PACIFIC HEALTH CARE ORGANIZATION INC - Quarter Report: 2016 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2016

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to _________

Commission File Number 000-50009

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. 

Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)      

Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)     

Yes ☐    No ☒

As of May 1, 2016, the registrant had 800,000 shares of common stock, par value $0.001, issued and outstanding.

 

 

 PACIFIC HEALTH CARE ORGANIZATION, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

PART I.   FINANCIAL INFORMATION

 

Item 1. Financial Information

 

Pacific Health Care Organization, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Pacific Health Care Organization, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Pacific Health Care Organization, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2016

 

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”) and in accordance with accounting standards generally accepted in the United States (“GAAP”).  Certain information and footnote disclosures normally included in condensed consolidated financial statements have been condensed or omitted in accordance with GAAP rules and regulations.  The information furnished in these interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the condensed consolidated financial statements and the revenues recognized and expenses incurred during the reporting period. These estimates and assumptions affect the Company’s recognition of deferred expenses, bad debts, income taxes, the carrying value of its long-lived assets and its provision for certain contingencies. The reasonableness of these estimates and assumptions is evaluated continually based on a combination of historical information and other information that comes to the Company’s attention that may vary its outlook for the future. While management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2015. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

Principles of Consolidation — The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  Intercompany transactions and balances have been eliminated in consolidation.

Basis of Accounting — The Company uses the accrual method of accounting.

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. Arrangements entered into in such agreements consist of bundled managed care which includes various units of accounting such as network solutions and patient management, including 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 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. 

Accounts Receivables and Bad Debt Allowance – 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 March 31, 2016 and December 31, 2015, our bad debt reserve of $59,500 and $55,000, respectively as a general reserve for certain balances over 90 days past due and for accounts that are potentially uncollectible.

The percentages of the amounts due from major customers to total accounts receivable as of March 31, 2016 and 2015 are as follows:

 

 

Reclassifications – Certain 2015 quarterly balances have been reclassified to conform to the 2016 presentation.  The reclassifications have had no effect on the financial position, operations or cash flows for the quarter ended March 31, 2016.

NOTE 2 - 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.

 

 

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” or “continue” or comparable terminology are intended to identify forward-looking statements.  These statements by their nature involve substantial risks 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; competition within our industry, including competition from much larger competitors;  merger and acquisition activities; legislative requirements or changes which could render our services less competitive or obsolete; our failure to successfully develop new customers, services, and/or products or to anticipate current or prospective customers’ needs; price increases or employee limitations; and completions, delays, reductions, or cancellations of contracts we have previously entered.

Forward-looking statements are predictions and not guarantees of future performance or events.  The 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. We undertake no obligation to amend this report or revise publicly these forward-looking statements (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 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 a specialty workers’ compensation managed care company providing a range of services for self-administered employers, insurers, third party administrators, municipalities and others.  Our clients are primarily located in the state of California, although we have processed bill reviews in 31 other states from our customers.  Workers’ compensation costs continue to increase due to rising medical costs, inflation, fraud and other factors.  Medical and indemnity costs associated with workers’ compensation in the state California are billions of dollars annually.  Our focus goes beyond the medical cost of claims.  Our goal is to reduce the entire cost of the claim, including medical, legal and administrative costs.  As noted above, through our subsidiary companies we provide a range of effective workers’ compensation cost containment services, including but not limited to:

 

According to recent 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.  It is the latter that our services impact.

As of the end of December 31, 2014, according to the Workers’ Compensation Insurance Rating Bureau of California, California (with the highest claims costs in the nation per claim) reported costs for workers’ compensation claims that were in excess of 188% above the median for all states.  Medical costs per claim have risen since 2005 by nearly $30,000 per claim.  SB 863, which was an attempt to reduce costs in California, has had little demonstrated results. The use of our highly administered medical control tools listed above can greatly diminish costs for unnecessary and prolonged medical treatment.  In addition, our network of specially selected and overseen providers are competent in returning injured workers back to modified or full duty in the most expeditious manner, thus saving costs for temporary disability payments.

