PACIFIC HEALTH CARE ORGANIZATION INC - Quarter Report: 2017 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549   

 

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FORM 10-Q  

 

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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 September 30, 2017

☐	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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 November 10, 2017, 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 Nine Months Ended September 30, 2017

(Unaudited)

 

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 principles generally accepted in the United States (“GAAP”).  Certain information and footnote disclosures normally included in 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, 2016.  Operating results for the nine months ended September 30, 2017, are not necessarily indicative of the results to be expected for the year ending December 31, 2017.

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 rating 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.   We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy.  At September 30, 2017 and December 31, 2016, bad debt reserves of $60,150 and $64,150, respectively, was 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 September 30, 2017 and September 30, 2016, are as follows:

 

Significant Customers - We provide services to insurers, third party administrators, self-administered employers, municipalities and other industries.  We are able to provide our full range of services to virtually any size employer in the state of California.  We are also able to provide UR, MBR and NCM services outside the state of California. 

During the period ended September 30, 2017 and 2016, we had three and four customers, respectively, that accounted for more than 10% of our total sales.  The following table sets forth details regarding the percentage of total sales attributable to our significant customers in the past two years:

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,” “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 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.

Recent Developments

MPN Enrollment Count

 

Changes to the MPN regulations in August 2014 eliminated the notice requirements to employees covered under an MPN program.  This change eliminated the need for our MPN clients to submit employee rosters for MPN notice mailings.  As a result, over the past several years, many of our MPN client/employers have stopped sending us employee rosters which we have historically used to determine employee/enrollee headcount information.  Enough of our MPN client/employers have stopped submitting to us such information that we can no longer accurately track the overall number of MPN participants.  Therefore, beginning in the first quarter 2017, we ceased tracking the overall number of MPN participants of all client/employers in our MPN program.

 

HCO Enrollment Count

 Historically, the HCO employee/enrollee headcount was directly related to the amount of revenue generated by HCO clients.  We were, however, at risk of losing several clients under this pricing model.  To remain competitive in the marketplace, we developed a new pricing model, which includes both a fixed monthly flat rate pricing option that is negotiated per client and/or a per claim incurred pricing model.  Under the per claim model, our client/employers do not incur this cost as an out of pocket cost, but rather apply the cost directly to the insured or self-insured claim.  As a result of moving from our fixed fee per number of employee/enrollees per customer model, beginning in the first quarter 2017 we have discontinued reporting the direct relationship between the number of HCO employee/enrollees and total HCO revenues because that historical relationship has become distorted as a result of the implementation of our new pricing model. This change in our pricing model had no significant impact to our current level of HCO revenues and we expect the same level of impact over the remaining months of 2017.

Results of Operations

The following represents selected components of our consolidated results of operations, for the three-month periods ended September 30, 2017 and 2016, respectively, together with changes from period-to-period:

 

Total revenues during the three-month period ended September 30, 2017, increased 11% to 1,600,907 compared to $1,443,596 during the three-month period ended September 30, 2016.

 

During the third quarter 2017, HCO, nurse case management, and utilization review increased 36%, 17%, and 26% respectively, while MPN, Medical Bill Review and other fees decreased by 3%, 22% and 34%, 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.

During the three-month periods ended September 30, 2017 and 2016, HCO fee revenues were $377,923 and $276,951, respectively.  The 36% increase in HCO revenue was primarily attributable to increased revenues derived from one major client during the third quarter of 2017, coupled with increased fees primarily from three other existing customers.

MPN fee revenue for the three-month periods ended September 30, 2017 and 2016, were $142,257 and $146,836, respectively, a decrease of 3%, resulting mainly from lower revenues from one existing customer.

During the three months ended September 30, 2017 and 2016, nurse case management revenue was $582,544 and $499,118, respectively.  The increase in nurse case management revenue of $83,426 was primarily from increased revenues from five existing customers when compared to the same period in 2016.  There is no assurance that nurse case management revenue will continue to grow at the rate realized in the quarter ended September 30, 2017 for the remaining months of fiscal 2017.

During the three-month periods ended September 30, 2017 and 2016, utilization review revenue was $277,886 and $221,176 respectively.  The increase of $56,710 in the 2017 period was primarily attributable to adding two new clients in the fourth quarter of fiscal 2016 and increases in revenues from other existing 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. 

During the three-month period ended September 30, 2017, medical bill review revenue decreased $40,735 to $147,094 when compared to the same period a year earlier.  This decrease was mainly caused by processing fewer hospital bills from existing customers.  Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement.  Such services include, but are not limited to, coding review and rebundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements.  These services can result in significant network savings. 

