Pacific Health Care Organization Inc 10-Q for FY2025 Q1
Pacific Health Care Organization Inc (PFHO)
About this 10-Q
Pacific Health Care Organization Inc filed this 10-Q on May 2, 2025, covering the quarter ended March 31, 2025 (FY2025 Q1).
Headline figures
Quarter ended March 31, 2025, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.82M
- up 30.1% from $1.4M a year earlier
- Net income
- $292.66K
- up 48.3% from net income of $197.4K a year earlier
- Diluted EPS
- $0.02
- unchanged from $0.02 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For the Quarterly Period Ended
or
For the transition period from to
Commission File Number
| (Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) | |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||
| N/A | N/A |
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.
Indicate by check mark whether the registrant has submitted electronically
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preceding 12 months (or for such shorter period that the registrant was required to submit such files.)
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.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected 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
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As of May 2, 2025, the registrant had
PACIFIC HEALTH CARE ORGANIZATION, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Pacific Health Care Organization, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| (Unaudited) March 31, |
December 31, | |||||||
| 2025 | 2024 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investments | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Long-term Assets | ||||||||
| Property and equipment, net | ||||||||
| Deferred tax assets | ||||||||
| Other assets | ||||||||
| Total long-term assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Income tax payable | ||||||||
| Dividends payable | ||||||||
| Insurance Financing | - | |||||||
| Unearned revenue | ||||||||
| Total current liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Convertible preferred stock, $ |
||||||||
| Common stock, $ |
||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Pacific Health Care Organization, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| For three months ended | ||||||||
| March 31, | ||||||||
| 2025 | 2024 | |||||||
| Revenues | ||||||||
| HCO | $ | $ | ||||||
| MPN | ||||||||
| Medical bill review | ||||||||
| Utilization review | ||||||||
| Medical case management | ||||||||
| Other | ||||||||
| Total revenues | ||||||||
| Expenses | ||||||||
| Salaries and wages | ||||||||
| Professional fees | ||||||||
| Insurance | ||||||||
| Outsource service fees | ||||||||
| Data maintenance | ||||||||
| General and administrative | ||||||||
| Total expenses | ||||||||
| Income from operations | ||||||||
| Other income (expense) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ||||||
| Total other income, net | ||||||||
| Income before taxes | ||||||||
| Income tax provision | ||||||||
| Net income | $ | $ | ||||||
| Basic earnings per share: | ||||||||
| Net Income per share amount | $ | $ | ||||||
| Weighted average shares outstanding, basic | ||||||||
| Fully diluted earnings per share: | ||||||||
| Net Income per share amount | $ | $ | ||||||
| Weighted average shares outstanding, diluted | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Pacific Health Care Organization, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Convertible Preferred Stock |
Common Stock | Additional Paid in |
Retained | Total Stockholders’ |
||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||||||||
| Balance December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||
| Balance March 31, 2024 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Balance December 31, 2024 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||
| Balance March 31, 2025 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Pacific Health Care Organization, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2025 | 2024 | |||||||
| Cash flows from Operating Activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Provision for credit losses | ( |
) | ||||||
| Noncash interest on investments | ( |
) | ( |
) | ||||
| Deferred taxes | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ||||||||
| Other assets | ( |
) | ||||||
| Prepaid expenses | ( |
) | ||||||
| Accounts Payable | ( |
) | ||||||
| Accrued expenses | ( |
) | ( |
) | ||||
| Income tax payable | ||||||||
| Unearned revenue | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from Investing Activities | ||||||||
| Purchase of property and office equipment | ( |
) | ( |
) | ||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| Cash flows from Financing Activities | ||||||||
| Payments made on insurance financing agreement | ( |
) | ||||||
| Net cash used in financing activities | ( |
) | ||||||
| Net increase in cash | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Non-cash investing and financing activities: | ||||||||
| Initial recognition of operating lease right-of-use asset and operating lease liability | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF FINANCIAL STATEMENT PRESENTATION AND NATURE OF BUSINESS
The accompanying unaudited condensed consolidated financial statements of Pacific Health Care Organization, Inc. (the “Company” or “PHCO”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Article 10 of Securities and Exchange Commission (the “SEC”) Regulation S-X. Certain information and footnote disclosures normally included in consolidated financial statements have been condensed or omitted in accordance with SEC rules and regulations. The information furnished in these unaudited 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.
While management believes the disclosures and information presented are adequate to make the information not misleading, the accompanying unaudited condensed consolidated financial statements should 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, 2024. Operating results for the three months ended March 31, 2025, are not necessarily indicative of the results to be expected for the year ended December 31, 2025.
PHCO is a workers’ compensation cost containment company providing a range of services principally to California employers and claims administrators. The Company was incorporated under the laws of the state of Utah in April 1970, under the name Clear Air, Inc. The Company changed its name to Pacific Health Care Organization, Inc., in January 2001. In February 2001, the Company acquired Medex, a California corporation organized in March 1994, in a share for share exchange. Medex is a wholly owned subsidiary of the Company. Medex is in the business of managing and administering both Health Care Organizations (“HCO”) and Medical Provider Networks (“MPN”) in the state of California, and providing workers’ compensation carve-out and Medicare set-aside services. In March 2011, the Company incorporated MMC, a Nevada corporation, as a wholly owned subsidiary of the Company. MMC oversees and manages the Company’s utilization review and bill review services. In February 2012, the Company incorporated MMM, a Nevada corporation, as a wholly owned subsidiary of the Company. MMM is responsible for overseeing and managing medical case management. The Company discontinued lien representation services in the third quarter of 2023 due to the lack of demand.
On October 19, 2021, the Company completed short-form mergers between PHCO and each of its wholly owned subsidiaries Industrial Resolutions Coalition (“IRC”), Medex Legal Support, Inc. (“MLS”), and Pacific Medical Holding Company (“PMHC”). As a result of the short-form mergers the separate existence of IRC, MLS and PMHC terminated and the business, assets and liabilities of those entities have been transferred to PHCO and, as appropriate, to its other subsidiaries. The Company continues to offer the services of IRC and MLS through its other subsidiaries as described in the preceding paragraph.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
| A. | Principles of Consolidation |
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
| B. | Use of Estimates |
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in these unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates include the values assigned to the allowance for credit losses and accruals for income taxes.
| C. | Reclassifications |
Certain reclassifications have been made to prior year amounts to conform to the current year presentations. These changes had no impact on the Company’s total assets, stockholders’ equity or reported net income.
| D. | Revenue Recognition |
The Company recognizes revenue in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle underlying Topic 606 is that the Company recognizes revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.