 

While the goal of services performed by the Company is to deliver the highest quality of timely medical care under state guidelines, we also focus on ensuring that the provision of such care significantly reduces the costs associated with payment for claims.

HCOs are networks of health care professionals specializing in the treatment of workplace injuries and in back-to-work rehabilitation and training.  HCOs were created to appeal to employees, while providing substantial savings to the employer clients.  In most cases, the HCO program gives the employer client 180 days of medical control in a provider network within which the employer client has the ability to direct the claim.  The injured worker may change physicians once, but may not leave the network.  The increased length of time during which the employer has control over the claim is designed to decrease the incidence of fraudulent claims and disability awards and is also based upon the notion that if there is more control over medical treatment there will be more control over getting injured workers back on the job and therefore, more control over the cost of claims and workers’ compensation premiums.

Our subsidiary Medex holds two HCO licenses.  Through these licenses we cover the entire state of California.  We offer injured workers a choice of enrolling in an HCO with a network managed by primary care providers requiring referrals to specialists or a second HCO where injured workers do not need any prior authorization to be seen and treated by specialists.

 

Our two HCO networks have contracted with approximately 3,900 individual providers and clinics, as well as hospitals, pharmacies, rehabilitation centers and other ancillary services enabling our HCOs to provide comprehensive medical services throughout California.  We are continually developing these networks based upon the nominations of new clients and the approvals of their claims administrators.  Provider credentialing is performed by Medex.

HCO guidelines impose certain medical oversight, reporting, information delivery and usage fees upon HCOs.  These requirements increase the administrative costs and obligations on HCOs as compared to MPNs, although the obligations and cost differentials are not currently as substantial as they were in the past.

 

Like an HCO, an MPN is a network of health care professionals, but MPN networks do not require the same level of medical expertise in treating work place injuries.  Under an MPN program the employer client dictates which physician the injured employee will see for the initial visit.  Thereafter, the employee can choose to treat with any physician within the MPN network.  Under the MPN program, however, for as long as the employee seeks treatment for his injury, he can only seek treatment from physicians within the MPN network.

The MPN program substantially allows medical control by the employer client for the life of the claim because the employee must stay within the MPN network for treatment.  However, the employer client has full control of only the initial treatment before the employee can treat with anyone in the network.  In addition, the MPN statute and regulations allow the injured worker to dispute treatment decisions, leading to second and third opinions, and then a review by an independent medical reviewer, whose decision can result in the employer client losing medical control.

Unlike HCOs, MPNs are not assessed annual fees and have no annual enrollment notice delivery requirements.  As a result, there are fewer administrative costs associated with an MPN program, which allows MPNs to market their services at a lower cost than HCOs.  For this reason, many clients opt to use the less complicated MPN even though the employer client has less control over employee claims.

As a licensed HCO and MPN, in addition to offering HCO and MPN programs, we are also able to offer our clients a combination of the HCO and MPN programs.  Under this plan model an employer can enroll its employees in the HCO program, and then prior to the expiration of the 90-day or 180-day treatment period under the HCO program, the employer can enroll the employee into the MPN program.  This allows employers to take advantage of both programs.  We believe that we are currently the only entity that offers both programs together in a combination program.

 

Through IRC we seek to create legal agreements for the implementation of Workers’ Compensation Carve-Outs for California employers with collective bargaining units and the administration of such programs within the statutory and regulatory requirements.  The California legislature permits employers and employees to engage in collective bargaining over alternative systems to resolve disputes in the workers’ compensation context.   These systems are called carve-outs because the employers and employees covered by such collective bargaining agreements are carved out from the state workers’ compensation system.  

 

Utilization review includes utilization review or utilization management functions that prospectively, retrospectively, or concurrently review and approve, modify, delay, or deny, based in whole or in part on medical necessity to cure and relieve, treatment recommendations by physicians, prior to, retrospectively, or concurrently with the provision of such medical treatment services pursuant to California Workers’ Compensation law, or other jurisdictional statutes.  