Other fees consist of revenue derived from network access and claims repricing, lien representation, legal support services, Medicare set aside and worker’s compensation carve-out services.  Other fee revenue for three-month periods ended September 30, 2017 and 2016, were $73,203 and $111,686 respectively. The decrease of $38,483 was mainly the result of decreased network access fees from one customer having realized lower levels of savings from using our PPO network. We expect this downward trend for this customer to continue for the remainder of 2017.

Expenses

 

Total expenses for the three months ended September 30, 2017 and 2016, were $1,182,418 and $1,139,381, respectively.  The increase of $43,037 was the result of increases in bad debt provision, consulting fees, professional fees, outsource service fees, and general and administrative expense partially offset by decreases in depreciation and amortization, salaries and wages, and data maintenance expense.

During the three-month period ended September 30, 2017, we recorded depreciation and amortization expense of $19,462 compared to $20,925 during the comparable 2016 period.  The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the fourth quarter of 2016.

During the three-month period ended September 30, 2017, bad debt provision increased by $11,250 compared to the three-month period ended September 30, 2016.  This increase was primarily the result of recording additional bad debt provision for one existing uncollectable account.

During the three months ended September 30, 2017, consulting fees increased to $90,079 from $75,228 during the three months ended September 30, 2016.   This increase was primarily the result on hiring a consultant as Director of Medical Management in August 2017.

During the three-month period ended September 30, 2017, salaries and wages decreased 5% to $547,963 compared to $574,100 during the same period in 2016. The decrease in salaries and wages of $26,137 was primarily the result of lower deferred compensation expense, payroll related taxes, commission expense and lower levels of other salaries and wages in Medex and PHCO.

For the three months ended September 30, 2017, we incurred professional fees of $109,064 compared to $82,105 during the three months ended September 30, 2016.  The $26,959 increase in professional fees was primarily the result of higher accounting expense, legal expenses, medical consultant fees and professional fees paid for nurse case management services resulting from increased numbers of cases processed.

During the three-month period ended September 30, 2017, we incurred insurance expenses of $79,489, a 2% decrease over the same three-month period in 2016.  This decrease in insurance expense was primarily attributable to lower group health insurance premiums resulting from a decreased number of employees when compared to the same period in 2016.  We do not expect current insurance fees to increase significantly over the remaining months of 2017.

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 $146,287 and $113,017 in outsource service fees during the three-month periods ended September 30, 2017 and 2016, respectively.  The increase of $33,270 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.  

During the three-month periods ended September 30, 2017 and 2016, data maintenance fees were $12,160 and $30,160, respectively.  The decrease of $18,000 was primarily the result of lower levels of customer notifications fees realized for new and existing customers during the three-month period ended September 30, 2017 when compared to the same period in 2016.  Data maintenance fees tend to fluctuate from month to month depending on when new customers are enrolled and when the annual renewal of existing customer notification are due.

 

During the three-month period ended September 30, 2017, general and administrative expenses increased 3% to $162,164 when compared to the three-month period ended September 30, 2016.  This increase of $4,270 was primarily attributable to increases in auto expense, dues and subscriptions, employment agency fees, IT enhancements, rental equipment, telephone expense and travel and entertainment expense, partially offset by decreases in office rent expense, office supplies, postage expense, paid time off expense and miscellaneous expenses.  We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2017.

Income from Operations

As a result of the 11% increase in total revenue during the three-month period ended September 30, 2017, which was partially offset by the 4% increase in total expenses during the same period, our income from operations increased by 38% during the three-month period ended September 30, 2017, when compared to the same period in 2016. 

Income Tax Provision

Because we realized income before taxes of $418,489 and $304,215 during the three-month periods ended September 30, 2017 and 2016, respectively, we realized a $47,678, or 38%, increase in our income tax provision. 

Net Income

During the three-month period ended September 30, 2017, total revenues of $1,600,907 was 11% higher when compared to the same period in 2016.  This increase in total revenues was partially offset by a 4% increase in total expenses, resulting in a 38% increase in income from operations compared to the three months ended September 30, 2016.  Correspondingly, we realized net income of $243,929 for the three-month period ended September 30, 2017, also a 38% increase compared to the three-month period ended September 30, 2016. 

The following represents selected components of our consolidated results of operations, for the nine-month periods ended September 30, 2017 and 2016, respectively, together with changes from period-to-period:

Total revenues during the nine-month period ended September 30, 2017, increased 20% to 4,817,800 compared to $4,002,466 during the nine-month period ended September 30, 2016.