7
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
ASC 606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
Revenues are generated as services are provided to the customer based on the agreed upon sales price in accordance with our customers’ contracts. Contracts are typically written for an initial annual period with automatic renewals on an annual or monthly basis, cancellable with 30 to 90 days’ notice, except as required by law for our HCO and MPN services, which require up to 180 days’ notice in some cases. When performing services for a public entity customer, the Company may be required to agree to the contract terms of the customer which are typically aligned with specific laws and regulations governing the customer.
The Company’s customers are typically large, well-established businesses with a significant workforce. The Company determines whether it is probable to collect substantially all of the consideration for services based on the creditworthiness of the customers at the time of commencing services.
The Company offers multiple services under its workers’ compensation cost containment specialty service lines. The Company typically provides a menu of offerings from which the customer may choose to purchase as bundled managed care, standalone services, or add-on ancillary services. The price of each service is separate and distinct and provides a separate and distinct value to the customer. Pricing is generally consistent for each service irrespective of the other services or quantities requested by the customer. Bundled managed care contracts are therefore accounted for as separate performance obligations. Customers are typically invoiced monthly in arrears or annually in advance, depending on the service provided and the customer’s preferences, and payment is due within 30 days. In cases where a customer is invoiced annually prior to services being rendered or remits payment in advance, typically for our HCO/MPN services, the Company records the cash collected as unearned revenue and recognizes the revenue over the contract term as services are rendered.
Contracts with customers often include promises to transfer multiple products and services to a customer, referred to as distinct performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
The Company allocates revenue to each performance obligation based on its stand-alone selling price (SSP). Judgment is required to determine unobservable SSP for each distinct performance obligation as most services provided by the Company are not directly observable. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we determine SSP using a cost-plus margin approach. Discounts and other concessions are rarely awarded, and returns and refunds are not part of the normal course of business.
As
of January 1, 2024, the balance of accounts receivable, net and unearned revenue was $
The Company recognizes revenue as described below for each type of service.
HCO/MPN
An HCO is a network of health care providers specializing in the treatment of workplace injuries and in back-to-work rehabilitation for our customers’ injured employees. HCOs provide injured employees with a network of health care providers in the event of a workers’ compensation injury, while providing their employer (our customer) control over medical treatment and costs. Like an HCO, an MPN is a network of health care providers, but health care providers participating in MPNs are not required to have the same level of medical expertise in treating workplace injuries. As a licensed HCO and approved MPN, in addition to offering HCO and MPN programs, we are also able to offer our customers a combination of the HCO and MPN programs.
The Company derives its HCO and MPN revenue from fees charged for various aspects of these programs. Monthly and annual HCO/MPN program administration is provided over time and invoiced monthly or annually for a fixed fee, with revenue recognized ratably over the applicable contractual term. HCO/MPN claim network fees are generated at specific points in time throughout the month and invoiced at the end of the month for an agreed upon per item fee. Monthly HCO/MPN custom network fees are provided over time and invoiced monthly for a fixed fee. Revenue is recognized ratably over time. Annual or one-time HCO notification letters are generated and mailed at a point in time during the year, at which time the customer is invoiced for the service for a fixed fee.
8
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For
the three months ended March 31, 2025 and 2024, the Company’s HCO programs generated approximately $
For
the three months ended March 31, 2025 and 2024, the Company’s MPN programs generated approximately $
Medical Bill Review
Medical bills are one of the biggest expenses that an employer’s workers’ compensation insurance company must pay for. To curtail these expenses, our customers utilize our medical bill review services to review medical bills for services rendered to an injured employee. We provide professional analysis of medical provider services and equipment billing to ascertain proper reimbursement.
The Company derives its medical bill review revenue from fees generated and delivered at a point in time and invoiced upon completion of the services. These services are invoiced at a fixed fee with certain items also invoiced for a percentage of savings produced for the customer.
Utilization Review
Utilization review, also known as utilization management, is required by law in all states for workers’ compensation claims. Utilization review evaluates the medical necessity of proposed treatment by comparing medical treatment requests against accepted medical guidelines. Its purpose is to serve as a safeguard against payor liability for medical costs that are not medically appropriate or approved by the relevant medical and legal authorities.
The Company derives its utilization review revenue from fees generated and delivered at a point in time and invoiced upon completion of the services. These services are invoiced at a fixed fee with certain items also invoiced for a percentage of savings produced for the customer.
Medical Case Management
Medical case management oversees injured employees’ medical treatment to ensure that it progresses to a resolution and ensures treatment plans are aligned from a medical perspective. Medical case management is a collaborative process that assesses, evaluates, coordinates, implements and monitors medical treatment plans and the options and services required for occupational injuries.
The Company derives its medical case management revenue from services performed and delivered over time and invoiced monthly for those services at a fixed hourly rate. The types of services offered include both telephonic and field case management as well as employee advocate services.
Other Revenues
Other revenues consist of services performed for Medicare set aside requests, network access fees charged for network access for preferred provider organizations, ancillary legal support services, and workers’ compensation carve-out services. Medicare set-aside services for workers’ compensation claims is a financial agreement that allocates a portion of a workers’ compensation settlement to pay for future medical services related to the work-place injury, illness, or disease. The purpose of the set-aside arrangement is to provide funds to the injured party to pay for future medical expenses that would not be covered by Medicare. Network access for preferred provider organizations gives customers access to provider groups that include a specialized network of medical providers related to workers’ compensation and the lower fees associated with the Company’s affiliation to those groups.
These services are performed at a point in time and invoiced upon completion of the service. Medicare set-aside requests are invoiced at a fixed fee or hourly rate, depending on the request type. Network access fees are invoiced at a percentage of savings produced for the customer. Ancillary legal services are invoiced at a fixed fee or hourly rate, depending on the service performed. Workers’ compensation carve-out services are invoiced at a fixed fee or hourly rate, depending on the service performed.
| E. | Cash and Cash Equivalents |
The Company considers all short-term, highly liquid investments that are readily convertible, within three months of origination, to known amounts as cash equivalents. As of March 31, 2025 and December 31, 2024, the Company had no cash equivalents.
| F. | Investments |
The Company maintains its investments in US treasury bills and has classified them as held-to-maturity at the time of purchase. Held-to-maturity purchases are those securities in which the Company has the ability and intent to hold until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums and discounts. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security using a straight-line method.