We provide UR to self-insured clients, insurance companies and public entities through MMC.  UR helps to reduce costs for the payor and determine if the recommended treatment is appropriate.  MMC offers automated review services that can cut the overhead costs of our clients and increase payer savings.  Our UR staff is experienced in the workers’ compensation industry and dedicated to providing a high standard of customer service.

 

 

Medical bill review refers to professional analysis of medical provider, services, or equipment billing to ascertain the proper reimbursement.  Such services include, but are not limited to, coding review and rebundling, customary and reasonableness review, fee schedule analysis, out-of-network bill review, pharmacy review, PPO management, and repricing. 

In connection with our MBR services, we provide bill review (cost containment) services to self-insured employers, insurance companies and the public sector to help reduce medical expenses paid by our customers through MMC.  In providing these services we provide network savings on top of State Fee Schedule savings allowing top provider networks to achieve savings.

 

We offer our clients quick turnaround, state of the art software and the expertise of our bill review staff.  We are committed to service and believe the reputation of our staff sets us apart from our competition.

 

Nurse case management 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 nurse case managers use communication and available resources to promote quality, cost-effective outcomes with the goal of returning the injured worker to gainful employment and maximum medical improvement as soon as medically appropriate.

Our credentialed registered nurses have expertise in various clinical areas and extensive backgrounds in workers’ compensation.  This combination allows our nurses the opportunity to facilitate medical treatment while understanding the nuances of workers’ compensation up to and including litigation.  By providing these services through MMM, we contribute to effective delivery of medical treatment assuring the injured worker receives quality treatment in a timely and appropriate manner to return the worker to gainful employment.

Our network access and claims repricing fees are generated from certain customers who have access to our network and who split with Medex the cost savings generated from their PPOs.   

Through MLS we offer our customers comprehensive lien representation services from negotiation to litigation, including filing petitions for reconsideration.  Our lien representation services offer high potential savings for our clients.

In February 2016, MLS began recording legal support service revenues consisting of fees charged to our customers for our legal representation at the Workers Compensation Appeals Board (“WCAB”). The fees include reimbursement of attorneys’ fees, travel and lodging expenses.

In December 2015, MLS commenced offering Medicare Set Aside services for Workers’ Compensation claims which is a financial agreement that allocates a portion of a workers’ compensation settlement to pay for future medical services related to the worker related injury, illness, or disease.  The purpose of the MSA arrangement is to provide funds to the injured party to pay for future medical expenses that would otherwise be covered by Medicare.  This program affords our clients an effective way to overcome complications after settlement and avoids unnecessary costs attached to the claim. .

Results of Operations

Total revenues during the three-month period ended March 31, 2016, decreased 45% to $1,309,161 compared to the three-month period ended March 31, 2015.  Total revenues decreased by 45% and the total number of employee enrollees decreased by 48% during the three-month period ended March 31, 2016, when compared to the same period in 2015.  As of March 31, 2016 we had approximately 352,000 total enrollees.  Enrollment consisted of approximately 169,000 HCO enrollees and 183,000 MPN enrollees.  By comparison as of March 31, 2015, we had approximately 674,000 total enrollees, including approximately 82,000 HCO enrollees and 592,000 MPN enrollees.

  

The net increase during 2016 in HCO employee enrollment of approximately 87,000 when compared to the previous year was primarily the result of several existing HCO customers increasing their enrollment and the addition of one new HCO customer.  MPN employee enrollment decreased by approximately 409,000 enrollees, approximately 69%, resulting primarily from the loss of a major MPN customer.

Our business generally has a long sales cycle, typically in excess of one year.  Once we have established a customer relationship, our revenue adjusts with the growth or retraction of our customers’ managed headcount volume.  New customers are added throughout the year and other customers terminate from the program for a variety of reasons.

