively, together with changes from period-to-period:
|
|
For nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Amount Change
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HCO fees
|
|
$
|
1,132,371
|
|
|
$
|
1,041,328
|
|
|
$
|
91,043
|
|
|
|
9
|
%
|
MPN fees
|
|
|
393,390
|
|
|
|
427,228
|
|
|
|
(33,838
|
)
|
|
|
-8
|
%
|
NCM fees
|
|
|
1,822,826
|
|
|
|
1,824,121
|
|
|
|
(1,295
|
)
|
|
|
-0
|
%
|
UR fees
|
|
|
914,262
|
|
|
|
788,229
|
|
|
|
126,033
|
|
|
|
16
|
%
|
MBR fees
|
|
|
380,293
|
|
|
|
481,352
|
|
|
|
(101,059
|
)
|
|
|
-21
|
%
|
Other
|
|
|
277,993
|
|
|
|
255,542
|
|
|
|
22,451
|
|
|
|
9
|
%
|
Total revenues
|
|
|
4,921,135
|
|
|
|
4,817,800
|
|
|
|
103,335
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
50,199
|
|
|
|
58,859
|
|
|
|
(8,660
|
)
|
|
|
-15
|
%
|
Bad debt provision
|
|
|
(35,000
|
)
|
|
|
30,500
|
|
|
|
(65,500
|
)
|
|
|
-215
|
%
|
Consulting fees
|
|
|
255,882
|
|
|
|
246,073
|
|
|
|
9,809
|
|
|
|
4
|
%
|
Salaries and wages
|
|
|
1,763,235
|
|
|
|
1,734,321
|
|
|
|
28,914
|
|
|
|
2
|
%
|
Professional fees
|
|
|
246,293
|
|
|
|
308,295
|
|
|
|
(62,002
|
)
|
|
|
-20
|
%
|
Insurance
|
|
|
213,242
|
|
|
|
257,495
|
|
|
|
(44,253
|
)
|
|
|
-17
|
%
|
Outsource service fees
|
|
|
351,962
|
|
|
|
404,538
|
|
|
|
(52,576
|
)
|
|
|
-13
|
%
|
Data maintenance
|
|
|
65,890
|
|
|
|
71,261
|
|
|
|
(5,371
|
)
|
|
|
-8
|
%
|
General and administrative
|
|
|
560,928
|
|
|
|
495,474
|
|
|
|
65,454
|
|
|
|
13
|
%
|
Total expenses
|
|
|
3,472,631
|
|
|
|
3,606,816
|
|
|
|
(134,185
|
)
|
|
|
-4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,448,504
|
|
|
|
1,210,984
|
|
|
|
237,520
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
1,448,504
|
|
|
|
1,210,984
|
|
|
|
237,520
|
|
|
|
20
|
%
|
Income tax provision
|
|
|
406,593
|
|
|
|
504,318
|
|
|
|
(97,725
|
)
|
|
|
-19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,041,911
|
|
|
$
|
706,666
|
|
|
$
|
335,245
|
|
|
|
47
|
%
|
Revenue
Total revenues during the nine-month period ended September 30, 2018, increased 2% to $4,921,135 compared to $4,817,800 during the nine-month period ended September 30, 2017.
During the first nine-months of 2018, HCO, utilization review, and other revenue increased 9%, 16% and 9% respectively, while MPN and medical bill review decreased by 8% and 21%, respectively. NCM revenue was slightly lower. 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 nine-month periods ended September 30, 2018 and 2017, HCO fee revenues were $1,132,371 and $1,041,328 respectively. The 9% increase in HCO revenue was primarily attributable to increases by one major client, partially offset by lower revenues from several existing HCO customers when compared to the same period in 2017.
MPN fees
MPN fee revenue for the nine-month periods ended September 30, 2018 and 2017, was $393,390 and $427,228 respectively, a decrease of 8%, resulting from the loss of two customers and decreases in revenue from others.