9
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The amortized cost basis, gross unrealized gains and losses, and fair value of the Company’s held-to-maturity securities at March 31, 2025 and December 31, 2024 are shown below.
| Held-to-maturity securities | ||||||||||||||||
| March 31, 2025 | Amortized
Cost Basis | Gross
Unrealized Gains | Gross
Unrealized Losses | Fair Value | ||||||||||||
| U.S. Treasury Bills | $ | $ | $ | $ | ||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
| December 31, 2024 | ||||||||||||||||
| U.S. Treasury Bills | $ | $ | $ | $ | ||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
The amortized cost basis and fair value of the Company’s securities at March 31, 2025, by contractual maturity, are shown below.
| March 31, 2025 | Amortized Cost | Fair Value | ||||||
| Held-to-maturity securities | ||||||||
| Due in one year or less | $ | $ | ||||||
| $ | $ | |||||||
The fair value of the Company’s held-to-maturity debt securities are determined based upon inputs, other than the quoted prices in active markets, that are observable either directly or indirectly and are classified as level 2 fair value investments.
| G. | Fair Value of Financial Instruments |
The Company applies ASC 820, “Fair Value Measurements.” This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement. |
The carrying amounts reported in the balance sheets for cash and cash equivalents, receivables and current assets and liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.
| H. | Accounts Receivable and Allowance for Credit |
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 credit losses.
The Company ages its receivables by date of invoice. Management reviews the allowance for credit loss quarterly and evaluates the balance
of accounts receivable based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability
of the reported amount. When a specific account is deemed uncollectible, the Company charges off the receivable against the allowance
for credit loss. 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. 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 credit losses 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, and past-due amounts. At March 31, 2025 and December 31, 2024, the
Company had an allowance for credit losses of $
10
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A roll-forward of the Company’s allowance for credit losses for the three-month periods ended is as follows:
| March
31, 2025 | March
31, 2024 | |||||||
| Allowance for credit losses, beginning of period | $ | $ | ||||||
| Current period provision | ( | ) | ||||||
| Write-off | ||||||||
| Recovery | ||||||||
| Allowance for credit losses, end of period | $ | $ | ||||||
| I. | Concentrations of Risk |
Cash and Cash Equivalents
Financial
instruments that potentially subject the Company to concentrations of credit risks are comprised of cash deposits in excess of federally
insured limits. The Company places its cash and cash equivalents at one well-known, quality financial institution. At times, such cash
and investments may be in excess of the $
Major Customers
During
the three months ended March 31, 2025 and 2024, respectively,
| March
31, 2025 | March
31, 2024 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
The
percentages of the amounts due from major customers who represent
| March
31, 2025 | December
31, 2024 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
| Customer D | % | % | ||||||
| J. | Leases |
On April 1, 2022, the Company moved office locations from 1201 Dove Street, Suite 300 in Newport Beach, California to 19800 MacArthur Boulevard, Suites 306 and 307, in Irvine, California. Our current lease was set to expire as of March 31, 2025, but was renewed on December 10, 2024 for an additional 12-month lease, with a new expiration of March 31, 2026 with no extension options.
The Company follows the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for all leases. As of March 31, 2025 and December 31, 2024, there were no operating lease right-of-use assets or liabilities. The Company elected to not apply the requirements of ASC 842 for short-term leases. Short-term leases are defined as leases that, at the commencement date, have a lease term of 12 months or less. Lease expense is recognized on a straight-line basis over the lease term. If a Company lease does not provide an implicit rate, the Company develops an estimated incremental borrowing rate at the commencement date based on the estimated rate at which it would borrow, in the current economic environment, an amount equal to the lease payments over a similar term on a collateralized basis which is used to determine the present value of lease payments. The Company had no finance leases at March 31, 2025 and December 31, 2024.
| K. | Depreciation |
The
cost of property and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements
is depreciated over the lesser of the length of the lease of the related assets or the estimated lives of the assets. Depreciation is
computed on the straight-line method which is
11
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| L. | General and Administrative Expenses |
General and administrative expenses include fees for advertising, charity, depreciation, bad debt and recoveries, rent expense for office, shareholders’ expense, auto expenses, bank charges, dues and subscriptions, education, equipment/repairs, IT enhancement and internet expenses, licenses and permits, office supplies, parking, postage and delivery, printing and reproduction, rent expense for equipment, telephone, travel expenses and entertainment costs, and compensated absences.
| M. | Income Taxes |
The Company accounts for income taxes by following the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, operating loss, and tax credit carry forwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of the tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted. Management believes that any write-off not allowed will not have a material impact on the Company’s financial position.
The Company is subject to taxation in United States federal and state jurisdictions. Based on its evaluation, the Company believes that it has no significant unrecognized tax positions. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The years 2021, 2022, 2023, and 2024 are still open for examination. The Company is not currently under audit by the Internal Revenue Service or any other tax authority.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. In accordance with current guidance, the Company classifies interest and penalties as income tax expense as incurred.
| N. | Share Based Compensation |
NOTE 3 – RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
Recently Adopted Accounting Guidance
On January 1, 2024, the Company retroactively adopted Accounting Standards Update (“ASU”) 2023-07: Improvements to Reportable Segment Disclosures. This ASU, which amends Topic 280: Segment Reporting, improves disclosure requirements for reportable segments and enhances disclosures for companies with single reportable segments. The adoption did not have a material impact on the Company’s financial statements.
The Company conducts its business activities and reports financial results as a single reportable segment, the workers’ compensation cost containment specialists segment, based on the nature of its business and accounting policies. The Chief Operating Decision Maker (“CODM”) is its executive team. The CODM makes decisions about allocating resources and assessing performance in a manner consistent with the way the Company operates its business and presents its financial results, using the same net income that is also reported on the consolidated statements of operations as net income. There are no reconciling items to the consolidated statements of operations. The measurement of segment assets is reported on the consolidated balance sheet as total assets. The CODM uses net income to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits into the workers’ compensation cost containment specialists segment or into other parts of the entity. All of the Company’s customers are based in the United States.
12
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recently Issued Accounting Guidance
In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures.” This ASU, which amends Topic 740: Income Taxes, enhances transparency by updating disclosure requirements for income taxes. The standard is effective for annual periods beginning after December 15, 2025. Early adoption is permitted in any annual period in which financial statements have not yet been issued (or made available for issuance).
The Company plans to adopt this standard on January 1, 2026, using the retrospective method of adoption. Based on the Company’s preliminary assessment, the adoption of ASU 2023-09 is not expected to have a material effect on the Company’s consolidated financial statements or related disclosures.