 

In the current economic environment, we anticipate businesses will continue to seek ways to further reduce their workers’ compensation program costs.  Even though the HCO and MPN programs have been shown to create a favorable return on investment for employers, (as our services are a significant component of the employers’ loss prevention programs), it is always a challenge to justify our fees to our customers.  In order to convince employers that the fees they pay us are well-spent, we must continue to provide a framework for expeditiously returning employees back to work at the lowest cost.  As a result, we have experienced and expect to continue to experience client turnover in the form of existing employer clients seeking to terminate or renegotiate the scope and terms of existing services.  We also anticipate our market may shrink as some employers seek to reduce their costs by managing their workers’ compensation care services in-house.

    

During the three-month periods ended March 31, 2016 and 2015, HCO fee revenues were $395,081 and $248,640, respectively.  While HCO enrollment increased 106% during the three-month period ended March 31, 2016, we realized an increase of 59% in revenue from HCO fees.  The increase in HCO revenue of $146,441 was primarily attributable to revenues derived from initial notification fees and mailing fees from a new HCO customer.

MPN fee revenues for the three-month periods ended March 31, 2016 and 2015 were $141,358 and $308,118, respectively, a decrease of 54%.  During the same period, employee enrollment decreased by 69%.  The reduction in revenues and employee enrollment resulted primarily from the termination of a major MPN customer which was partially offset by the addition of four new customers in the third quarter of 2015.

During the three-month period ended March 31, 2016, UR revenues decreased $847,324 to $166,966 when compared to the same period a year earlier. As discussed above, during the fourth quarter 2015, AmTrust, our largest customer, terminated the services we were providing to them.  During the three-month period ended March 31, 2016, we recorded zero revenues from our former customers, AmTrust,  Prime, and Companion, compared to $686,950, $55,955 and $33,675, respectively, during the same period in 2015.  Also contributing to the lower UR revenues was the reduction in the number of bills submitted for review by one of our existing customers during the three-month period ended 2016 when compared to the same period in 2015.  We anticipate the lower levels of bills from this customer to continue, however we expect billings from other existing customers to increase during the remainder of 2016.  We foresee the loss of AmTrust, Prime and Companion will have a significant negative impact on UR fees, revenue, profitability and liquidity during 2016, and until such time as we are able to replace the revenue generated from these customers.

During the three-month period ended March 31, 2016, MBR revenues decreased $165,442 to $204,972 when compared to the same period a year earlier.  This was largely the result of the loss of Companion as a customer in June 2015, partially offset by increases from existing customers.  With the loss of Companion, we anticipate MBR fees will be significantly lower throughout 2016.  We recorded no revenues from Companion during the three-month period ended March 31, 2016, compared to revenues of $214,319 during the same period in 2015.   We have and will continue our efforts to, at least partially, replace the lost MBR revenue from Companion.  

During the three months ended March 31, 2016 and 2015, NCM revenues were $288,736 and $244,472, respectively. The increase in NCM revenues of $44,264 was primarily attributed to adding three new customers and increases from existing customer resulting in increases in NCM fees of $32,869 and $11,395, respectively. We expect NCM fees to moderately increase in the second quarter of 2016, when compared to the same period in 2015, resulting from the addition of new customers and increased volume from existing customers.

Other fees consist of revenues derived from network access and claims repricing, legal support services, lien representation services, MSA services and worker’s compensation carve-outs provided by Medex, MLS and IRC. Other fee revenues for the three-month periods ended March 31, 2016 and 2015 were $112,048 and $183,164, respectively.  The decrease of $71,116 was primarily the result of decreased network access fees from one customer having lower savings realized from using our PPO network. We expect this downward trend to continue for the remainder of 2016.

Our network access and claims repricing fees are generated from certain customers who have access to our network and split with Medex the cost savings generated from their PPO.  During the three month periods ended March 31, 2016 and 2015 network access fee revenues generated were $87,060 and $158,105, respectively. This decrease of $71,044 was primarily the result of one customer phasing out the use of our PPO network.  As mentioned above we expect this downward trend to continue for the remaining months of 2016.