NCM fees
During the nine-months ended September 30, 2018 and 2017, nurse case management revenue was $1,822,826 and $1,824,121, respectively. The decrease in nurse case management revenue of $1,295 was primarily the result of losing a customer during our first quarter 2018 which was partially offset by increases in revenues from existing customers and gaining one new customer. As a result of losing a significant customer in the first quarter 2018, there is no assurance that nurse case management revenue will decrease at the rate realized during the nine months ended September 30, 2018, for the remainder of fiscal 2018.
UR fees
During the nine-month periods ended September 30, 2018 and 2017, utilization review revenue was $914,262 and $788,229, respectively. The increase of $126,033 in the 2018 period was attributable to increased volume from existing customers and the addition of two new customers in third quarter 2018. 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 nine-month period ended September 30, 2018, medical bill review revenue decreased $101,059 to $380,293 when compared to the same period a year earlier. This 21% decrease was mainly caused by processing fewer hospital bills from existing customers. As mentioned above, 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.
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 fees revenue for nine-month periods ended September 30, 2018 and 2017, were
$277,993 and $255,542, respectively. The increase of $22,451 was primarily the result of increased Medicare set-aside referrals. We did not record any revenue for lien representation, legal support services, and workers’ compensation carve-out services.
Expenses
Total expenses for the nine-months ended September 30, 2018 and 2017, were $3,472,631 and $3,606,816, respectively. The decrease of $134,185 was the result of decreases in depreciation, bad debt, professional fees, insurance, outsource service fees and data maintenance, partially offset by increases in consulting fees, salaries and wages and general and administrative fees.
Depreciation and Amortization
During the nine-month period ended September 30, 2018, we recorded depreciation and amortization expense of $50,199 compared to $58,859 during the comparable 2017 period. The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the nine-months ended September 30, 2018.
Bad Debt
Provision
During the nine-month period ended September 30, 2018, bad debt provision decreased by $65,500 compared to the nine-month period ended September 30, 2017. This decrease was primarily the result of various delinquent customers making payments which resolved their uncollectible status.
Consulting Fees
During the nine-months ended September 30, 2018, consulting fees increased to $255,882 from $246,073, when compared the nine months ended September 30, 2017. This 4% increase was mainly the result of hiring a consultant to assist us in our merger and acquisition strategies.
Salaries and Wages
During the nine-month period ended September 30, 2018, salaries and wages increased 2% to $1,763,235 compared to $1,734,321 during the same period in 2017. This increase was primarily the result of additional staffing in nurse case management, HCO, MPN, and on July 1, 2018, we reinstated the senior executive 10% salary reductions implemented in June 2016.
Professional Fees
For the nine-months ended September 30, 2018, we incurred professional fees of $246,293 compared to $308,295 during the nine months ended September 30, 2017. The decrease of $62,002 in professional fees was primarily the result of lower fees paid for accounting, legal, and nurse case management services, partially offset by increased fees for medical consulting and other fees related to Medicare set-asides.
Insurance
During the nine-month period ended September 30, 2018, we incurred insurance expenses of $213,242, a 17% decrease over the same nine-month period in 2017. The decrease in insurance expense was primarily attributed to lower workers’ compensation premiums for our employees and lower directors’ and officers’ insurance premiums during the nine-month period ended September 30, 2018 compared to the same period in 2017. We do not expect current insurance fees to increase significantly over the remaining months of 2018.
Outsource Service Fees
Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review, Medicare set-aside services, field nurse case management services, and typically tends to fluctuate in correspondence with demand for those services.
We incurred $351,962 and $404,538 in outsource service fees during the nine-month periods ended September 2018 and 2017, respectively. The decrease of $52,576 was primarily the result of decreases in outsource services required for field nurse 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 nine-month period ended September 30, 2018 and 2017, data maintenance fees were $65,890 and $71,261, respectively. The decrease of $5,371 was primarily the result of losing a major customer, which was partially offset by increases in data maintenance by other existing customers during the nine-month period ended September 30, 2018.