NOTE 4 – PROPERTY AND EQUIPMENT
Scheduled below are the assets, costs, and accumulated depreciation at March 31, 2025 and December 31, 2024.
| March
31, 2025 | December
31, 2024 | |||||||
| Computer equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Totals | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total Property and Equipment, net | $ | $ | ||||||
Depreciation
expense for the three months ended March 31, 2025 and 2024, totaled $
NOTE 5 – LEASES
The
Company rents office space at 19800 MacArthur Boulevard, Suites 306 & 307, in Irvine, California. This lease was to expire as of
March 31, 2025, but was renewed on December 10, 2024, for an additional 12 months, with a new expiration of March 31, 2026. The lease
provides
Lease
expenses were $
NOTE 6 – ACCRUED EXPENSES
As of March 31, 2025 and December 31, 2024, accrued expenses consisted of the following:
| March
31, 2025 | December
31, 2024 | |||||||
| Salaries and wages | $ | $ | ||||||
| Compensated absences | ||||||||
| Legal fees | ||||||||
| Accounting fees | ||||||||
| Sales commissions | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
NOTE 7 – INSURANCE FINANCING AGREEMENT
The
Company entered into an insurance policy finance arrangement for business insurance coverage effective May 2024. The agreement matured
in March 2025 and had monthly payments of principal and interest of approximately $
NOTE 8 – INCOME TAXES
For
the three months ended March 31, 2025, the Company recognized expense from income taxes of $
13
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9 – BENEFITS AND OTHER COMPENSATION
The Company offers a 401(k)-profit sharing plan for employees who meet the eligibility requirements. Pursuant to the plan, the Company may make discretionary matching contributions and/or discretionary profit-sharing contributions to the plan. All such contributions must comply with federal pension laws, non-discrimination requirements and the terms of the plan. In determining whether to make a discretionary contribution, the board of directors would evaluate current and prospective costs of such awards to
the Company and management’s desire to reward and retain employees and attract new employees. To date, the Company has never made matching contributions and/or discretionary profit-sharing contributions to any plan.
NOTE 10 – EQUITY INCENTIVE AWARDS
2018 Plan
The
Pacific Health Care Organization 2018 Equity Incentive Plan (the “2018 Plan”) became effective on April 6, 2018. The 2018
Plan permits the granting of
NOTE 11 – STOCKHOLDERS’ EQUITY
On
January 6, 2020, the Company effected a
The
Company has two classes of stock. The Company had
The Company purchased no shares of treasury stock during the three-month periods ended March 31, 2025 and 2024. The Company does not have a plan to repurchase outstanding shares of common stock.
As
of March 31, 2025 and December 31, 2024, the Company had dividends payable of $
14
Pacific Health Care Organization, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 12 – EARNINGS PER SHARE OF COMMON STOCK
The
computation of earnings per share of common stock is based on the weighted average number of shares outstanding at the date of these
unaudited condensed consolidated financial statements. The fully diluted earnings per share includes
| Basic and Diluted Net Income per share calculation | For
the Three Months Ended March 31, | |||||||
| 2025 | 2024 | |||||||
| Net Income to common stockholders | $ | $ | ||||||
| Weighted average shares outstanding, basic | ||||||||
| Basic Net Income per share | $ | $ | ||||||
| Weighted average shares outstanding, diluted | ||||||||
| Diluted Net Income per share | $ | $ | ||||||
For
the quarters ended March 31, 2025 and 2024, there were common stock equivalents related to convertible preferred stock that had a dilutive
effect of
NOTE 13 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in such matters may arise from time to time that may harm the Company’s business. To the knowledge of management, there is no material litigation or governmental agency proceeding pending or threatened against the Company or any of its subsidiaries. Further, the Company is not aware of any material
proceeding to which any director, member of senior management or owner of record or beneficially of more than five percent of any class of voting securities of the Company, or any associate of any of them is a party adverse to or has a material interest adverse to the Company or any of its subsidiaries.
NOTE 14 – RELATED PARTY TRANSACTIONS
The
Company defines a related party as an individual who has the ability to exercise significant influence over the Company’s management
or operations, including individuals who own
The
Company retains Donald P. Balzano, who is a shareholder owning
The
Company’s former CFO, Kat Kubota, provides financial consulting services for the Company. Kat Kubota is the daughter of Tom Kubota,
the Company’s CEO, President, Chairman of the board and majority shareholder, and sister of Lauren Kubota, the Company’s
Vice President and Secretary, and a board member. The fees paid to Ms. Kubota are recorded in Professional Fees in the unaudited condensed
consolidated income statement. This consulting arrangement commenced upon Ms. Kubota’s resignation from the CFO position with the
Company on March 5, 2024. As of December 31, 2024, the amount due to Ms. Kubota of $
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Throughout this Quarterly Report on Form 10-Q (this “quarterly report”), 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”), Medex Managed Care, Inc. (“MMC”) and Medex Medical Management, Inc. (“MMM”).
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below should be read in conjunction with our unaudited condensed consolidated financial statements, and notes thereto, contained in this quarterly report, as well as our audited consolidated financial statements, and notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the Securities and Exchange Commission (the “SEC”) on March 19, 2025 (the “Annual Report”).
All statements other than statements of historical fact included herein and in the documents incorporated by reference in this quarterly report, if any, including without limitation, statements regarding future events, financial condition or results of operations, business strategy, potential acquisitions, budgets, projected costs, liquidity, capital resources, and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “foresee,” “future,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “strategy,” “will,” “would,” and other similar expressions and their negatives.