In February 2016, MLS began recording legal support service revenues consisting of fees charged to our customers for representation at the Workers Compensation Appeals Board (“WCAB”). The fees include reimbursement of expert witness fees, travel, lodging and other miscellaneous expenses incurred in behalf of our customers.  During the three-month period ended March 31, 2016, legal support service revenues were $3,403.

During the three-month period ended March 31, 2016, we recorded lien representation fees totaling $3,155 compared to $25,059 during the same period a year earlier.  MLS hired a lien defense manager and a lien defense administrator in January 2015.  The lien manager and lien administrative assistant resigned in September 2015, and were replaced by transferring personnel from MMC.  The decrease of $21,904 was primarily the result of the reduction of active lien cases from one major customer.  We do not anticipate the lien representation fees to increase during the remaining months of 2016 unless we are able to acquire new customers and our existing customers increase their volume of new lien cases.

In December 2015, MLS commenced offering Medicare Set Aside services for workers’ compensation claims which is a financial agreement that allocates a portion of a workers’ compensation settlement to pay for future medical services related to the worker related injury, illness, or disease.  The purpose of the MSA arrangement is to provide funds to the injured party to pay for future medical expenses that would otherwise be covered by Medicare.  This program affords our clients an effective way to overcome complications after settlement and avoids unnecessary costs attached to the claim. During the three months ended March 31, 2016, we recorded MSA revenues totaling $11,800. We recorded no MSA revenue during the first fiscal quarter 2015.  Unless we are able to attract new customers during the remaining months of 2016 we expect revenues to remain constant for the rest of fiscal 2016.

In November 2015, through IRC we commenced creating legal agreements for the implementation of Workers’ Compensation Carve-Outs for California employers with collective bargaining units and the administration of such programs within the statutory and regulatory requirements.  The California legislature permits employers and employees to engage in collective bargaining over alternative systems to resolve disputes in the workers’ compensation context.   These systems are called carve-outs because the employers and employees covered by such collective bargaining agreements are carved out from the state workers’ compensation system.  During the three months ended March 31, 2016 we recorded in IRC carve-outs revenues totaling $6,630.  We recorded no IRC Carve-outs revenue during the three months ended March 31, 2015.  Until we are able to complete future negotiations with our targeted unions and add additional personnel and resources, we do not expect carve-outs revenues to increase over the remaining months of fiscal 2016.

Expenses

Total expenses for the three months ended March 31, 2016 and 2015, were $1,144,534 and $1,498,541, respectively.  The decrease of $354,007 was the result of decreases in bad debt, salaries and wages, professional fees, insurance, outsource service fees and general and administrative expense, partially offset by increases in depreciation, consulting fees and data maintenance expense.

During the three-month periods ended March 31, 2016 and 2015, we recorded bad debt provisions of $4,500 and $8,250, respectively, to cover potential uncollectible account receivables.  At March 31, 2016 and December 31, 2015, our allowances for bad debt balances were $59,500 and $55,000, respectively.

During the three months ended March 31, 2016, consulting fees increased to $101,532 from $90,190 during the three months ended March 31, 2015.  This increase of $11,342 was primarily the result of hiring a consultant with the title of director of healthcare in December 2015. In March 2016, this position was changed from a consultant to an employee. Currently, we have no plans to hire additional consultants for the remaining months in 2016.

Salaries and wages decreased $110,700 or 16% to $575,111 during the three months ended March 31, 2016, compared to $685,811 during the three months ended March 31, 2015.  The decrease in salaries and wages was due to terminations partially offset by new hires and salary increases.  In June 2015, the director of managed care and workers compensation of MMC resigned.  Medex hired a vice president of operations in August 2015.  Medex terminated an HCO manager and a marketing coordinator in August 2015.  Additionally, MLS terminated two employees in September 2015, and these vacant positions were filled in October 2015, by two existing personnel within the Company.  The Company employed 36 and 40 full-time employees as of March 31, 2016 and 2015, respectively.