General and Administrative
During the nine-month period ended September 30, 2018, general and administrative expense increased 13% to $560,928 when compared to the nine-month period ended September 30, 2017. This increase of $65,454 was primarily attributable to increases in auto expense, bank charges, dues and subscriptions, education expense, employment agency fees, licenses and permits, telephone expense, rent expense, partially offset by decreases in charitable contributions, IT enhancement, postage, travel and entertainment expense, and miscellaneous expense. 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 2% increase in total revenue during the nine-month period ended September 30, 2018, coupled with a 4% decrease in total expenses, our income from operations before taxes increased to $1,448,504 a 20% increase compared to the same period in 2017.
Income Tax Provision
We realized income before taxes of $1,448,504 and $1,210,984 during the nine-month periods ended September 30, 2018 and 2017, respectively. However, as a result of implementing the lower corporate tax rate at the beginning of fiscal 2018 we realized a $97,725, or 19%, decrease in our income tax provision.
Net Income
During the nine-month period ended September 30, 2018, total revenues of $4,921,135 was 2% higher when compared to the same period in 2017. This increase in total revenues together with a decrease of 4% in total expenses resulted in a 20% increase in income from operations. Correspondingly, we realized net income of $1,041,911 for the nine-month period ended September 30, 2018, a 47% increase compared to the nine-month period ended September 30, 2017.
Liquidity and Capital Resources
As of September 30, 2018, we had cash on hand of $6,846,162 compared to $5,815,071 at December 31, 2017. The $1,031,091 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, depreciation and amortization, credit card payables, accrued expenses and a decrease in accounts receivable and unearned revenues, partially offset by decreases in bad debt provision, income tax payable, deferred rent expenses, accounts payable and increases in prepaid expenses and prepaid income tax. We used $30,418 in investing activities to purchase computers, furniture and equipment. Cash for financing activities of $19,923 was used to issue cash dividends 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. We are actively conducting a search to for a suitable insurance company to acquire. At the current time, there is no assurance we can identify a suitable candidate or negotiate acceptable terms of an acquisition. If we do find a suitable acquisition candidate, we anticipate an acquisition of this sort will require greater capital resources than we currently possess, which would likely require us to seek 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. The use of our capital stock either for an equity financing or as consideration for an acquisition could lead to substantial dilution to our existing shareholders.
Ca
sh Flow
During the nine months ended September 30, 2018, cash was primarily used to fund operations. We had a net increase in cash of $1,031,091 during the nine months ended September 30, 2018. See below for additional information.
|
|
For the nine months ended September
|
|
|
|
2018
(unaudited)
|
|
|
2017
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
$
|
1,081,432
|
|
|
$
|
621,241
|
|
Net cash used in investing activities
|
|
|
(30,418
|
)
|
|
|
(13,446
|
)
|
Net cash used in financing activities
|
|
|
(19,923
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
1,031,091
|
|
|
$
|
607,795
|
|
During the nine months ended September 30, 2018 and 2017, net cash provided by operating activities was $1,081,432 and $621,241, respectively. As discussed herein, we realized net income of $1,041,911 during the nine months ended September 30, 2018, compared to net income of $706,666 during the nine months ended September 30, 2017.
Net cash used in investing activities was $30,418 and $13,446 during the nine-month periods ended September 30, 2018 and 2017, respectively. During the nine-month periods ended September 30, 2018 and 2017, net cash used in investing activities was used to purchase computer equipment, furniture and office equipment.
Net cash used in financing activities during the nine-month periods ended September 30, 2018 and 2017 was $19,923 and $0, respectively. During the 2018 period certain shareholders submitted the necessary paperwork to receive payment of the cash dividend declared on their shares in 2015. We received no similar requests during the 2017 period.
Summary of Material Contractual Commitments
The following is a summary of our material contractual commitments as of September 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
|
|
$
|
36,182
|
|
|
$
|
20,675
|
|
|
$
|
15,507
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Office Leases
|
|
$
|
903,973
|
|
|
|
238,146
|
|
|
|
665,827
|
|
|
|
-
|
|
|
|
-
|
|
Total Operating Leases
|
|
$
|
940,155
|
|
|
$
|
258,821
|
|
|
$
|
681,334
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Off-Balance Sheet Financing Arrangements
As of September 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.