Forward-looking statements are not guarantees of future performance and involve known and unknown risks and uncertainties, many of which may be beyond our control. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and actual results could differ materially as a result of various factors. The following include some but not all of the factors that could cause actual results and financial condition to differ materially from those expressed or implied by forward-looking statements:
| ● | competition within our industry, including competition from much larger competitors; |
| ● | our ability to retain existing customers and to attract new customers; |
| ● | cost reduction efforts by our existing and prospective customers; |
| ● | failure to retain or recruit, or changes in, officers and key employees, and uncertainties in our ability to maintain key consultants and advisors; |
| ● | reductions in workers’ compensation claims or the demand for our services, from whatever source; |
| ● | the loss, ineffective management, malfunction (including those resulting from cybersecurity incidences and breaches), or increased costs of third-party-provided technologies and services on which our operations rely; |
| ● | cybersecurity incidences and breaches, and other software system failures, and the imposition of laws imposing costly cybersecurity and data protection compliance; |
| ● | delays, reductions, or cancellations of contracts we have previously entered; |
| ● | changes in U.S. trade policies and retaliatory responses from other countries, including tariffs; |
| ● | The effects of and uncertainty surrounding the adoption, use and reliability of disruptive technologies such as artificial intelligence; |
| ● | the loss of or inability to obtain adequate insurance coverage; |
| ● | legislative and regulatory requirements or changes which could render our services less competitive or obsolete; |
| ● | business combinations involving our customers or competitors; |
| ● | economic and labor market conditions generally and in the industries in which we and our customers participate, including the effects resulting from immigration laws and enforcement, economic recessions, financial sector turmoil, international conflicts, and rising domestic inflation and related economic policy responses; and |
| ● | our failure to successfully develop new services and/or products either organically or through acquisition, or to anticipate current or prospective customers’ needs. |
16
For more detailed information about particular risk factors related to us and our business, see Part I, Item 1A Risk Factors of our Annual Report.
New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
One should not place undue reliance on forward-looking statements. Forward-looking statements are based on the beliefs of management as well as assumptions made by and information currently available to management and apply only as of the date of this quarterly report or the respective dates of the documents it incorporates by reference. Neither we nor any other person assumes any responsibility for the accuracy or completeness of forward-looking statements. Further, except to the extent required by law, we undertake no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or a change in events, conditions, circumstances, or assumptions underlying such statements, or otherwise.
Overview
We are workers’ compensation cost containment specialists providing a range of services principally to California employers and claims administrators. We incorporated under the laws of the state of Utah in April 1970, under the name Clear Air, Inc. We changed our name to Pacific Health Care Organization, Inc., in January 2001. In February 2001, we acquired Medex, a California corporation organized in March 1994, in a share for share exchange. Medex is in the business of managing and administering both Health Care Organizations (“HCOs”) and Medical Provider Networks (“MPNs”) in the state of California and providing workers’ compensation carve-out and Medicare set-aside services. In March 2011, we incorporated MMC, a Nevada corporation, as a wholly owned subsidiary of the Company. MMC oversees and manages the Company’s utilization review and bill review services. In February 2012, we incorporated MMM, a Nevada corporation, as a wholly owned subsidiary of the Company. MMM is responsible for overseeing and managing medical case management and employee advocate services. We discontinued lien representation services in the third quarter of 2023 due to the lack of demand.
Business of the Company
We offer an integrated and layered array of complementary business solutions that enable our customers to better manage their workers’ compensation-related healthcare administration costs. We are constantly looking for ways to expand the suite of services we can provide our customers, either through strategic acquisitions or organic development.
Our business objective is to deliver value to our customers by reducing their workers’ compensation-related medical claims expenses in a manner that will ensure injured employees receive high quality healthcare, allowing them 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 longer than average treatment duration. Our services focus on ensuring timely medical treatment to reduce the claim duration and medical treatment costs.
Our services include providing customers access to our HCOs and MPNs. We also provide medical bill review, medical case management, employee advocate services, utilization review, workers’ compensation carve-outs and Medicare set-aside services. Complementary to these services, we also provide expert witness testimony. We offer our services as a bundled managed care solution, as standalone services, or as add-on ancillary services.
Our core services focus on reducing medical treatment costs by enabling our customers to have control and oversight of the medical treatment of their injured employees to ensure treatment is timely and appropriate. This control is primarily obtained by participation in our HCOs or one of our MPNs. Through Medex, we hold two of three total licenses issued by the state of California to establish and manage HCOs within the state of California. We hold several government-issued licenses to operate medical provider networks. We also hold approvals issued by the state of California to function as an MPN and currently administer 22 MPNs. Our HCO and MPN programs provide our customers with provider networks within which the customer 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 necessary vocational rehabilitation and training. Our medical bill and utilization review services provide oversight of medical billing and treatment requests, and our medical case management and employee advocate services keep workers’ compensation claims progressing to a resolution and assure treatment plans are aligned from a medical perspective.
Our customers include self-administered employers, insurers, third party administrators, municipalities, and others. Our principal customers are companies with operations located in the state of California where the cost of workers’ compensation insurance is a critical problem for employers, though we process medical bill reviews, utilization reviews and provide medical case management and employee advocate services in several other states. Our provider networks, which are located only in California, are comprised of providers experienced in treating occupational injuries.
17
Our business has a long sales cycle, typically eight months or more. Once we have established a customer relationship and enrolled the employees of our employer customers, we anticipate our revenue to adjust with the growth or retraction of our customers’ employee headcount. We also expect growth and retraction of employee headcounts throughout the year as we gain new customers and lose existing customers. The reasons for customer terminations vary but include when a customer opts to use a different workers’ compensation administration vendor; engages an insurance carrier or third-party administrator that uses a different workers’ compensation administration vendor; and when our contract ends with state and local governments and they are required to engage in a public bidding process for their workers’ compensation administration vendor.
Key trends affecting results of operations
Our operating revenues typically correlate with general economic conditions and the size and activities of our customers’ workforces. During the first three months of 2025, we saw an increase in MPN revenue related to growth in our customers’ workforces and an increase in medical bill review revenue due to increased review activity from current and new customers, when compared to the same period in 2024. However, if economic conditions become challenging, including from the effects of inflationary pressures, elevated interest rates, and difficult labor market conditions, our customers may reduce their workforce or seek price-competitive alternatives to our services. This could result in a decline in the number of employees enrolled in our HCO and MPN programs and the volume of medical bills reviewed, which could materially affect related revenues.
The increase in our HCO revenue during the first quarter of 2025 was due primarily to the timing of delivery of services to a significant customer that began phasing out our services during the fourth quarter of fiscal year 2024. Because we anticipate the customer’s services will be completely phased out during 2025, we expect the timing-based fluctuations in revenue from this customer to phase out, as well.
The expansion of our employee advocate services to six states outside of California continues to bolster our medical case management revenues. During the first quarter of 2025, revenue from our employee advocate services increased 64% when compared to the same period of 2024, which drove a 54% increase in medical case management revenue. We plan to continue to expand employee advocate services within the states we currently operate when feasible during 2025, but cannot guarantee that we will be successful in further growing this service.