  

For the three months ended March 31, 2016, we incurred professional fees of $70,492, compared to $120,346 during the three months ended March 31, 2015.   The $49,854 decrease in professional fees was primarily the result of lower fees paid by MMM for field case management services resulting from reduced levels of field cases, partially offset by higher legal fees.  We expect professional fees to remain at the current levels for the remainder of fiscal 2016.

During the three months ended March 31, 2016, we incurred insurance expenses of $78,304 a $6,453 decrease over the prior year three-month period. The decrease in insurance expense was primarily caused by lower group health insurance premiums resulting from the decrease in salaries and wages when compared to the same period a year earlier. We are currently reviewing our entire company insurance policies and do not expect a material increase or decrease during the remainder of this fiscal year.

Outsource service fees consist of costs incurred in outsourcing UR and MBR services and certain NCM services.  We do not, at this time, have enough volume to justify creating our own UR and MBR in-house staff.  Instead, we utilize outside vendors to provide specific services for our clients, charging additional fees over and above those paid to our outside vendors for administration and coordination of UR, MBR and NCM services directly to the clients.  Typically our outsource service fees increase and decrease in correspondence with the level of MBR and UR services, and some NCM services, we provide to our customers.  In times when the level of MBR or UR services rendered increases, we typically experience higher outsource service fees, and when the level of services we render decreases, we typically experience lower outsource service fees.  We incurred $86,228 and  $337,747 in outsource service fees during the three-month periods ended March 31, 2016 and 2015, respectively.  The decrease of $251,519 was largely the result of the lower numbers of UR and MBR reviews conducted by our outsource service providers, resulting primarily from lost business from AmTrust and Companion as previously mentioned.  We anticipate our outsource service fees will continue to move in correspondence with the level of UR, MBR and NCM services we provide in the future.  Therefore, we anticipate substantial  reductions in outsource service fees over the remaining months of fiscal 2016 when compared to the same periods in 2015 if we are unable to attract significant new customers.

During the three months ended March 31, 2016 and 2015, data maintenance fees were $56,496 and $7,285, respectively.  The increase of $49,211 was a primarily the result of notification fees associated with the addition of a new HCO customer in February 2016.

 

During the three months ended March 31, 2016, general and administrative expenses decreased $1,261 from $151,369 when compared to the three-month period ended March 31, 2015.  This decrease of $1,261 was primarily attributable to decreases in advertising, auto expenses, dues and subscriptions, equipment repairs, printing and reproduction, travel, entertainment and vacation expense partially offset by increases in office supplies, postage expense, telephone expense, office rent, shareholders’ expense, and miscellaneous general administration expense. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2016.

As a result of the 45% decrease in total revenue during the three-month period ended March 31, 2016, which was partially offset by the 24% decrease in total expenses, our income from operations decreased by 81% during the three-month period ended March 31, 2016.  We expect income from operations for the remaining quarters of fiscal 2016 to be significantly lower when compared to the same quarters in 2015 unless we are able to increase revenues from existing customers and add new customers.

Because we realized income before taxes of $164,627 during the three-month period ended March 31, 2016, compared to $870,427 during the three-month period March 31, 2015, we realized a $293,685, or 81%, decrease in our income tax provision.  We expect this trend to continue until our income before taxes increases.

During the three months ended March 31, 2016, total revenues of $1,309,161 was lower by $1,059,937 when compared to the same period in 2015.  This decrease in total revenues was partially offset by decreases in total expenses of $354,007 resulting in income from operations of $164,627compared to income from operations of $870,557 during three months ended March 31, 2015.  Correspondingly, we realized net income of $96,126 for the three months ended March 31, 2016, compared to net income of $508,241, during the three months ended March 31, 2015.   For reasons discussed throughout this report, unless we are able to add some significant new customers, we expect revenue and net income to be significantly lower throughout 2016 when compared to 2015.