During the first nine-months of 2017, HCO, nurse case management, and utilization review, increased 8%, 55% and 32% respectively, while MPN, MBR and other fees decreased by 2%, 7%, and 17%, 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.

During the nine-month periods ended September30, 2017 and 2016, HCO fee revenues were $1,041,328 and $965,768 respectively. The 8% increase in HCO revenue was primarily attributable to the addition of one major customer in January 2017, partially offset by lower revenues from several existing HCO customers when compared to the same period in 2016

MPN fee revenue for the nine-month periods ended September 30, 2017 and 2016, was $427,228 and $436,893 respectively, a decrease of 2%, resulting from lower revenues from one existing customer. 

 

During the nine-months ended September 30, 2017 and 2016, nurse case management revenue was $1,824,121 and $1,176,447, respectively.  The increase in nurse case management revenue of $647,674 was primarily the result of adding new customers during the third and fourth quarters of 2016, and increases in revenues from existing customers.  As a result of losing a significant customer in October 2017, we do not expect nurse case management revenue to increase at the rate realized during the nine months ended September 30, 2017, for the remainder of fiscal 2017.

During the nine-month periods ended September 30, 2017 and 2016, utilization review revenue was $788,229 and $596,205, respectively.  The increase of $192,024 in the 2017 period was attributable to adding new clients in the third and fourth quarters of fiscal 2016.  Utilization review can provide a safeguard against unnecessary and inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, etc.   Through our skilled staff and automated review system, we are able to deliver utilization review services that cut overhead costs for the self-insured clients, insurance companies and the public entities we service. 

 

During the nine-month period ended September 30, 2017, medical bill review revenue decreased $36,541 to $481,352 when compared to the same period a year earlier.  This 7% decrease was mainly caused by processing fewer hospital claims from existing customers.  Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement.  Such services include, but are not limited to, coding review and 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.  These services can result in significant network savings. 

Other fees consist of revenue derived from network access and claims repricing, lien representation, legal support services, Medicare set aside and worker’s compensation carve-outs services.  Other fee revenue for nine-month periods ended September 30, 2017 and 2016, was $255,542 and $309,260, respectively. The decrease of $53,718 was mainly the result of decreased network access fees from one customer having realized lower savings from using our PPO network. We expect this downward trend for this customer to continue for the remainder of 2017.

Expenses

 

Total expenses for the nine-months ended September 30, 2017 and 2016, were $3,606,816 and $3,403,496, respectively.  The increase of $203,320 was the result of increases in bad debt, salaries and wages, professional fees, insurance, outsource service fees, and general and administrative expense, partially offset by decreases in depreciation and amortization, consulting fees and data maintenance expense.

 

During the nine-month period ended September 30, 2017, we recorded depreciation and amortization expense of $58,859 compared to $63,247 during the comparable 2016 period.  The decrease in depreciation and amortization was primarily attributable to certain fixed assets being fully depreciated during the fourth quarter of 2016.

During the nine-month period ended September 30, 2017, bad debt provision increased by $17,000 compared to the nine-month period ended September 30, 2016.  This increase was primarily the result of additional provisions required for one potential uncollectable account.

During the nine-months ended September 30, 2017, consulting fees decreased to $246,073 from $265,296, when compared the nine months ended September 30, 2016.   This 7% decrease was mainly the result of a reduction in fees paid to two consultants commencing in June 2016 and converting a consultant to an employee in March 2016.

 

During the nine-month period ended September 30, 2017, salaries and wages increased 1% to $1,734,321 compared to $1,717,148 during the same period in 2016.  This increase was primarily the result of additional staffing in nurse case management and higher levels of commissions, partially offset by salary reductions of 10% by several senior executives in June 2016.

For the nine-months ended September 30, 2017, we incurred professional fees of $308,295 compared to $224,368 during the nine months ended September 30, 2016.   The $83,927 increase in professional fees was primarily the result of higher professional fees paid for nurse case management services resulting from increased numbers of cases processed.

During the nine-month period ended September 30, 2017, we incurred insurance expenses of $257,495, a 6% increase over the same nine-month period in 2016.  The increase in insurance expense was primarily attributed to higher workers’ compensation premiums for our employees and directors’ and officers’ insurance premiums during the nine months period ended September 30, 2017 compared to the same period in 2016. We do not expect current insurance fees to increase significantly over the remaining months of 2017.

Outsource service fees consist of costs incurred by our subsidiaries in outsourcing utilization review, medical bill review, Medicare set aside services, nurse case management services, and typically tends to increase and decrease in correspondence with increases and decreases in demand for those services.  We incurred $404,538 and $288,225 in outsource service fees during the nine-month periods ended September 2017 and 2016, respectively.  The increase of $116,313 was primarily the result of increases in outsource services required for utilization review, Medicare set aside fees 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.  