Though we continue our efforts to increase our customer base and reduce customer concentration across all service lines, the addition or loss of a single customer can materially impact our results of operations. As disclosed previously, a significant customer terminated our services in the fourth quarter of 2024 and is in process of phasing out our services. Though we anticipate an impact on operating revenues from the loss of this customer during 2025, we also expect to mitigate the impact with increased business from other customers. We believe we will continue to be susceptible to risks associated with customer concentration and related potential material impacts on our results of operations in the foreseeable future.
Revenue
We derive revenue from fees charged for HCO notifications, HCO/MPN program administration, HCO/MPN custom networks, HCO/MPN claim network fees, medical bill review, utilization review services, medical case management and employee advocate services, Medicare set-asides, and network access.
HCO
HCO revenue is generated from fees charged to our employer customers for annual and new hire notifications to enroll their employees into our HCO program, annual or monthly program administration, custom network fees, claim network fees to access our HCO provider networks, and fees for other ancillary services they may select.
MPN
Like HCO revenue, MPN revenue is generated from fees charged to our employer customers for monthly program administration, custom network fees, and claim network fees to access our MPN provider networks. Unlike HCOs, from which we derive revenues from annual and new hire notification fees, MPNs do not require annual and new hire notifications and as such we do not generate related revenues.
Medical bill review
Medical bill review involves analyzing medical provider services and equipment billing to ascertain proper reimbursement. California and many other states have established fee schedules for the maximum allowable fees payable under workers’ compensation for a variety of procedures performed by medical providers. Many procedures, however, are not covered under the fee schedules, such as hospital bills, which still require review and negotiation. Our medical bill review services include coding review and re-bundling, confirming that the services are customary and reasonable, fee schedule compliance, out-of-network bill review, pharmacy review, and preferred provider organization repricing arrangements. Our medical bill review services can result in significant savings for our customers. Revenue for medical bill reviews is generated based on a set fee per medical bill reviewed and a percentage of savings of the preferred provider organization discounts. Hospital bill review services generate revenue on a percentage of savings off of the hospital bill, usually with a negotiated cap.
18
Utilization review
Utilization review is the review of medical treatment requests by providers to give a safeguard for employers and injured employees against unnecessary or inappropriate medical treatment from the perspective of medical necessity, quality of care, appropriateness of decision-making, and timeliness of treatment. Its purpose is to reduce employer liability for medical costs that are not medically appropriate or approved by the relevant medical and legal authorities and the payor. We generate revenue when we receive a referral for a request for authorization of treatment from a claims adjuster. We bill by the number of treatment requests and the level of expertise of the reviewer required to approve, modify, or deny the request.
Medical case management
Medical case management oversees the injured employees’ medical treatment to ensure that it progresses to a resolution and assures treatment plans are aligned from a medical perspective. Medical oversight is a collaborative process that assesses, evaluates, coordinates, implements and monitors medical treatment plans and the options and services required to meet an injured worker’s health needs. Our medical case management services are performed by nurses who are licensed by the state and have expertise in various clinical areas and backgrounds in workers’ compensation matters. We work to manage the number of nurses in our program to maintain our ratio of claims per nurse at a level that ensures timely and appropriate medical care is given to the injured worker and facilitates faster claim closures for our customers.
We also offer employee advocate services, which is similar to medical case management in that it utilizes our medical case managers who provide similar services; however, the medical case manager is an advocate for the employee. We generate revenue from these services when we receive a workers’ compensation claim and a medical case manager is assigned to oversee the injured workers’ medical treatment, with billing based on the number of hours a medical case manager works on the claim.
Other
Other revenue consists of revenue derived from network access fees charged for network access for preferred provider organizations, ancillary legal support services, Medicare set-aside and workers’ compensation carve-out services.
The following table sets forth, for the quarters ended March 31, 2025 and 2024, respectively, the percentage each revenue item identified in our unaudited condensed consolidated financial statements contributed to total revenues during the respective period.
| 2025 | 2024 | |||||||
| HCO | 27 | % | 21 | % | ||||
| MPN | 9 | % | 11 | % | ||||
| Medical bill review | 7 | % | 7 | % | ||||
| Utilization review | 27 | % | 35 | % | ||||
| Medical case management | 29 | % | 24 | % | ||||
| Other | 1 | % | 2 | % | ||||
Expense
Salaries and wages
Salaries and wages reflect employment-related compensation we pay to our employees, payroll processing, payroll taxes and commissions.
Professional fees
Professional fees include fees we pay to third parties to provide IT, financial, marketing, lobbying, in-house legal services related to the various services we offer, consulting, field medical case management, and board of directors’ fees for board meetings, as well as legal, accounting, and other professional services fees.
Insurance
Insurance expenses are comprised primarily of health insurance benefits offered to our employees, directors’ and officers’ liability insurance, and cyber liability, workers’ compensation and business liability coverages.
Outsource service fees
Outsource service fees consist of costs incurred by our subsidiaries by partially outsourcing utilization review, medical bill review, administrative services for medical case management and HCO, and Medicare set-aside services; and typically tend to fluctuate in correlation with customer demand for those services.
19
Data maintenance fees
Data maintenance fees include fees we pay to a third party to process HCO annual and new hire employee enrollments and notifications. HCO employee enrollment and notification fees fluctuate throughout the year because of the varied timing of customer enrollment in our HCO program, the number of employees our customers have in their workforce, the number of new hires throughout the year, and the number of new workers’ compensation claims.
General and administrative
General and administrative expenses consist primarily of depreciation, bad debt, dues and subscriptions, IT enhancement, meals, travel, and entertainment, office rent, telephone, vacation expense, licenses and permits, miscellaneous, advertising and marketing, auto expenses, bank charges and fees, education, parking, postage and delivery, shareholders’ expense, equipment repairs and office supplies.