Liquidity and Capital Resources

As of March 31, 2016, we had cash on hand of $4,427,185 compared to $3,834,924 at December 31, 2015.  The $592,261 increase in cash on hand was primarily the result of realizing net income, coupled with increases in bad debt provision, accrued expenses, and deferred rent expense, with decreases in accounts receivables, prepaid income tax and deferred compensation.  These changes were partially offset by an increase in prepaid expense and decreases in accounts payable and unearned revenues.

Cash used in investing activities of $3,535 was primarily the result of purchasing new computers to replace older computers to increase efficiency.

We currently have planned certain capital expenditures during fiscal 2016 to support potential new customers’ software requirements. We do not expect these software expenditures to be material.   We do not anticipate this will require us to seek outside sources of funding. We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses.  We have not identified any suitable opportunity at the current time.  We could use cash or stock of our Company or some combination of both in any such expansion or acquisition.  An expansion or acquisition of this sort may require greater capital resources than we possess.  Should we need additional capital resources, we most likely would seek to obtain such through debt and/or equity financing.  We do not currently possess an institutional source of financing.  There is no assurance that we could be successful in obtaining equity or debt financing on favorable terms, or at all.

Cash Flow

During the three months ended March 31, 2016, cash was primarily used to fund operations. We had a net increase in cash of $592,261 during the three months ended March 31, 2016.  See below for additional information.

During the three months ended March 31, 2016 and 2015, net cash provided by operating activities were $597,024 and $297,687, respectively.  As discussed herein, we realized net income of $96,126 during the three months ended March 31, 2016, compared to net income of $508,241 during the three months ended March 31, 2015.

 

Summary of Material Contractual Commitments

 

The following is a summary of our material contractual commitments as of March 31, 2016.

 

(1)

In October 2013, we entered into a 36 month operating lease for an office copy machine with monthly payments of $161. In December 2013, we leased two document scanners with monthly operating lease payments of $207 each for 36 months. In February 2014, we entered into a 36 month operating lease for an office copy machine with monthly payments at $960.

(2)

On July 23, 2015, we entered into a 79 month lease to lease approximately 9,439 square feet of office space that commenced on September 28, 2015.  This office space serves as our principal executive offices, as well as, the principal offices of our operating subsidiaries, Medex, IRC, MLS, MMM and MMC.

 

In January 2010, we entered into a capital lease arrangement whereby we leased an office copy machine for $25,543. The asset was recorded on our balance sheet under office equipment under capital lease and our liability incurred under the lease was recorded as current and noncurrent obligations under capital lease.  The lease arrangement was for a term of 48 months at level rents with capital interest rate at 7%.  During January 2015, the office copy machine under this capital lease arrangement was retired.  

 In August 2012, we entered into a capital lease arrangement whereby we leased office server equipment for $38,380.  The asset was recorded on our balance sheet under office equipment under capital lease and our liability incurred under the lease was recorded as current and noncurrent obligations under capital lease.  The lease arrangement was for a term of 36 months at level rents with capital interest rate at 7.5%. The term of this capital lease arrangement expired in July 2015.

Off-Balance Sheet Financing Arrangements

As of March 31, 2016, 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.

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

 

This information is not required for smaller reporting companies.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act.)  We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in the reports filed or submitted by us to the Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.  Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our principal executive officer and principal financial officer concluded that as of March 31, 2016, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2016, that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.   OTHER INFORMATION

Item 1A.  Risk Factors

There have been no material changes to the risk factors listed in Part I, “Item 1A, Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2015.  These risk factors should be carefully considered with the information provided elsewhere in this report, which could materially adversely affect our business, financial condition or results of operations.

 

Item 6.   Exhibits

 

Exhibits.  The following exhibits are filed or furnished, as applicable, as part of this report:

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.