During the nine-month period ended September 30, 2017 and 2016, data maintenance fees were $71,261 and $113,175, respectively.  The decrease of $41,914 was primarily the result of recording notification fees associated with the addition of a major HCO customer in the first quarter 2016, with a lower level of notification fees recorded for this same customer during the nine-month period ended September 30, 2017.

 

During the nine-month period ended September 30, 2017, general and administrative expenses increased 4% to $495,474 when compared to the nine-month period ended September 30, 2016.  This increase of $20,244 was primarily attributable to increases in dues and subscriptions, employment agency fees, IT enhancement, license and permits, telephone expense, rent expense, travel and entertainment expense and miscellaneous expense, partially offset by decreases in charitable contributions, auto expense, postage expense, office supplies and paid time off expense. We do not expect current levels of general and administrative expenses to materially increase during the remaining months of 2017.

Income from Operations

As a result of the 20% increase in total revenue during the nine-month period ended September 30, 2017, which was partially offset by the 6% increase in total expenses, our income from operations before taxes increased to $1,210,984, a 102% increase compared to the same period in 2016. 

Income Tax Provision

Because we realized income before taxes of $1,210,984 and $598,970 during the nine-month periods ended September 30, 2017 and 2016, respectively, we realized a $254,789 or 102%, increase in our income tax provision. 

Net Income

During the nine-month period ended September 30, 2017, total revenues of $4,817,800 was 20% higher when compared to the same period in 2016.  This increase in total revenues was partially offset by a 6% increase in total expenses, resulting in a 102% increase in income from operations.  Correspondingly, we realized net income of $706,666 for the nine-month period ended September 30, 2017, also a 102% increase compared to the nine-month period ended September 30, 2016. 

Liquidity and Capital Resources

As of September 30, 2017, we had cash on hand of $5,613,412 compared to $5,005,617 at December 31, 2016.  The $607,795 increase was primarily the result of net cash provided by our operating activities, partially offset by cash used in investing activities. Net cash provided by our operating activities was the result of realizing net income with increases in accumulated depreciation, accrued expenses, and deferred rent expense, partially offset by decreases in our bad debt, prepaid expense, accounts payable, income tax payable, unearned revenues and increases in our accounts receivable. We used $13,446 in investing activities for purchases of computers, furniture and equipment.  Barring a significant downturn in the economy or the loss of major customers, we believe that cash on hand and anticipated revenues from operations will be sufficient to cover our operating expenses over the next twelve months.

We currently have planned certain capital expenditures during fiscal 2017 to support potential new customers’ software requirements. We do not expect these software expenditures to be material.   We do not anticipate this will require us to seek outside sources of funding. We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses.  We are taking steps to look at acquisition candidates to vertically grow our Company.  In October 2017, we announced that we had retained a west-coast based investment banking firm to assist us in identifying potential merger and acquisition opportunities, as well as, to explore sources of institutional source of financing.   We have not found any suitable candidate at the current time.  We could use cash or stock of our Company or some combination of both in any expansion or acquisition.  An expansion or acquisition may require greater capital resources than we possess.  Should we need additional capital resources, we most likely would seek to obtain such through equity and/or debt 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 nine months ended September 30, 2017, cash was primarily used to fund operations. We had a net increase in cash of $607,795 during the nine months ended September 30, 2017.  See below for additional information.

During the nine months ended September 30, 2017 and 2016, net cash provided by operating activities was $621,241 and $1,049,690, respectively.  As discussed herein, we realized net income of $706,666 during the nine months ended September 30, 2017, compared to net income of $349,441 during the nine months ended September 30, 2016.  

Net cash used in investing activities was $13,446 and $33,556 during the nine-month periods ended September 30, 2017 and 2016, respectively.  During the nine-month periods ended September 30, 2017 and 2016, 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, 2017 and 2016 was $0 and $2,063, respectively, resulting from lower cash dividends paid.

Summary of Material Contractual Commitments

The following is a summary of our material contractual commitments as of September 30, 2017.

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

This information is not required for smaller reporting companies.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, which are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q.  Based on the evaluation of our disclosure controls and procedures as of September 30, 2017, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2017, that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.   OTHER INFORMATION

Item 1A.  Risk Factors

Management does not believe there have been any material changes to the risk factors listed in Part I, “Item 1A, Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2016.  These risk factors should be carefully considered with the information provided elsewhere in this report, which could materially adversely affect our business, financial condition or results of operations.

 

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.