The following table sets forth, for the quarters ended March 31, 2025 and 2024, respectively, the percentage each expense item identified in our unaudited condensed consolidated financial statements contributed to total expenses during the respective period.
| 2025 | 2024 | |||||||
| Salaries and wages | 48 | % | 55 | % | ||||
| Professional fees | 16 | % | 12 | % | ||||
| Insurance | 5 | % | 6 | % | ||||
| Outsource service fees | 12 | % | 14 | % | ||||
| Data maintenance fees | 9 | % | 1 | % | ||||
| General and administrative | 10 | % | 12 | % | ||||
Results of Operations
Comparison of the three months ended March 31, 2025 and 2024
The following represents selected components of our unaudited condensed consolidated results of operations for the three-month periods ended March 31, 2025 and 2024, respectively, together with changes from period-to-period:
| For
three months ended March 31, | ||||||||||||||||
| 2025 | 2024 | Amount Change | % Change | |||||||||||||
| Revenues | ||||||||||||||||
| HCO | $ | 494,129 | $ | 287,295 | $ | 206,834 | 72 | % | ||||||||
| MPN | 159,005 | 147,981 | 11,024 | 7 | % | |||||||||||
| Medical bill review | 128,577 | 99,988 | 28,589 | 29 | % | |||||||||||
| Utilization review | 495,042 | 498,654 | (3,612 | ) | (1 | %) | ||||||||||
| Medical case management | 516,311 | 335,167 | 181,144 | 54 | % | |||||||||||
| Other | 25,750 | 28,746 | (2,996 | ) | (10 | %) | ||||||||||
| Total revenues | 1,818,814 | 1,397,831 | 420,983 | 30 | % | |||||||||||
| Expenses | ||||||||||||||||
| Salaries and wages | 724,415 | 672,054 | 52,361 | 8 | % | |||||||||||
| Professional fees | 235,130 | 146,892 | 88,238 | 60 | % | |||||||||||
| Insurance | 82,608 | 79,456 | 3,152 | 4 | % | |||||||||||
| Outsource service fees | 173,550 | 168,205 | 5,345 | 3 | % | |||||||||||
| Data maintenance | 136,115 | 10,732 | 125,383 | 1,168 | % | |||||||||||
| General and administrative | 152,577 | 145,299 | 7,278 | 5 | % | |||||||||||
| Total expenses | 1,504,395 | 1,222,638 | 281,757 | 23 | % | |||||||||||
| Income from operations | 314,419 | 175,193 | 139,226 | 79 | % | |||||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | 93,744 | 99,245 | (5,501 | ) | (6 | %) | ||||||||||
| Interest expense | (1,522 | ) | - | (1,522 | ) | - | % | |||||||||
| Total other income, net | 92,222 | 99,245 | (7,023 | ) | (7 | %) | ||||||||||
| Income before taxes | 406,641 | 274,438 | 132,203 | 48 | % | |||||||||||
| Income tax provision | 113,978 | 77,035 | 36,943 | 48 | % | |||||||||||
| Net income | $ | 292,663 | $ | 197,403 | $ | 95,260 | 48 | % | ||||||||
20
Revenue
HCO
During the three-month period ended March 31, 2025, HCO revenue increased 72% compared to the same period in the prior year. The increase in HCO revenue was attributable primarily to the timing of when we completed the final annual notifications during each year for the significant customer that is completing a phase out of our services during fiscal year 2025.
MPN
MPN revenue for the three-month period ended March 31, 2025 increased by 7% compared to the same period in the prior year. The increase in MPN revenue was largely due to an increase in monthly MPN program administration fees, resulting from the addition of a new customer and an increase in our existing customers’ reported injuries. The increase in MPN revenue was partially offset by a decrease in both employee headcount and reported injuries at other customer locations.
Medical bill review
During the three-month period ended March 31, 2025, medical bill review revenue increased by 29% compared to the same period in the prior year. The increase was due to a net increase in bill reviews performed for existing customers along with the addition of a new customer.
Medical case management
During the three-month period ended March 31, 2025, medical case management revenue increased 54% compared to the same period in the prior year. The increase was attributable to an increase in managed claims by existing customers, an increase in employee advocate services revenue due to the continued growth of the program, and increased accuracy and efficiency in our related billing processes.
Other
Other revenue for the three-month period ended March 31, 2025 decreased 10% compared to the same period in the prior year, primarily due to the discontinuance of network access fee-related services for the significant customer that began phasing out our services during the fourth quarter of 2024.
Expenses
Salaries and wages
During the three-month period ended March 31, 2025, salaries and wages increased 8% compared to the three months ended March 31, 2024. The increase was due primarily to the addition of two employees during the first quarter of fiscal year 2025. Given the current increased wage inflation trends, we expect salaries and wages will increase in future periods from our efforts to attract and retain employees.
Professional fees
During the three-month period ended March 31, 2025, professional fees increased 60% compared to the three months ended March 31, 2024. The increase in professional fees was primarily the result of increases in accounting and legal services during that period associated with the transition to a new auditing firm.
21
Insurance
During the three-month period ended March 31, 2025, insurance expenses increased 4% compared to the same period in the prior year due to increases in health insurance costs for employees.
Data maintenance
During the three-month period ended March 31, 2025, data maintenance fees increased 1,168% compared to the three months ended March 31, 2024. The increase in data maintenance fees was primarily due to the timing of when we completed annual and termination letters and related billing for the significant customer that is completing a phase out of our services during fiscal year 2025. We expect similar future fluctuations for data maintenance fees when the timing of sending annual and termination letters for customers does not align between comparable periods.
General and administrative
General and administrative expenses increased by 5% during the three-month period ended March 31, 2025 compared to the three months ended March 31, 2024. The increase was primarily due to increases in advertising and marketing, dues and subscriptions, and licenses and permits. The increases were offset primarily by decreases in vacation and miscellaneous expenses.
Income from Operations
During the three-month period ended March 31, 2025, we recognized a 30% increase in total revenue and a 23% increase in total expenses. As a result, our income from operations increased $139,226, or 79%, when compared to the three months ended March 31, 2024.
Other Income, net
During the three-month period ended March 31, 2025, other income, net decreased 7%, primarily due to a decrease in interest income from our investments in U.S. Treasury Bills.
Income Tax Provision
We realized an increase in our income tax provision of $36,943, or 48%, during the three-month period ended March 31, 2025 compared to the same period in the prior year, which was attributable to the increase in income from operations during that period.
Net Income
During the three-month period ended March 31, 2025, we realized a 30% increase in total revenues, a 23% increase in total expenses, and a 48% increase in our provision for income tax when compared to the same period in the prior year. As a result, we realized net income of $292,663, a 48% increase in net income during the three-month period ended March 31, 2025.
Liquidity and Capital Resources
Management currently believes that cash on hand and anticipated cash flows from operations will be sufficient to fund our operations for at least the next twelve months. The Company’s primary sources of liquidity are cash, cash equivalents, short-term investments, and future cash generated from operations. However, our ability to generate cash from operations will depend on our future operating performance, which is subject to certain ongoing known and unknown risks and uncertainties. For a discussion of particular risk factors related to our business, see Part I, Item 1A Risk Factors of our Annual Report.
We currently have planned certain capital expenditures to replace laptops and ancillary devices due to their age and as part of our ongoing continuity plan. We anticipate investing activities will continue throughout 2025 as we replace aging software, computer equipment, and further enhance our IT security. We anticipate these costs will be significant, but believe we have adequate cash on hand to cover these expenses. We do not anticipate these expenditures will require us to seek outside sources of funding.
22
We intend to continue to pursue potential acquisition transactions that, if additional cash on hand were needed for such a transaction, we would either need to condition closing upon maturity of our investments, if applicable, or seek alternate financing, or a combination of those approaches. We may also seek growth through organic development of new lines of business or expansion of existing offerings. Depending upon the nature of the opportunities we identify, such acquisitions or expansion could require greater capital resources than we currently possess. Should we need additional capital resources, we could seek to obtain such through debt and/or equity financing. We do not currently possess an institutional source of financing and there is no assurance that we could be successful in obtaining equity or debt financing when needed, on favorable terms, or at all. We could also use shares of our capital stock as consideration for a business acquisition transaction, but there is also no assurance that there would be significant interest in our capital stock from a potential seller or the market.
Cash Flow
During the three months ended March 31, 2025, we had a net increase in cash and cash equivalents of $286,911. See below for additional discussion and analysis of cash flow.
For
the three months ended | ||||||||
2025 | 2024 | |||||||
| Net cash provided by operating activities | $ | 330,726 | $ | 290,948 | ||||
| Net cash (used in) investing activities | (8,510 | ) | (3,749 | ) | ||||
| Net cash (used in) financing activities | (35,305 | ) | - | |||||
| Net increase in cash | $ | 286,911 | $ | 287,199 | ||||
Net cash provided by operating activities was $330,726 and $290,948 for the three months ended March 31, 2025 and 2024, respectively. This $39,778 increase in cash flow from operations during the first quarter of 2025 was primarily the result of higher net income partially offset by changes in working capital balances.
Net cash used in investing activities was $8,510 and $3,749 for the three months ended March 31, 2025 and 2024, respectively. The change in net cash used in investing activities was due to increased purchases of new computer equipment during the first quarter of 2025. We expect net cash used in investing activities to increase through 2025 as we continue to update our current computer equipment.
Net cash used in financing activities was $35,305 and $0 for the three months ended March 31, 2025 and 2024, respectively. The increase in net cash used in financing activities from period to period was the result of payments made on our insurance financing agreement during the first quarter of 2025.
Off-Balance Sheet Financing Arrangements
As of March 31, 2025, we had no off-balance sheet financing arrangements.
Inflation
We experience pricing pressures in the form of competitive pricing. Insurance carriers and third-party administrators compete against us for customers by offering bundled claims administration services with their own managed care services at a lower rate. We are also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits and facility leases. We believe that these impacts can be material to our revenues or net income. Some of our customers are public entities which contract with us at a fixed price for the term of the contract. Increases in labor and employee benefits can reduce our profit margin over the term of these contracts. See also “the effects of inflation may have a disproportionate impact on our business” under Part I, Item 1A Risk Factors of our Annual Report.
For more detailed information about our critical accounting estimates related to us and our business, see “Critical Accounting Estimates” under Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Smaller reporting companies are not required to provide the information required by this Item.
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Item 4. Controls and Procedures
Remediation of Previously Disclosed Material Weakness in Internal Control over Financial Reporting
As previously disclosed in Item 9A of our Annual Report for the year ended December 31, 2024, management identified a material weakness as of that date. The identified material weakness was in connection with our controls over financial reporting related to the identification and recording of loan amounts payable and accounting for dividends paid. In response to the material weakness, with the oversight of the board of directors, we implemented changes to our internal control over financial reporting, which consisted primarily of new policies and procedures to assist management in recording transactions appropriately, identifying loan amounts payable and accounting for dividends paid. We have completed documentation of these corrective actions and, based on the evidence obtained in validating the design and effectiveness of the implemented control, we have concluded that the previously disclosed material weakness has been remediated as of March 31, 2025.
Changes in Internal Control over Financial Reporting
The change described under “Remediation of Previously Disclosed Material Weakness in Internal Control over Financial Reporting” above represents a change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended March 31, 2025 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Other than this change, there were no changes in the Company’s internal control over financial reporting during the first quarter of 2025 identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As noted above, the material weakness in our controls over financial reporting as reported in our Annual Report at December 31, 2024 has been fully remediated as of March 31, 2025, and our internal control over financial reporting was effective.
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PART II. OTHER INFORMATION
Item 1A. Risk Factors
Management does not believe there have been any material changes to the risk factors listed under Part I, Item 1A Risk Factors of our Annual Report.
Item 5. Other Information
During
the quarter ended March 31, 2025, none of our directors or executive officers
Item 6. Exhibits
Exhibits. The following exhibits are filed or furnished, as applicable, as part of this quarterly report:
| * | Filed or furnished herewith, as applicable. |
| (1) | Incorporated by reference to Registrant’s Registration Statement on Form 10-SB as filed with the SEC on September 19, 2002. |
| (2) | Incorporated by reference to Registrant’s Registration Statement on Form 10-SB/A-2 as filed with the SEC on July 13, 2004. |
| (3) | Incorporated by reference to Registrant’s Definitive Proxy Statement on Schedule 14A as filed with the SEC on March 13, 2008. |
| (4) | Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the SEC on November 22, 2016. |
| (5) | Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the SEC on March 27, 2018. |
| (6) | Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the SEC on January 2, 2020. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PACIFIC HEALTH CARE ORGANIZATION, INC. | |
| Date: May 2, 2025 | /s/ Tom Kubota |
| Tom Kubota | |
| Chief Executive Officer, | |
| President and Chairman of the Board | |
| (Principal Executive, Financial and Accounting Officer) |
26
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Tom Kubota, certify that:
| 1) | I have reviewed this quarterly report on Form 10-Q of Pacific Health Care Organization, Inc.: |
| 2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4) | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
| (a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and |
| 5) | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 2, 2025 | By: | /s/ Tom Kubota |
| Tom Kubota | ||
| Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Tom Kubota, certify that:
| 1) | I have reviewed this quarterly report on Form 10-Q of Pacific Health Care Organization, Inc.: |
| 2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4) | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
| (a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and |
| 5) | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 2, 2025 | By: | /s/ Tom Kubota |
| Tom Kubota | ||
| Principal Financial Officer |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of Pacific Health Care Organization, Inc. (the “Company”) for the quarter ended March 31, 2025, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
| Date: May 2, 2025 | By: | /s/ Tom Kubota |
| Tom Kubota | ||
| Chief Executive Officer and Principal Financial Officer |